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.
Any excuse to make a reference to the late, great and wonderful Ian Dury.
I sent the following email to my friend in response to the stock market rallies and the green shoots of optimism seemingly turning into beautiful May flowers:
"I take it nothing can has fundamentally changed? The confidence couldn't possibly be so self-fulfilling that all the consumer and corporate debt somehow vanishes into a great big black hole?"
His response, justifiably caustic, was:
"Of course, that's the answer. We wake up on May 1, and its all been a nightmare.
"Suddenly houses are still worth what they were there years ago, and are still increasing in price on a monthly basis.
"None of the banks have been nationalised, and the shadow banking systems is still the same size as the normal banking system.
All is fine with the world, and neither Chrysler nor GM are close to bankruptcy."
Quite. Enjoy it while it lasts.
"Nobody can see until the end of the month - never mind into the third quarter," commented an olefins trader recently.
"The reason is that very senior managers are too busy micro-managing everything, from getting involved in trying to track commodity chemical price direction to insisting on signing off every expenditure over a few hundred dollars.
"The problem with these senior guys when they track markets is that they are so out-of-the-loop - assuming that they have ever actually been in the loop - that they don't know what they are doing."
I heard of one big company where the CEO has even insisted on signing off travel authorisation to next week's APIC conference in South Korea.
In these days of tight credit and collapsed sales, it's understandable that much tighter control on spending is essential.
And during the boom years, can we all honestly say that every single trip we made was entirely commercially justified - and that we were always sufficiently foused on the bottom line to get maximum value out of each trip? Look back at your old expenses forms and count up the number of genuine "drinks with Mr Kim" entries.
It will be interesting to see how the lessons being learnt today will be remembered when the economy has fully recovered.
But from a HR perspective, a tough sign-off regime needs to be well-communicated.
So does the senior guys tracking shifts in chemicals pricing - whether competently or incompetently - otherwise the workers on the ground are likely to become demoralised.
They are unlikely to be able to leave in this current climate, but will surely perform far worse if they feel their opinions are being ignored for no good and well-explained reasons.
Off-the-record, of course, how does your company measure up?
And did you fiddle your expenses during the good times?
The timing of when to strike the ball is everything in the wonderful sport of cricket - and also, apparently, in the American pastime of baseball.
An Australian banker is fond of reminding the English how much better his country is at playing cricket.
But his gloating doesn't extend to how well he's been timing dipping in and out of equity markets of late. Like a lot of other "cashed up" people he is suffering from the "if only" syndrome.
"A lot of money seems to be pouring into stock markets because it has nowhere else to go. I didn't expect this run to last as long," he said.
All the moving indicators are pointing upwards with crude above $55/bbl on Thursday where he thought there would be very tough resistance.
"There's so much crude in storage which has been acquired by the financial traders who perceive the economic recovery is just around the corner. This is a big risk.
"Equity markets are also responding as if a recovery is only three months away. They usually price in a recovery about a quarter ahead of when it actually happens, but I believe that the recovery - or rather the bottom of the market - is at least six months away."
And in his view, you have to be very careful how you measure "recovery" in the context of the worst economic downturn since possibly the Great Depression.
The first important measure is the effect of inventory adjustments on GDP (gross domestic product) growth.
In the US, for example, total inventory reductions subtracted $50bn from growth in the fourth quarter of last year, he said.
The first quarter adjustments will see a further $100bn or so of production cuts and the second quarter possibly in excess of $150bn.
The collapse of liquidity in Q4 2008 forced companies across all sectors to make much quicker operating-rate cuts and plant closures than occurred at the start of previous recessions.
"There was simply no re-financing available so the companies had no choice."
BASF has reduced is global production by 25%, Bayer Material Science has taken 300,000 tonne/year of polycarbonate (PC) capacity temporarily off-line and Dow Chemical's average operating in the fourth quarter was just 64%.
"I expect some inventory replenishment down many of the production chains in Q3 in the US, and probably elsewhere," he added.
"This could give the false impression that we have reached the bottom of this crisis and recovery has begun."
Inventory building in Q3 would need to be measured against consumer spending, he said.
Retail sales on big-ticket durable items such as autos and homes might take longer to bounce back in the West than in Asia. Cost consciousness could also extend for some time to clothing, food and tourism.
Individual wealth has been badly dented by the fall in stock markets relative to their peak and the collapse in housing.
"Savings rates are likely to continue increasing as a result of this loss in wealth - even more so if unemployment keeps on rising."
Recoveries in GDP growth in the third quarter of this year would also need to be measured against the same period in 2007 rather than 2008, he added.
"This will give us a measure of how far we are away from returning to the boom conditions of 2004-07."
The crisis began in the third quarter of 2008.
Any comparison between Q4 2009 and Q4 2008 would be even more misleading as the global economy ground to a virtual halt during the last quarter of last year.
Comparing 2007 with 2009 is crucial for the chemicals industry as new capacity was planned on the belief that growth would continue at levels close to the great boom years.
"Even if were still in a global boom we would still need capacity to shut down," said Paul Hodges, chairman of UK consultancy International eChem.
"In most building block products we are now faced with 20% oversupply."
It could be a very long time before the world economy enjoys another period like 2004-07.
Consumer and corporate credit is likely to remain much more restricted because of financial-sector reforms.
"You also have to look at the potential for credit-card debt going bad to undermine consumer spending and the stability of the banks," the banker added.
"The first quarter results of the Western banks were very misleading. They looked good because of a reduction in competition due to consolidations and bank failures.
(Also, the banks could hardly fail to make money as governments were practically giving money away)
"But behind the numbers you could see warnings over just how much bad debt could result from credit-card defaults.
"As much as 25% of the revenues of some commercial banks come from credit-card transactions."
Consumers who are not in danger of default will be eager to pay off their plastic debts rather than incur 20% interest charges, he said.
The other big risk is the rate of recovery on corporate debt that's gone bad. Optimists think it could be as high as 40%, whereas others are warning of returns of as low as just a few cents on the dollar.
There appears to be the risk of a least a double-dip recession - perhaps even three dips.
Commodity chemicals prices started going up before the current equity-market rally.
This followed the deep global production cuts in aromatics, olefins and derivatives and a rebound in feedstock costs.
It's a moot point whether the cuts, combined with delayed start-ups in the Middle East, created genuinely tight markets or just the perception that they were tight.
In the end, though, the result was the same - raising the age-old conundrum of whether sentiment or fundamentals are driving markets.
A danger is that rising crude prices and the stock-market rally could lead to chemicals production being ramped up (if it hasn't happened already), despite the uncertain outlook for consumption.
Confidence can be a dangerous thing.
It's a great deal easier to off-load shares when you think the market has turned than a warehouse full of polyolefins.
The current run-up in equities might go on and on - perhaps even for several years, according to economist Russell Napier.
For example,the stock market rally after the dot com bubble burst was fuelled by too-lax lending. Was this in effect a bear-market boom?
Now governments are pouring money into economies the world over to stimulate consumption.
This will lead in perhaps as long as 2-3 years time to a big inflation problem, the Chinese losing their appetite for US Treasuries, Treasury yields doubling and a cataclysmic bear market with the S&P falling to 400.
Until then, S&P could easily double from its March low, predicts Napier
Do you have the courage to stick your money in and wait?
It still feels counter-intuitive that the current run-up will last a few years given the scale of consumer and corporate debt.
But since when has logic had anything to do with anything?
This very interesting note from Jun Ma, chief economist for Greater China at Deutsche Bank (see the end of this post) offers evidence to support what this blog has been worried about for some time - the quality of China's economic rebound.
The government would presumably be less concerned about the sharp increase in loan growth if the extra money had substantially boosted domestic consumption.
Instead, a large portion of the new loans could well have ended up in the hands of speculators (helping to drive chemicals prices up), Factories also seem to have been encouraged to keep operating rates high for social reasons - and state-owned enterprises area wash with cash for industriall investments. This is crowding out borrowing by private companies.
Net lending falls 70%mom to RMB592bn in April
RMB net lending fell sharply to RMB592bn in April from RMB1.9tn in March, broadly consistent with our expectation. We believe this reflects the success of the window guidance (about 3 weeks ago) by PBOC and CBRC that advised banks to "appropriately control loan growth"; the decline in new project approvals; as well as the slower pace of equity capital injections from the central government budget.
Going forward, the continuation of these factors will likely lead to a further decline in net lending to about RMB300-400bn per month in the remainder of this year.
As lagging indicators, the yoy growth in outstanding loans remained at 29.7% in April and M2 growth accelerated a little to 26%. Within a few months, we expect these yoy rates will begin to moderate following the decline in monthly net lending.
We see two main implications from the slowdown in net lending. First, net lending is a good leading indicator for QoQ GDP growth in China, with a lead time of about one quarter. The 70-80% fall in QoQ net lending in Q2 implies that QoQ GDP growth will likely moderate in Q3, following its peak in Q2 (at an annualized rate of 12-14%). Together with other factors such as a more visible corporate capex slowdown and a less supportive inventory cycle, it will likely result in a second phase of economic deceleration (measured on a QoQ basis) from Q3. On a YoY basis, the second down-leg of the economic cycle will likely begin in Q1 next year, as YoY growth lags QoQ growth by about two quarters. Second, net lending has a high correlation with market turnover in the A share market. The decline in net lending growth will therefore likely be associated with reduced liquidity for the A share market going forward.
Yoy inflation falls further in April
CPI inflation declined to -1.5% yoy in April, down from -1.2% in March. Producer prices are also declining, falling 6.6% yoy in April, vs a fall of 6.0% in March. Both figures are identical to our forecasts. In the CPI index, a 0.8%mom decline in food prices led the index down. Other commodity prices were essentially unchanged on the month according to the Ministry of Commerce. We expect yoy CPI inflation to remain in negative territory for another three or four months and PPI inflation to remain negative for six months. Upside risks to inflation stem from the possibility of higher wheat prices after a drought earlier in the year and the possibility of higher pork prices as farmers have slaughtered pigs in recent weeks due to the 10% drop in pork prices amid the Swine Flu outbreak (note that mainland China reported its first confirmed swine flu case today). Month-on-month PPI inflation - much more influenced by non-food raw materials prices - should recover on stronger demand due to rising gov't-led capex and inventory restocking in coming months, but these price increases may not be sustained beyond mid-Q3 when we think the QoQ increase in the number of new projects starts to fall and the inventory cycle turns less favorable.
One of the new skills being learnt in this current crisis is how to run plants efficiently at low operating rates.
"It's funny that for years now, we've worried about how to scale up profitably. Now industry is faced with just the opposite, how to scale down profitably," says Mark Matzopoulos, chief operating officer at UK-based Process Systems Enterprise in this article in ICIS Chemical Business.
A friend of mine has just graduated from university with a very good degree in chemicals engineering and has managed to land a job with an engineering company. His fellow graduates have not been as lucky in their search for jobs with chemical companies.
At least somebody is making money out of this crisis
Consensus opinion tends to swing firmly in one direction and then the other.
For example, in the good old days of 2007 you would have been pretty hard-pressed to find many in the chemicals industry who saw anything but a mildly cyclical downturn.
But the widely-held view now - that we are facing five years of incredibly tough times, the first period of this length in the history of the business - might also not come true.
"In 1992, the same was being said but then within 12 months the industry was in recovery," said an old industry hand.
"I don't know what the macroeconomic factors might be on this occasion. If I did I could make a fortune. In 1992, it was the unexpected emergence of very strong Asian demand.
"But even if the economic news keeps getting ever-gloomier, the industry itself might make yet more adjustments to bring supply much more in line with demand."
He cited the sweeping production cutbacks that have already taken place as evidence that the will to make the necessary changes exists.
"Leveraged and private-sector companies will just not sit on their hands. In the distant past, action was slow because the industry was mainly state-owned."
These included Dow Chemical reducing operating rates to a 63% average in Q4 last year, BASF shutting down 25% of capacity in Q1and Bayer Material Science idling 300,000 tonne/year of polycarbonate (PC) capacity - again in the first quarter.
The cutbacks seem to have been more extensive than in a recession of this comparable severity - the one which occurred in the early 1980s.
"Chemical companies had no choice because raising working capital through re-financing was simply impossible," says a Singapore-based banker.
Maybe if cash flow remains constrained by ever-weaker revenues - even if the financial system is repaired - companies will face no option but to permanently shut down capacity and definitively cancel projects.
The extent of the capacity closures to date suggests that markets being brought back into balance is possible far more quickly than the doom-mongers (including myself) expect.
A few major bankruptcies might make this process very rapid indeed through closure of a large amount of a capacity in one fell-sweep.
Apologies for letting this blog slip again, but have been busy trying to make a crust presenting ICIS training courses.
And so as a bonus for our army of avid readers, here are my extended thoughts on the above:
In the midst of the economic crisis it would be so easy to bury your head in the proverbial sand and forget that once the recovery does arrive, the same old feedstock-cost problems seem almost certain to re-emerge.
"The profitability of your average Asian naphtha cracker with the right level of investment in derivatives was extremely good throughout 2007. This was particularly the case if you were processing C4s into butadiene," said an industry observer.
"But in the first half of last year margins turned negative because of rising crude and naphtha costs. Every manufacturer down every product chain frantically built inventory because of the fear that oil would reach $200/bbl by the end of the year."
Of course we all know what really happened: Crude prices collapsed in Q4 resulting in the biggest inventory losses in the history of the chemicals industry. Stocks simply had to be liquidated due to the non-availability of working capital.
Governments are lavishing cash on stimulus packages in a desperate effort to return the world to business as usual.
This might on the surface seem the sensible thing to do, but unless that money is spent wisely in boosting energy conservation and renewable technologies, a return to strong growth could hasten the return of $100/bbl plus crude.
There's not much sign of smart investment in China. A surge in bank lending has been used to ramp up steel and aluminium production and provide the finance for manufacturers of finished goods to run their plants hard in order to limit job losses.
China announced a $586bn stimulus package last November and then in March disclosed plans for heavy investment in ten industrial sectors, including refining and petrochemicals.
"While the (investment) proposals may boost the economy, and thus energy demand in the short term, they could also lead to continued growth of energy-intensive industries in the medium to long term," writes the UK-based Cambridge Energy Consultants in an article on its website.
The Obama administration has also come in for some pretty fierce criticism over a cap-and-trade-bill before the House of Representatives. Lots of emissions permits would be given free under the bill, offering benefits to coal-based electricity generators and other energy-intensive industries.
Oil industry experts are queuing up to warn that the economic crisis has cut capital investment by the small independent oil companies in harder-to-get-at conventional crude reserves. The oil majors have slowed down development of unconventional sources of oil, such as the Alberta Tar Sands.
OPEC warned at its recent meeting that the fall in prices was resulting in lower investment, and the Paris-based International Energy Agency estimates that spending on oil and natural gas exploration will fall by 21% this year over 2008. This would represent $100bn less spending on building reserves.
The implications of a return of very expensive crude are obvious for Asia's petrochemical industry, which is largely naphtha-based.
The Middle East gas-based producers would once again stand to benefit due to another surge in margins as, of course, global petrochemical prices are oil-driven.
But what if everyone suffers? Could the return to crude in excess of $100/bbl re-awaken inflation, further stoked by excess liquidity resulting from government stimulus packages?
The danger is that we might repeatedly see nascent economic recoveries nipped in the bud by surging energy costs.
BASF announced last June that it was looking at making petrochemicals from biomass using its catalyst expertise, and said that it had made good progress at the laboratory stage.
Numerous companies were also looking at methanol-to-olefins technologies, including ExxonMobil and LyondellBasell.
China's coal reserves offer an opportunity to make methanol into large amounts of olefins and transportation fuels.
Let's hope that cutbacks forced on companies by the financial crisis have not included freezing research into attempting to break the crude-petrochemicals link.
Another concern is the long-term outlook for naphtha supply.
The US announced new car and truck fuel-efficiency regulations last week, which, in the short term could increase the availability of the feedstock.
By 2016, all new autos will have to meet a 39 miles per gallon standard (mpg) standard, up 42% from the current 27.5 mpg. Trucks will have to do 30 mpg versus 23 mpg today.
"Europe was already heading for an enormous gasoline surplus by 2015 even before this announcement," said Paul Hodges, chemicals consultant with the UK based International eChem.
Diesel demand in Europe has surged at the expensive of gasoline. However, the Europeans have been able to export their way out of gasoline surpluses due to shortages in the States.
But these exports were already under threat from increases in US refining capacity and the mandated steep rise in ethanol blending, added Hodges.
"The new fuel-efficiency standards will increase the pressure for European refinery closures, but in the interim there could be a disposal problem.
"This could create the opportunity for cost-advantaged naphtha supplies into the hard-pressed European and US petrochemical industries."
Eventually, though, refinery capacity will have to close because, as one Asian-based oil and gas consultant put it "there is going to be a worldwide glut of gasoline. Even on a straight-run basis before you look at more advanced processing, there will be a big surplus requiring rationalisation."
It is far too early to say whether refinery closures will lead to a net reduction in available naphtha.
Asia is adding capacity as Europe confronts the need to rationalise. In 2009-10 alone, 2.7m bbl/day of refining capacity is due to be come on stream in Asia Pacific, according to oil and gas consultancy FACTS Global Energy.
But naphtha exports from the Middle East could decline as the region looks to crack more naphtha in order to widen its petrochemical-product slate.
In Abu Dhabi, for example, a naphtha cracker complex is due to start-up by 2013.
Anyone with either access to advantaged ethane, propane and butane or with a proven technology that breaks the refinery/petrochemicals interface might be OK during the next oil shock.
The key for Asian liquids-based producers without either of the above must surely be maximising feedstock flexibility.
This flexibility could include cracking more liquefied petroleum gas (LPG).
LPG should be in abundant supply once liquefied natural gas (LNG) demand is booming again on higher oil costs and rising environmental concerns.
LNG producers either extract the gas during initial processing or leave it in the LNG to be taken out at re-gasification terminals.
Whatever are the solutions, they need to be found and found quickly if surging stock markets are proof of a quicker-than-expected economic recovery.
Source of picture: The Nymex
To continue the same theme of earlier this week, I agree with my fellow blogger Paul Hodges when he warns that OPEC's price target for $75-80/bbl could nip the nascent economic recovery in the bud.
As he quite rightly argues, inventory building ahead of further crude rises in 2007-08 occurred despite evidence of slowing end-use demand for chemicals.
A recent Lex piece in the Financial Times calculated that crude prices averaged around $100/bbl last year. With the world consuming a total of $88m bb/day this therefore cost the world economy $3.200bn.
When the article was written earlier this month, prices were averaging around $50/bbl which would for the whole of 2009 represent a saving of $1,600bn.
This is more than the total of all the government bailouts - $1,600bn - and the bailouts are one-offs rather than the constant savings resulting from cheaper crude.
This year's crude bill looks likely to be more expensive that had seem the case in early May, though, as a result of oil around $60/bbl, assuming it stays around this level (one hell of a big assumption but hey, why not, the rest of the media has become adept at turning a short-term trends into a long term outlook).
As the excellent Schork daily oil and gas report points out, oil and gas inventories remain at record highs.
But traders are ignoring the underlying long term trend in favour of putting a positive spin on recent relatively minor reductions in stock levels.
As the report points out, it's all about market psychology:
What started out as a bear market rally in equities
back in March is now in the process of morphing
into a full fledged rally. Sidelined money,
disgruntled and dismayed that it has missed the
bull's party of the last two months, is now
reluctantly piling back into the market. Some of
this money is finding its way onto the NYMEX.
The Street has convinced itself the recession is
over. Two months ago traders were buying
because they wanted to "participate" in the
equities rally before the bear market resumed.
Today these same traders are spinning a dubious
fundamental case because dour economic
headlines, which the market receives nearly daily,
are less bad. Thus, the crude oil bulls have
hitched their wagon to the equities. And, they are
going to continue to do so until it stops working
for them.
I remain convinced this is just about market psychology and the economic news is going to get worse before it gets better - so prepare for a lot more volatilty in energy pricing.
A sharp dip in crude would help inject some more much-needed cash into the world economy.
But - again as Paul Hodges points out - if crude does reach the OPEC target of $75-80/bbl this will at least encourage some of the investment necessary to lessen the supply crunch when the economic recovery has conclusively arrived.
Source:Amazon.com
I remain perplexed by the direction of chemicals, oil and commodity markets over the last few months - and now I understand the reason why.
It's not about feedstock, it's not about inventory levels or what end-use demand is really like, it's all to do with affairs of the heart.
Thanks again to my fellow blogger Paul Hodge who writes:
The Illicit Encounters website has a major increase in traffic when either the market collapses, or has a sudden rise. Apparently, when markets are up, traders "think they can have an affair because they feel they can get away with anything. When the market hits the bottom, they are looking for a way to relieve the pressure."
The site first came to the blog's attention in December, when the Financial Times reported on its rather lucrative business model - a male membership fee of £119/month ($190). Now it appears to have forecasting potential too.
As with financial markets, surely with c hemicals pricing. All we need to do is to produce an index, on a confidential basis,of course, which tracks this particular form of intra-industry activity.
It's easy to get caught up in the excitement over the rebound in the Chinese economy and miss underlying weaknesses which point to some major problems ahead.
To some extent, in a desperate effort to compensate for collapsing export trade, China might have borrowed from the future in order to achieve a swift recovery.
"The (Chinese government's economic) stimulus programme borrows from a future investment cycle," writes the online research publication, the China Economic Quarterly (CEQ), in its Q2 report.
"Since 1978 China has run relatively regular five-year investment cycles followed by five years of retrenchment."
Spending by the State on infrastructure and industry boomed in 2003-07 and so the following five years were supposed to involve the reductions in expenditure necessary to repair a big hole in the national balance sheet.
But, of course, the reverse has happened with infrastructure and industrial projects scheduled for the next 5-10 years now set to be completed over the next 3-4 years. This includes speeding up investments in the refinery and petrochemical industries.
"China could be in for some rough times after the stimulus money runs out in 2011," the CEQ adds.
Repair work to the national budget might not be the only reason why longer-term prospects could be a lot bleaker than many expect.
China might also fail to boost domestic demand sufficiently to compensate for export trade which might take many years to recover.
"For the first time in the 30-year reform era, China faces an extended period - five years or perhaps longer - in which exports will provide no significant contribution to growth," says the CEQ.
The reason is the well-documented collapse in the West's debt-financed consumption binge.
On the surface, it looks as if China is making great headway towards realising more of its enormous domestic-growth potential: retail sales grew by 16% in Q1 this year, up from 15% in the first quarter of 2008.
If you dig deeper, though, as the CEQ again does, you discover that retail sales include many "institutional" purchases, meaning those by state-owned enterprises (SOEs).
The government has increased military salaries by 50% and is providing rebates of 13% and 10% respectively off rural purchases of household appliances and automobiles.
Despite all this cash sloshing about, however, when you take away the institutional purchases from the retail sales figures, the CEQ concludes that there is little evidence of a pick-up in consumption.
Longer term, this can be fixed if efforts to create much better pension and healthcare systems lead to more spending and lower savings levels.
Compared with the West, and particularly the US, the Chinese keep an awful lot more of their money bank deposits.
But here's another potential pitfall: all that money sloshing around (the CEQ estimates the total stimulus will be worth Yuan5-6 trillion, or 15-18% - much bigger than the originally announced Yuan4 trillion) could end up creating another non-performing loans crisis similar to that of the early 1990s.
This could force China's banks to lower interest rates on deposits in order to repair their balance sheets, warns Peking University finance professor Michael Pettis on his blog, China Financial Markets.As bank deposits are such an important method of saving money in China, lower interest rates could lead to more money being saved as compensation, leading to damaged consumer growth, he adds.
Numerous economists are also warning that too much of the stimulus is in the form of loans to the SOEs, which can be less efficient in boosting the economy than private companies.
The private sector, hammered by the collapse in export trade, is in contrast reported to be struggling for finance.
An inevitable slow down in bank lending, the result of the huge rise in loan growth during Q1, could also be put yet another brake on the economy.
"RMB (Yuan) net lending fell sharply to YuanB592bn in April from YuanMB1.9tn in March, broadly consistent with our expectation," writes Jun Ma, Chief Economist Greater China for Deutsche Bank, in a report.
"We believe this reflects the success of the window guidance by the PBOC (People's Bank of China) and the CBRC (China Banking Regulatory Commission) that advised banks to "appropriately control loan growth"; the decline in new project approvals; as well as the slower pace of equity capital injections from the central government budget.
"Going forward, the continuation of these factors will likely lead to a further decline in net lending to about Yuan300-400bn per month in the remainder of this year."
A further worry remains the potential global deflationary effect in H2 of China stockpiling raw materials, including perhaps chemicals and polymers.
Imports of polyethylene (PE) and polypropylene (PP) have, for example, been at record levels in Q1.
However, it's impossible at this stage to say whether this involves major stockpiling or is more the result of better demand and big production cutbacks by Sinopec and PetroChina earlier this year.
In the case of iron ore and copper, though, the steep rise in Q1 imports (iron ore was up by 33% and copper by 62%) are being widely attributed to state-backed inventory building and strong investment demand.
"China is stock piling commodities - everything from metals to oil," said a chemicals industry source.
"The argument is that it's better to store financial reserves in commodities rather than US dollars."
"There has also been some stock piling of gasoline and diesel in anticipation of price increases by the government."
Gasoline and diesel prices were indeed increased from early June - the first time since March.
But if you put five economists in a room, goes the old adapted saying, you are likely to get at least ten different opinions.
It can be just easy to interpret some of the recent data in a much more positive way, and it might just be possible that the current euphoria will create a self-fulfilling prophecy of a sustained recovery.
It's worth being aware, though, that a 50% rise in the local stock markets since the start of the year and lots of positive macro-economic news might not tell the full story.
Cartoon: Peter Brookes, The Times
Yes, this blog has gone staggeringly quiet over the last few weeks as I gained a life: I went home to the UK and mixed with some people who had no interest in or desire to know anything about polypropylene. Do you realise that there are some people out there who have never even heard of catalytic reformers? Amazing....
Anyway, before I return to my sad little petrochemicals bubble, here are some reflections on the political chaos gripping good old Blighty caused by MPs' expenses.
The pleasure the Brits are deriving from their fuming indignation over some upper-class twit claiming the cost of cleaning out his moat, and other such extraordinary fiddles, almost makes up for the misery inflicted by collapsing house prices.
But as I kept saying over many a pint of wonderful British real ale during my leave: "Corruption? Call this corruption. If you want real, decent corrupt politicians then go to India or the Philippines, to name but two Asian countries affected by this problem.
"The good people there would be delighted if all that their political leaders did was claim the odd household plant or a bit or mortgage tax relief off the State."
It's good fun to have a go at politicians, though - God knows they all deserve it.
And there is never any excuse to fiddle your expenses and quite obviously, all the journalists enjoying the hunt have never, ever over claimed or falsely claimed for anything (you can be probably tell, except if you are American that is, that this is intended to be sarcastic).
I had a friend many years ago who worked on a national newspaper who received a major telling off for not claiming enough fraudulent lunches, dinners and gallons of alcohol, the reason being that if the accountants saw one person managing on less everyone else might have been forced to follow suit.
Most national newspaper journalists, certainly in the 1990s anyway and so this may have changed, could double their salaries by being on the fiddle.
But in the row over MPs' expenses perhaps not enough focus is being placed on a much bigger issue. This is how Britain is going to repair its government finances without creating major inflation problems or interest-rate hikes that will limit inflation but nip the recovery in the bud. The same applies, of course, to the US.
I don't pretend to understand Bond yields etc.
Perhaps nobody understands, nobody has control, nobody has a flipping clue and so in the absence of any clarity the only debate worth having is over why the former Home Secretary's husband, working as a government-paid political assistant, claimed porn movies on his expenses (still my favourite of all the scandals).
Toodle pip. I promise you in my next post that I'll write about polypropylene for all you fellow sad people out there.
Picture: The Daily Mail
Ok, I lied - I am having trouble getting back into my petrochemicals bubble and so this post is not about polypropylene. Apologies to all those disappointed C3 H6 molecules out there.
I was sharing lunch with a highly demotivated Singapore-based chemicals industry employee recently and the great British 1970s sitcom, The Good Life, came to mind (see above picture for the full cast - don't you just love the clothes?).
In that sitcom, Tom Good, played by the actor Richard Briers, is meeting "Sir", the boss of the plastics processing company where he works as a draftsman. The company specialises in desiging and molding those little plastic toys you used to get (or might still get - I am not sure) free in your breakfast cereal.
"Sir" puts his arm around Tom, who he has noticed for the first time because he has been introduced by his friend Jerry, played by the late and great Paul Eddington, as "our top designer". Jerry is a monumental crawler and, as a result, is in an executive position.
Anyway, "Sir" says to Tom, or roughly words to this effect: "A new bubble has just come off the top of our think tank and I want you to take charge of this project - plastic hippopotamuses (or was it giraffes? Couldn't find on Google). Are you excited? Do you think you are the man for the job?". He is speaking in one of those annoyingly enthusiastic voices you may have heard in meetings and wished "if only I could have the presence of mind to fake it that well".
Tom, is of course, supposed to show enthusiasm in order to crawl up the slippery corporate ladder, but instead bursts out laughing, goes home, quits his job, and decides to become self-sufficient by growing all his own food - and keeping lifestock - in his suburban back garden.
To return to my lunch with the unhappy chemicals-industry employee, he had been ground down by having to bite his tongue in so many long and dull meetings that when his boss asked for ideas for a new corporate slogan, he replied: "How about 'The Relentless Pursuit of Mediocrity?' ".
He lives in a condo with a window box as a back garden and so growing fruit and vegetables for a new career is not option.
Anonymous contributions would be gratefully received for comments you would have liked to have made in company meetings, but felt unable to do so. This is your chance to let off some steam.
As I've been warning on this blog for some time, the explosion of credit in China has created a great deal of paper-bottomed optimism over the recovery.
Fitch, the ratings agency, has just raised its macro-prudential risk indicator ffor China from category 1 (safe) to category 3 (Iceland et al) because of the lending surge and public debt.
China's Banking Regulatory Commission warned last week: "The top priority at the moment is to stop explosive lending. Banks should carefully monitor the process of credit approval and allocation, and make sure that loans flow into the real economy."
And Andy Xie, the often-quoted Sino-bear, says in the same article I've linked to above from The Daily Telegraph: "Commodity speculators have been using cheap credit to play the arbitrage spread between futures and spot on the oil markets. They have even found ways to trade lumber to iron ore by sheer scale of leverage. "They've made everything open to speculation."
This is probably one of the main factors behind the boom in speculation in linear-low density polyethylene (LLDPE) futures on the Dalian Commodity Exchange. PVC futures were also recently launched on the exchange.
As my fellow blogger Paul Hodges points out on his blog, Chemicals & The Economy, China is at risk of repeating the mistakes of the West: an unsustainable rise in credit.
The obvious danger, as has been flagged up before, is a sudden collapse in chemicals demand and pricing as inventories are unwound (built up with too-easy) as tougher lending conditions are imposed. This could be an even more dramatic bursting of the current equities and commodity price bubbles if it occurs at the same time as sharp fall in crude (which seems likely if equities are hammered.
Picture: The China Daily
"I've given up trying to read the polyolefin market in China. I just can't figure out what's going on," said a senior source with a major North American producer late last week.
"I keep returning to the fundamentals and cannot understand why prices have risen so steeply since mid-February."
Him and me both; we are perplexed by statistics which show a rise in domestic polyethylene (PE) production and imports, despite, as my colleague Paul Hodges points out, a sharp in exports of finished goods.
Where is all this stuff going? Into inventories of finished goods, perhaps, as factories are kept running for social reasons?
Oil is another reason why chemicals pricing in general has gone up by so much.
Now it looks as if equity and oil markets are heading in the other direction.
But as a second source told me by email this morning: "I've stopped worrying about this; I am just making money while it lasts."
Quite, but to return to the North American producer and his theories for these weird numbers, he added the following:
(Anybody else out there - your views as always are more than welcome).
"Dalian (the LLDPE commodity exchange) is now leading the market - i.e. people are pricing off it.
"My big concern is that large volumes are being stored in Dalian warehouses for physical delivery and could hit the market in one flood. I am still confused about how much actually turns physical - very little so far from what I've read, which is strange as the website states that each contract has to close with physical delivery.
"The Dalian exchange might be a reason why we have seen both stronger import volumes and higher local production.
"Some strange things are happening which might be down to the futures market. For example, agricultural film demand remains strong even though this is not the agricultural season.
"This could be the result of Dalian and/or speculation and high storage levels in the physical market made easier by the very easy credit conditions in China.
"There also seems to be a correlation between higher pricing and the fall in recycled or scrap imports.
"The reduction is about 30% so far this year, which is due to less scrap-material availability in the West.
"Supply in the scrap markets is tighter because less consumer goods are being bought in Europe and the US, which are wrapped in recyclable PE.
"The Chinese government has apparently also tightened up regulations on scrap imports after concerns were raised over health risks."
The scrap factor could be important as over the past 2-3 years, the steep rise in recycled material has taken around 4-5 percentage points a year off virgin polymer growth.
Also, once polymer prices go past $1,000-1,200/tonne it becomes economic to ship in scrap polymer and convert, according to one source.
Take away this automatic price-capping mechanism and you could have another reason why prices have risen by so much since mid-February - and why production and imports are both up.
Source of Picture : purchasing.com
In his own words, here is how one contact describes the current situation with a couple of extra points added by yours truly (with links)
"We've seen arbitrage close from Europe on polyolefins with no new business since April-May. Some material was delivered in June but this was merely May deals.
"The recent rise in European monomer prices (about Euros85/tonne for C3s and Euros$80/tonne for propylene) has helped claw back margins at the cracker level. In fact if you now look at the propylene-to-PP spread it's the worst it has been for the past two years.
"Clearly, these increases in contract monomer prices have put paid to any further arbitrage for the time being."
"I think the recent ethylene and propylene prices rises have been driven mainly by short covering from traders and with energy prices coming off I can't see current levels being sustained.
"One of the major reasons is that the non-PP consumers can't continue to pay the high monomer prices and so will have to cut back on operating rates - if they haven't already (for example, in the case of acrylonitrile)
"In the first half, the European industry was helped by pretty good operating rate discipline, but in the US plants have been running pretty hard.
"The European plants were also constrained from running any harder because spot monomer prices made this economic if they had insufficient flexibility in contract arrangements to up their operating rates.
"The rise in China PE imports is probably also reflected in PP which is not what the industry expected - we had anticipated import growth to be flat this year.
"The reason is delays to new capacity and re-stocking. We haven't seen a new PE plant in China for over a year with the next ond due on stream in July-August - Fujian.
There has also been substantial China petrochemical turnaround programme in April-June as our re-launched World Ethylene Plant Report illustrates.
In addition, deep cutbacks were made earlier in the year for market reasons.
"I think the reasons for the project delays have been that EPC (engineering, procurement and construction) resources have been severely overstretched.
"You just couldn't get enough of these experienced project managers to oversee the big investments - and also cost constraints were a big issue because of the high prices of both labour and raw materials.
"You faced a choice of, say, focusing on the cracker and certain derivatives at the expense of lesser derivatives which have meant some parts of some projects have been delayed.
"The delays are not the result of market factors.
"When you think about the China market, if it grows at 5% a year that means there is a need for one new world scale plant every 12 months - which hasn't transpired. If it grows at 10% you need three new world scale plants.
"And despite the global economic problems the market is still growing.
"Another factor behind tight PP in China has been small plants have been off-line because poor refinery economics have meant that the propylene hasn't been available. There is a total of about 500,000 tonne/year of these smaller, refinery-linked plants in China.
"The refineries have been running at low rates because of weak fuels demand and rising oil prices. Restrictions are still in place which prevent refiners from fully passing on the costs of more expensive crude.
"It's clear, though, that when all this new capacity starts up there will be a blood bath.
"The fall in crude by $10/bbl is clearly also going to have an effect and buying patterns will change as everyone holds back rather than brings forward purchases."
Source of Picture: Chinasnippets.com
Perhaps this post will help explain why a perplexed Hong Kong-based financial analyst wrote to me the other day, in response to my probably failed efforts to adequately explain rising chemicals demand in China:
"I stilll don't understand why polymer imports from PP, PE, PVC, and even SM (+15% per month avg) are up by so much this year."
One reason is a property boom that has some scary long-term implications (all the SM for EPS for insulation, for example, and PVC. Despite China's self-sufficiency in PVC local carbide plants suffered when oil prices collapsed.)
Fund manager Stephan van der Mersch, writing on the China Financial Markets blog describes a recent trip to Guiyang, the capital of Guizhou province as follows:
"I thought I'd seen insane excess in the past - 200 thousand square meter malls completely empty next to apartment complexes with 40 thousand units and 30% occupancy rates, etc. etc.
"But what we saw over there is rather hard to fathom. It seems the Guiyang city mayor had the same idea as the Shenzhen mayor - to move the old downtown to a piece of undeveloped land.
"Of course Guiyang has a quarter the population and probably a quarter the per capita income of Shenzhen.
What was most distressing was that the (recent) development has been totally uncoordinated - a project with 15 buildings here, in another field two miles away a project with one building, another mile in another direction three buildings, sprawled over what was easily over 30 square kms. of farmland well north of town.
" We conservatively guesstimated that we saw US$10bn of NPLs in one afternoon. The only buildings that were occupied were six-storey towers built to accommodate the peasants who had been displaced by the construction."
Michael Pettis, author of the blog, later in the same post repeats his prediction that China could suffer a Japanese-style long period of slow growth rather than a dramatic crash - because of China's control over the banking system.
But he warns that this could be at the expense of consumer growth, as I had written about earlier on this blog, if the cost of cleaning up the banks is forced onto the public.
And he adds that the current property boom is being driven by:
*Buying sentiment returning to levels of the last boom - 2007
*Developers buying land again, resulting in land prices once more skyrocketing
*Negative real interest rates on bank deposits and, as mentioned many times before on this blog, the explosion in liquidity
*Construction industry loans being rolled over from short into long-term liabiltiies
"If a meaningful portion of Chinese household savings is in real estate that never will be occupied or won't transact for the next decade (and then transacts at a potentially lower rate 10 years out given that the building has been rotting for ten years and the construction quality sucks), are those savings really there?," he writes.
"China needs to increase domestic consumption for stable internally driven growth. You can't increase domestic consumption if you're buying real estate. So this is yet one other way that this whole liquidity injection is preventing a transition to a consumption-based economy. You really do wonder how long the Chinese will keep up this level of "pump priming". If they realize how much they're screwing themselves for the next decade, the central government might just tighten liquidity.'
If and when liquidity is tightened signifcantly in China, a major support to global chemicals pricing and demand wil have been removed.
Michael's blog is currently being blocked in China, he says.
"Bob, I think I we should give this up as I can't get a wireless connection and I couldn't be bothered to talk to anyone."
Source of Picture: Faculty.SMU.Edu
.
......and the effect on the quality of data and analysis is one of my big concerns - particularly at a time like this when petrochemical markets are becoming harder to fathom (many thanks to Andrew Keen and his excellent book, The Cult Of The Amateur).
The overwhelming volume of information on the Internet has led to the emergence of a new breed of journalist/company researcher/data gatherer.
No longer is it necessary to speak to people on the telephone and/or to interview them face-to-face.
Instead it is possible for the clever writer/researcher to compile an article from an Internet search. You can cobble together a convincing story (on the surface at least) by lifting data, analysis - and even quotes - without checking the accuracy for yourself.
The benefit of direct contact with multiple sources is that with experience and over time you get to work out who is reliable and who isn't from your assessment of character and motives etc; in other words, intuition.
There is no substitute for getting out of your comfy chair and travelling through the Chinese hinterland in search of the Holy Grail - real inventory levels (that's unless, of course, you are frightened of someone finding out that you are fraud with very little sincere knowledge of and interest in what you do).
Yahoo Messenger etc have further eroded the need for direct contact - again, taking away the human interaction which I believe is essential to get good quality information.
Now we have a generation of journalists/researchers who are spoilt - and I am sure overwhelmed also - by all the free information out there. Because you've never had to get off your proverbial rear end to tell a convincing story to your boss, you quite probably don't even know how to.
And more recently we have seen the emergence of an army of amateur and totally untrained citizen journalists, researchers and "experts" who can witness the riots in Burma from the comfort of their armchairs and nobody will be able to tell the difference (in other words, they make it up).
I was talking to a corporate relations officer of a certain International Oil Company the other week. He told me how one of his senior executives was so disgusted by the banality of the questions being asked that he gave the interviewer his business card back and said, "I think you should recycle this."
I once suggested to someone that while the Internet was of course essential (who would want to go back to parchment after William Caxton came along?), an experiment should be tried with young journalists/researchers/analysts etc.
I suggested that we should switch off the Internet, give them only a telephone, a travel budget and a list of contacts, along with some hard-copy resources, and assess whether they were able to assemble original and accurate information.
We could then offer training for those who fell below the mark. He accused me of being an "Old Fart".
But I am not sure how much of this was motivated by the fear of telling the Emperor he really had no clothes as opposed to a genuine belief that I was wrong.
Source of Picture: http://backincccp.blogspot.com/
Peter Seeger's most-famous song (being performed here by Pete, Bob Dylan, Judy Collins and Arlo Guthrie) was "Where Have All The Flowers Gone?"
Perhaps a new version should be cut entitled, "Where Have All The Polymers Gone?" when you start to piece together China's imports during the H1 2009 versus plastic-production sales and exports.
There have been some quite staggering year-on-year percentage increases in imports
High-density PE (HDPE) was up by 64%, low density PE (LDPE) by 94%, linear-low density PE (LLDPE) by 52% and polypropylene (PP) by 50%.
Chow Bee Lin of ICIS news reported on Monday that plastic end-product output in January-May this year rose to Yuan (CNY) 382 trillion ($56 trillion), a 7.46% increase over the same period last year, according to the Ministry of Industry and Information Technology (MIIT).
But the production/sales ratio was at 97% - 1.46% lower.
Overall plastic-product exports declined by 12.13% in value terms to Yuan 40 trillion.
PE film and sheet exports fell by 10.1% during January-July over H1 last year with PP film and sheet exports tumbling by 37%
Toy-industry output rose 7.78% and so unless the economic stimulus has led to the Chinese buying more toys, this might be a problem.
Hardly surprisingly, more than 60% of local plastics consumption went into the construction industry as a result of all the infrastructure spending. Polyvinyl Chloride (PVC) imports rose 142% in the six months to June because of this strong demand and low operating rates among local producers. The domestic carbide-based players have seen their economics eroded on falling oil prices.
The home appliance subsidy scheme boosted plastics consumption in the washing machine and refrigerator application sectors, local appliance makers said.
China produced 16.9m units of washing machines and 24m units of refrigerators in the first five months of this year, which were 2% and 5.5% higher compared with January-May 2008, the MIIT add
BUT it was still unclear how much of this extra production has been absorbed by increased
The government has mobilised around 10,000 students from seven universities in order to raise awareness of the subsidy scheme and to assess how much the consumers have actually spent, again according to the MITT.
It's interesting to note from this graph that, month-on-month declines in PE and PP imports since May.
Strong PP imports up until as late as May interest were being driven by optimism over the impact on demand of the subsidy scheme and the peak turnaround season, which ran from April to June - according to an earlier story by Bee Lin of ICIS news.
Until firm evidence emerges that most of the washing machines and refrigerators haven't ended up some warehouses somewhere, interest in imports may stay weak.
And for both PE and PP, the buyers know that supply has increased due to the end of the turnaround season with the prospect of some major start-ups of new plants in H2.
Make your own mind up about the role of the Dalian Commodity Exchange linear-low density polyethylene (LLDPE) and polyvinyl chloride (PVC) futures contracts from the interviews below.
The first quote is from Sinopec - from an ICIS news story.
There then follows my interviews with a major Asian producer and a consultant based in Asia.
The chart below shows the correlation between Dalian LLDPE and domestic physical market prices in China, courtesy of CBI - our joint venture partner in China.
My next step, after what the major producer has said, is to do some research into any links between Dalian and pricing in the overall chemicals market.
Sinopec's view
"We will not take futures price as pricing references. The impact of futures prices on spot markets will remain only a reflection of market sentiment," a senior official in Sinopec's synthetic resin department."
"This is the result of the limited amount of physical deliveries taking place through the futures markets."
The Asian producer:
"
The Dalian futures market LLDPE price plays a big role in the Chinese polymer market. Although it trades only LLPE and PVC, it has become a trend setter for the entire market.
Many traders and end users also take part in the trading. Sinopec and PetroChina follow the Dalian market ."
The consultant
"The Dalian exchange has become a reference point for producers. Even though they are not trading on it (no hedging is taking place as it's also financial and chemicals traders) there is a psychological effect as it's a daily price that's very easily accessible: just log on to the screen each morning and there you go.
"In the absence of a complete picture of what's happening in China, Dalian is as good a guide as any.
"For example, there are no truly reliable inventory assessments at all the polymer and finished-goods levels, and there can be a lack of clarity on local production levels.
"What is fundamental growth versus the short-term boost from rising bank lending? The exchange has, as a result, become a very useful tool and a great way of making money.
"The world is a bit lopsided now because there are also so many other factors confusing the market - including the real effect of the decline of the availability of recycled material versus the oil price.
"When the new supply hits the market then new supply will become THE factor and it's likely that people will take less notice of Dalian.
"This doesn't mean that the volumes will go down necessarily - this depends on whether bank lending remains free and easy.
"I see an upside potential for pricing in Q3 because the new capacities won't have hit the market then but I see things turning bad from the fourth quarter."
Ron Kirk faces a tough balancing act
Source of Picture: United States Mission - Geneva
"The rebuilt American economy must be export-oriented and less consumption-oriented," said Larry Summers, Director of the US President's National Economic Council, earlier this month.
But, as The Economist says in this article, this will be a little like turning a giant oil tanker in the opposite direction; meaning, it will take considerable time during which America will suffer sub-par growth, warns Mohamed El-Erian, CEO of Pimco - the world's largest bond investor.
So what's going to happen when the US has to start reining back its huge budget deficit through cuts in economic stimulus? Will the economy have been sufficiently transformed by then?
Or could the US be dragged into a wave of protectionist policies in order to protect domestic industry in the absence of a rise in exports sufficient to make up for all that lost government stimulus? Goodness, that sounded like a mouthful.
It might not be the protectionism we are all familiar with - for example, antidumping duties which are more favoured by the developing world.
Instead you might seen much greater scrutiny of imports from the developing world on the grounds of safety and carbon emissions (by this point, if the House of Representatives gets its way, there could be a carbon import tax in place anyway for countries that don't sign up to a US carbon trading scheme).
Closer attention might also be paid to the working condition, and pay of labourers in countries such as China. Ron Kirk, the US trade representative, recently gave a speech to steel workers in Pittsburgh in which he warned America's trading partners about violations in labour standards.
On the other side of the world, China - as we've written before on this blog - might have to also rein back government spending and order the banks to reduce loan growth.
And in order to repair the their balance sheets, the banks may be forced to raise deposit rates.
If rates rise by enough the real cost of borrowing (i.e. the rates minus inflation) will be positive again.
Real deposit rates becoming positive led to the last real-estate collapse in 2007 and a wider economic slowdown in China.
This could hamper the country's efforts to rebalance its economy in the opposite direction to the US - away from exports and more towards domestic consumption.
Thus in a desperate effort to protect growth, the Chinese government might be even less likely than at present to let the Yuan strengthen. A stronger Yuan would make it a lot easier for the US to raise its exports.
The chemicals industry might be well advised to plan for a very nasty trade war.
A Mars Bar feast in store if crude hits $30/bbl again
Source of Picture: Amazon.com
Polyethylene (PE) inventories in China at the second and third local distributor levels are at very high levels, two reliable industry sources have told us.
Speculating in polyolefins has been made a great deal easier by lax bank lending - contributing to a 51% rise in imports during January-May 2009 over the same months last year.
The US was able to raise low-density PE (LDPE) exports to China by 27% in January-May and HDPE by a staggering 65% (up until end-March shipments were actually down by 3%, indicating how strong the buying spree has been since then on greater macroeconomic confidence, tight supply on shutdowns and rising oil prices).
Strong end-user has also added to the momentum.
The booming construction sector consumed lots of high-density PE (HDPE) pipes.
We are also hearing reports of government investment in better disaster-preparedness - after the mistakes exposed by last year's Sichuan tragedy - as being partly behind very tight HDPE yarn grade markets. Yarn grade is used to make tarpaulin for tents with the surface of the tents laminated by linear-low density (LLDPE) and LDPE.
Demand for agricultural film (LDPE and LLDPE) has received a boost from government initiatives to raise output on farms. One of the peak seasons for agricultural film demand is also about to start.
Lack of availability of recycled plastic is another major factor in the surge in demand for virgin resins.
Recently, though, markets have become becalmed due to a classic buyer and seller stand-off.
Are we at one of those inflexion points or could the rally be sustained for some time yet?
I still think this won't be a V-shaped recovery so it's only a question of when there is another severe correction in pricing (of course, the same applies to the other polymers. I will look at PP over the next few days).
New supply will become the biggest factor in directing markets, but, according to some sources, perhaps not until as late as Q4 due to continued start-up delays.
But even if the new-output glut doesn't hit the market until the fourth quarter -or perhaps even late - a collapse in crude might have already flushed the true level of Chinese inventories out of the system.
Or could more air be first of all pumped back into the crude bubble?
Premiums for long-dated US crude futures have grown dramatically since mid-July, according to this report from Reuters.
"The discount for front-month to second-month oil futures has nearly doubled since July 13, to $1.75 from 89 cents," the report continues.
This shift in the forward curve might be big enough to trigger a new round of buy and store programmes for offshore vessels that were off-loaded in May when the curve moved in the opposite direction.
Bargain prices for very chartering Very Large Crude Carriers (VLCCs), which can help store up to 2m barrels of oil, could revive the offshore storage trend.
But the danger is that one day storage space might simply run out - or before that the cost of storage rises above that of finance. Cheap and easy lending, the result of the US government's rescue of the banks, is one of the main reasons behind the rise in oil.
Before any of the above happens, the weak state of demand might be enough to topple the market.
OPEC is predicting a sharp drop in oil prices over the next few weeks because of the huge build inventories of crude products, according to this report in the Wall Street Journal.
Stockpiles of diesel and heating oil are at 24-year highs, leading to the possibility of more crude oil production cuts being announced at the next OPEC meeting on 9 September.
Venezuela, Iran and Angola are already apparently exceeding existing quotas, raising doubts over whether any additional cutbacks would work.
Further demand destruction seems likely because - as we've written about before - defaults on unsecured consumer debt, such as credit cards, could result in a second wave in the financial crisis.
"The real unknown is to what extent a recession on par with the 1930s will be turned into something much worse by consumer debt," writes the FT in this article.
As this chart shows UK household debt has risen steadily over the last nine months to stand at 170% of disposable income with the US at 140% - well ahead of levels during the early 1990s recession.
Like this for a while longer?
Source of Picture: Bahnuprasad.net/blog
The question, of course, is what is the right kind of growth?
If you are trader of whatever kind the only growth you care about is in aset values. In other words the more bubbles the better and as long as you get out in time before they pop, marvellous.
But if you are government or a company it's obviously a lot different as this excellent column from Lex of the Financial Times points out.
India's alarm over inflation raises a quandary: Does it rein back spending on infrastructurre to bring govt spending (the main culprit of the rising cost of living) under control or raise corporate taxes and attack the hugely overmanned civil service.
The big and well-connected companies are likely to resist tax hikes with equally well-placed civil servants unlikely to lobby fo their own extinction.
The end-result could be a slowdown in the infrastucture spending necessary to unlock all that rural potential - meaning chemicals consumption remains a fraction of what it is in China.
"Excuse me, are you sure about that?"
Source of Picture: bshort.org
A wise man said to me recently: "All data is wrong; all you can do is make sure you are consistently wrong".
Now this is absolutely not meant to be any criticism whatsoever of what consultants or other market observers do for a living. They are the hand that feeds me and I've never wanted to come across as critical, it's just I wish we could all get it more right sometimes.
Just to emphasise that we can all be fallible - including this particular idiot journalist - here's a story from a long time ago.
I was visiting a certain company somewhere in China with a former colleague of mine with a rather large ego (not sure why this is relevant, other than my amusement at his flustered and blundering excuse-making when we were caught out, rather than the honest and straightforward admission that we'd dropped a huge clanger).
Anyway, we were in the midst of one of those interminably long lunches when an official from the company told us that they had completed a new purified terephthalic acid (PTA) plant in the next field. He added that it was due on-stream in three months' time.
We duly travelled back to Singapore in a state of joy at our "scoop" and published the exclusive story in our magazine.
The following week a consultant called us and said: "Do you know that they haven't even started building the plant yet? They were just putting out a statement to deter others from building - all utter nonsense. Didn't you think to double check?"
I admitted no and he pointed out that one of us should have stood up to pretend to want to stretch our legs or go the bathroom and glance out of the company dining room window at the adjacent field.
Sure enough, the plant didn't start-up three months later and so we had to do some serious humble-pie eating.
You live and learn.
Peering through the fog
On the theme of data again, in the ideal world it might be possible to send thousands of hardworking foot solders out into the field in China to chase down every warehouse of polymers and count every single pallet of polyolefins.
Not not really - don't talk nonsense; in reality, this is far too big a job for anyone.
But why not some kind of inventory survey to help pierce the gloom? If it works it could be extended to other products.
There clearly is a need as this paragraph from an excellent Insight piece on the Q2 chemicals results by Nigel Davis indicates:
"The impact of the recession has been widespread and deep. There is so much talk about the apparent end to de-stocking but inventory levels are still low. BASF said that its customers were ordering at very short notice and only in small volumes. The inventory situation is opaque. There are no reliable figures."
Chemical companies as a whole displayed "dangerously complacent" views about second-half 2009 prospects when they released their Q2 results late last week, argues chemicals analyst Paul Satchell in his blog.
"They believe that demand has bottomed. Although they can't see the upturn yet they believe the worst is definitely behind us," writes Satchell.
"This blog sees this as dangerously complacent, particularly as analysts and investors have returned to a positive stance on the sector."
When you look at the results themselves, the numbers look better but only on a sequential basis (and watch out for some misleading year-on-year numbers in H2 when performances are very likely to be better than the disastrous second half of 2008. A more useful comparison might be with H2 2007).
Most companies reported year-on-year volume declines in the low 20% range - better than reductions of more than 30% in the first quarter of 2009.
Margins were again lower than in the same quarter last year but up on Q1 2009.
In the case of basic upstream petrochemicals, producers have largely been playing catch up with higher crude prices in this year's second quarter.
The overall margin improvements are likely to be the result of stronger returns further down the product chains.
These relatively better downstream performance could well be the result of extraordinary increases in apparent demand for polymers and other commodity chemicals. These have occurred at a time of tight global supply (the result of market-driven deep production cutbacks after the Q4 2008 price collapses and turnarounds).
The true nature of the demand increases is at the heart of the complacency Paul is worried about.
Numbers emerging from China remain counter-intuitive.
In January-May over the same period last year high-density PE (HDPE) general trading was up by more than 130%, even though re-exports were down by 16%.
To repeat yet again, how can this happen while China remains so heavily dependent on exports and the global economy remains weak?
BASF, when it disclosed its Q2 results, said that it expected global chemicals output to fall by 8% this year.
This would mean that by the end of this year, production would be back to 2005 levels.
In other words, the global chemicals industry will have lost three years of growth.
The broad-based chemicals giant is signalled out by Satchell as one of the few companies that has acknowledged the risk of another downturn caused by overcapacities, bankruptcies and growing unemployment.
The end of the bubble in oil and oil-product prices might cause severe problems in H2 this year. This could be before new petrochemical capacities and/or a winding down of speculation in China start directing markets.
"The risk from a potential fall in oil is only being thought about in terms of raw materials pricing. People seem to have already forgotten what triggered the de-stocking from last summer," adds Paul Satchell.
Source of Picture: Australiannews.com
In this article in the South China Morning Post (you can register for free for 14 days if you are not already a subscriber) Michael Pettis makes the argument that China is taking a big risk by stockpiling commodites such as iron ore, copper and oil.
Inventory building is on the assumption that the current strong growth will be maintained. But as we have highlighted on many occasions on this blog, dangerous imbalances make a fall in growth seem more likely.
It doesn't seem logical that in the mighty scheme of things chemicals are being strategically stockpiled as buying chemicals as a hedge against future price rises is far less critical than oil.
But the rebound in Chinese demand for oil - with a lot going into storage - has helped drive up the global price of crude. And, of course, chemicals have followed.
And what has made China well which might make it sick again - excessive loan growth - has helped speculation in commodity chemicals and polymers.
As my fellow blogger Paul Hodges has said before, "Hope for the best, but prepare for the worst".
Source of picture: waittilnextcentury.blogspot
Back to an old theme, the Dalian Commodity Exchange, this story from ICIS news talks of how physical cargoes are being bought and then sold at a price fixed now for November delivery. At the time of writing this was realising a $169/tonne profit.
This could be old news, but I had only been really thinking about paper trade - i.e. the practice of dipping in and out on a daily basis to make a quick buck with only cash settlements taking place.
If this is widespread this is altogether different. It raises the possibility that if a lot of these types of trades take place and there is a sudden fall in the price, those left holding the contracts close to or at maturity might panic. You then could have the classic self-perpetuating downward price spiral in the market as a whole.
And if physical deals like this on the exchange increase, it would be harder to say that the market has no relevance to determining real-world pricing.
Arbitrage like this also might have the obvious effect of forcing increases in off-exchange PE prices (and posssibly all polyolefins as the exchange is apparently being watched by producers every of grade).
As any such increases in the regular market would not be the result of fundamentals, wouldn't this add to volatility?
Or alternatively I suppose, if enough physical cargoes were delivered through the exchange, supply might tighten sufficiently to maintain strong prices in the regular market!
Source of picture: oxo.typepad.com
Leaving China aside for a change - where the speculative frenzy continues apace -Paul Satchell, chemicals analyst, has a four-step measure for assessing whether the US and Europe are really out of the woods.
"Purchasing behaviour is strongly influenced by a customer's confidence, and, in the current context, four distinct phases could usefully be examined," he writes on his blog.
These are:
1. Normal buying patterns - annual/quarterly indications and regular (say, weekly) off-takes
2. De-stocking by customers - sharp reduction of off-takes, well below indications
3. 'Hand-to-mouth' purchasing - small quantities to satisfy immediate needs (indicator of low stock levels and weak confidence)
4. Gradual return to normal buying patterns as in 1.
"We expect that many chemicals manufacturers have experienced at least stages 1, 2 and possibly 3 since mid-2008. A move by major customers into stage 4 would give producers confidence to return capacity from idling.
Only when normal purchasing behaviour becomes commonplace, accompanied by reasonable volume trends, will we be confident that a recovery is soundly-based."
Who is going to be the first to put his or her head above the parapet?
If you are a chief financial officer who has just spent months explaining away how you lost your company so much money in Q4, do you really want to take that risk?
It seems ironic that in the crazy scramble to protect itself from the consequences of the US collapse of the US debt-growth model, China has headed down the same path.
As my fellow blogger Paul Hodges pointed out last Friday, official concerns over the bubbles in equity and property markets are increasing.
Zhang Jianguo, president of the 2nd largest bank, China Construction, has announced a 70% cut in H2 lending to Rmb 200bn ($29bn), "to avert a surge in bad debt".
What's also alarming is that the government is getting increasingly alarmed that too much lending has gone into speculation rather than where it's supposed to go - investment in infrastructure.
This again raises the danger that chemical companies have made unrealistic assumptions about underlying demand.
And this article, by Chen Changhua writing in the Chinese newspaper, Cajing, includes the following point:
"How quickly a country can recover from an economic slump is determined by the productivity of the country. Japan has not been able to recover from the 1990s slump mainly because there are not enough competitive new-generation enterprises to replace old enterprises. "
He warns the same fate could befall China unless the state-owned enterprises, the beneficiaries of much of the huge amounts of new lending, face tougher competition from the private sector.
Never underestimate the power of vested interests.
"Reports of my death are greatly exaggerated," Mark Twain once famously said after his obituary was published before he had died.
Similarly, the US polypropylene (PP) industry had been virtually written off late last year after a calamitous collapse in pricing resulted in inventory losses totalling a staggering $700m in November alone.
But the day of reckoning has been postponed by numerous project delays and a big recovery in Chinese demand.
US PP exports to China more than tripled in the first five months of this year compared with January-May 2008, according to the US Department of Commerce.
Of the extra 2.77m tonnes/year of Middle East capacity due on stream by now, only around 1m tonnes/year has hit the market.
"What also happened from mid-November was that buyers globally, and particularly in China, recognised that prices had hit rock bottom," says Joe Congdon, a consultant with Townsend Solutions.
"And then you had the Chinese stimulus package boosting confidence with the recovery in oil prices from around February, adding extra momentum."
Other export markets were far weaker, however, for US producers - their shipments to Mexico were down by 20% and to Canada by 25%.
Not surprisingly, sales to Brazil tumbled by 43% as a result of a 350,000 tonne/year plant that started up there last year.
Total US PP exports in January-May of this year were 4% lower, and, as the accompanying chart from the American Chemistry Council (ACC) shows, production was substantially down during the whole of the first half of 2009.
But without the surge in shipments to China, which perhaps bought more time for some tough decisions, the overall picture might have been a lot worse.
Nobody had the luxury of time late last year when announcements were made about closing 500,000 tonnes/year of capacity in the first half of 2009. Some of the plants being shut down are part of integrated complexes that are not necessarily entirely loss-making.
Oversupply is still big. Consumption totalled just above 7.4m tonnes in 2008, which was 8% lower than the previous year, with capacity still at 9.4m tonnes.
No further announcements about capacity closures have been made so far this year.
"What needs to happen to bring supply more in line with demand is further closure announcements. Another 500,000 tonnes/year of shutdowns would bring capacity utilisation to 85%, Congdon added.
Townsend Solutions is currently forecasting North American rates at less than 80% for the next five years.
"We are predicting global growth of 3.7%/year in 2008-13 compared with last year's forecast of 4.9% for 2007-12. The future of PP has changed dramatically in just one year," Congdon added.
The US domestic market looks likely to be difficult. Exports will also be hit much harder as a result of the new capacity.
And as for the more immediate prospects, current exports were characterised as "lousy" by a US industry source - the result of the high cost of feedstock.
Monomer supply has been reduced by refinery operation rate cutbacks due to weak gasoline demand. Fluid catalytic crackers (FCCs) are running at around 85%.
But if PP export opportunities existed, enough propylene could be found, according to market sources.
"The market will pay maybe 47-48 cents/lb for bagged homopolymer free on board (FOB) exported from Houston," said a trader.
"But with a potential 4-cent spike in monomer contracts this month, PP producers are looking 53-54 cents/lb FOB Houston in a bag."
The US PP industry has become more heavily dependent on refineries for feedstock supply. Naphtha cracking has suffered as a result of the fall in natural gas prices relative to crude, and ethane cracking is now far more economic.
"Around 70% of C3s are being sourced from refineries and 30% from crackers. The split used to be 50/50," said a US PP producer.
Gasoline demand isn't expected to improve due to the weak US economy.
Another factor behind the weak PP export trade is a steep fall in buying interest in anticipation of the further new volumes.
These include the recent start-up of a 350,000 tonne/year line by PetroRabigh in Saudi Arabia, which is supplied by propylene from a deep catalytic cracker.
Output from Saudi Arabia's new propane dehydrogenation (PDH)-to-PP complexes is also expected to increase, with several start-ups set to take place in China during the second half of the year.
Mark Twain was twice feared dead before he finally passed away of a heart attack in 1910.
And, of course, the US PP industry isn't going to really expire. This is a huge market with very sophisticated distribution and marketing networks.
A lot of acquisition interest seems likely to emerge very soon.
David Barry contributed to this article.
Confidence along all the chemicals value chains is always a key issue because of the ability to aggressively manage inventories, according to the London-based chemicals analyst Paul Satchell.
So there's the ever-present risk of sudden and very disruptive de-stocking. The longer the current rallies in commodity prices and stock markets continue, the greater might be the risk that confidence becomes excessive and mistakes made last year are repeated.
If the events of last year have taught is anything it's that markets don't behave rationally.
Those who arrive late for the party just as the punch bowl is taken away might suffer the most - along with those who've been there for a while but don't make an exit before the bar closes.
Inventory rebuilding
There's plenty of evidence of inventory building in Asia which might not always in response to strong underlying demand. For example:
*Polyethylene (PE) inventories in China at the second and third distributor levels were at very high levels in June, according to one industry report. Polypropylene (PP) inventories were, however, at normal levels.
*Benzene, toluene and monoethylene glycol (MEG) inventories were said by several sources to be also very high in July. Hydro-dealkylation (HDA) and toluene disproportionation (TDP) operating rates were also reported to have been raised - a long with benzene production from coal-based steel plants. Strong overall reformer economics, up until the end of the first half of August, could have lead wrong decisions on production levels
Polyester operating rates were said to be on the rise from H2 July as producers tapped into ample bank lending in order to increase rates. This was on the assumption that the September buying season for textiles and garments would be strong, leading to a big improvement in exports. The next Canton Trade Fair will also be a major indicator (the textile and garments phase of the fair takes place between 31 October-4 November). But there are already signs of improvement: The textile and garment industry exported $14bn goods in June, up 13% from the previous month, said the National Development and Reform Commission. But this was still 10% down on a year ago.
A big influence on confidence will be whether China can be successful in taking the air out of its current real-estate and stock market bubbles.
Supply of new loans in July dropped to $52bn from $197.5b in June - a 77% reduction.
(China might not want to do anything more to spoil the mood of the party before the 60th anniversary of the Revolution, which takes place on the 1 October).
But this bubble has yet to reach the scale of the last one which went pop in October 2007.
At its peak so far this year the Shanghai Composite Index has traded at 3.8 times its book value, barely half the 7.2 book multiple in October 2007, according to the Financial Times newspaper.
There's also plenty of caution
The inventory building we talked about earlier only applies to China and traders in just about every commodity everywhere in the world.
Chemicals companies outside China seem to be exercising extreme caution because of the huge inventory losses incurred in Q4 last year.
"Inventories are being kept low because there is very little visibility down the value chains," said a UK-based chemicals consultant.
"The credit crunch means that it remains difficult to finance inventories.
"Chief financial officers have just spent months explaining away large inventory losses from the fourth quarter. They are unwilling from a career point of view to risk having to go through the same performance again. "
The focus is cost control with market share taking second place.
As one Asian industry source put it: "Sixty per cent of our focus used to be winning on business in a broad range of markets and 40% on cost efficiency; now these percentages have been reversed and we would rather lose sales than break our tighter budgets."
The same applies to operating rates. US and Europe have maintained deep operating rate cuts - and have idled or permanently closed many plants - with the Northeast Asians also said to be showing very good discipline at the cracker level.
Middle Eastern players were in contrast reported to be running flat out in August following production problems in H1. These prevented them from taking full advantage of strong Chinese import demand.
The main focus in polyolefins is on selecting which grades to be produced based on pure economics rather than, again, on winning or maintaining market share.
But will this type of caution be enough to prevent a sudden reversal in petrochemical pricing?
The Oil Factor
The big danger is that any retreat could be driven by an unwinding of heavy speculation in crude.
At the moment the market remains in full-carry contango, meaning the combined cost of storage and borrowing (the full-carry cost) is below the futures price.
If this changes - or quite simply storage space runs out - there could be a sudden stampede for the exit.
What seemed counter-intuitive is that oil prices were at mid-August levels when estimates of demand kept falling.
This is unless you accepted that the oil market was again being speculator-driven.
Petroleum demand would be 1.8m barrels of oil per day lower than it had forecast in June, said oil, gas and refining consultancy Purvin & Gertz.
OPEC said in a report in August that the "market remains fundamentally weak". And it noted that US consumption is "still showing a massive reduction."
Could it all happen at the same?
This big worry is that Chinese growth could fall on less economic stimulus as oil prices collapse and much-delayed new Middle East petrochemical capacity hits the markets.
China is also due to start-up several major cracker projects in the second half of this year.
But the first half of this year was far better than anyone dared to expect. There was a strong recovery in petrochemical pricing with some reasonable spreads at the polyethylene end of the chain as this chart shows (the same applied to PP)
View image
Let's just hope that the traders in all the commodities, including chemicals, don't spoil the recovery before real demand has the chance to catch up with the improved confidence.
Garbage out, garbage in
Source of Picture: The Daily Telegraph
Here goes for the second part of this series.
Is there anybody out there who can help?
How will the ongoing availability of recycled material affect the pricing power of virgin resins? (We have the data to show that imports of scrap polyethylene (PE) and polypropylene (PP) fell in Nov-Feb, but have since heard anecdotal evidence that they have increased again. If so why?
Questions worth asking on recycling:
a.) Has there been a recovery in availability of recycled material? If so why? Is this because of stronger demand in the West for durable consumer goods wrapped in plastics, which are recycled and sent back to China?
b.) And/or is this the result of the rise in virgin resins since March. Has this resulted in a much harder global search for and new sourcing of the scrap material that is available?
c.) And/or has there been a relaxation in the govt regulations covering recycled material that's made imports easier?
d.) If recycled material is now more readily available, has this set a new pricing cap on virgin resins? At what price is it now economic for converters to switch to recycled material?
e.) Has the rise in virgin resins also led to more fillers being used again?
f.) What's the current state of distribution networks for recycled material? We have heard that lots of traders in recycled material went bust during the big price collapse last year as they were left holding high stocks of material that was more expensive than virgin resin. We also understand that remaining traders in recycled material were interested in trading in virgin plastics in Jan-May because the profits were greater. A further factor to consider might be that the Dalian Commodity Exchange (where linear-low density PE and polyvinyl chloride futures are traded - see later notes) is a lot quicker and less risky way of making money than trading in scrap. This might have also hampered the rebuilding of the scrap-supplier network
g.) We have focused on China. Is recycling also a major issue outside China?
All the questions above could equally apply to some of the other polymers. PS is hard to recycle, but what about the impact on, say, PET resin water bottles? We are not sure if this has even been economic, but could this be a factor behind the lack of an automatic recycling price cap down the fibres chain - or any other chains for that matter?
Source of Picture: ChinaMonthlyReview.Org
Polyester operating rates in China have started to rise on anticipation that the global economic recovery has arrived, according to Leonard DeGuzman, chemicals consultant with DeWitt & Co.
Is this another example of a dangerous price bubble or further proof that we are really emerging from the woods?
"The impact of more plentiful lending only started to affect polyester markets from the second half of July when the synthetic fibre makers started tapping into extra credit lines," he said.
"It's the result of greater confidence that textile and garment exports to the West will rise because the economic recovery is really here."
Polyolefin resin converters have been taking advantage of the huge increase in bank loans since as early as the first quarter.
But their polyester counterparts have displayed more caution because of the textile and garment industry's bigger export dependence.
"You have to realise that it's not just clothing exports that have been affected. Non-apparel going into automobiles and housing have also been hit hard," said DeGuzman.
He warned that the poly-condensation players have yet to see any actual improvement in demand.
"They are just making the assumption that the next big order season from the West for textiles and garments, which begins in September, will be much better than in the spring season."
Another key measure will be the third phase of the next Canton Trade Fair, which includes textiles and garments. This takes place between 31 October and 4 November.
The recovery in pricing and confidence in upstream markets arrived a long time ago.
Benzene was trading at or below naphtha on several occasions late last year.
But prices soared to a ten-week high of $900/tonne FOB (free on board) Korea for the week ending 7 August, according to ICIS pricing - a $55/tonne increase. Naphtha was at $651-652/tonne CFR (cost and freight) Japan.
Overall, reformer margins looked very healthy with toluene at $905-915/tonne FOB Korea and mixed xylenes (MX) at $835-837/tonne FOB Korea.
"Target spreads are $150-180 and so this is a very good position," said DeGuzman.
"This is generally true when crude remains under $100/bbl. When WTI surpassed the $100/bbl mark, reformers expanded their target spreads to $200-220/tonne. They grew as high as $250-270/tonne when oil was above $130/bbl."
The rebound goes back to the deep refinery operating rate cutbacks in China in the fourth quarter of last year, which left the country short of benzene.
Imports, as a result, soared to approximately 507,933 tonnes in January-June compared with 327,982 tonnes for the whole of 2008, according to DeWitt.
Where is it all going? Could a substantial amount have gone into speculation and inventories given that the styrenics and phenol chains have been weak?
The phenol chain had improved in early August, however, although later fell back again on weaker crude prices, said DeGuzman.
"Total benzene inventories in China were at 43,500 tonnes in July which is considered extremely high," he said.
"At above 38,000 tonnes local producers started discounting ex-factory prices in order to move material. Prices start increasing when stocks are at 15,000-23,000 tonnes."
But as of the week starting 10 August, DeGuzman said that inventories had fallen to a "snug" level of 25,000 tonnes."
This is another example of persistently high levels of volatility and uncertainty, making operating rate and inventory mistakes all too easy.
A clear sign that confidence in benzene is high is that pricing is closely tracking crude, he said.
Hydrodealkylation and toluene disproportion units are running flat out in Asia, DeGuzman added.
China's economic recovery has also led to a big rise in coal-based benzene output - a co-product of steel production.
"Operating rates at the coal-based plants were 50-70% in March, but in May rose to 80-85%.
"Logistics have also improved because it's the summer season, making benzene buyers more willing to off-take from the steel producers."
Toluene inventories totalled around 95,000-100,000 tonnes in May and in June were at 90-95,000 tonnes.
At the beginning of August, however, they had fallen to 65,000 tonnes and last week to 53,000 tonnes. Normal inventories are 40,000 tonnes.
The drawdown could be because China's refineries are running harder on the July increases in domestic gasoline and diesel prices.
Moving back down the chain, the overall spreads between mixed MX and paraxylene (PX) look healthy
PX supply has also been tight on several delayed start-ups in China.
Japanese producers have been reluctant to raise PX rates on what they say are poor economics with availability from Japan further constrained by outages, said DeGuzman.
Purified terephthalic acid (PTA) producers seem to have had little trouble absorbing the cost push from PX.
PTA prices were $1,120-1,130/tonne CFR (cost and freight) China on 7 August, a $10/tonne increase over the previous week. Four weeks earlier they were at $1,085-1,095//tonne CFR China.
But, to repeat - what is the extent of the actual improvement in synthetic fibres demand?
There are genuine reasons to be a lot more cheerful than a few months ago.
Chinese manufacturers in general are seeing stronger orders from the West as global oil prices and stock markets remain infused with optimism.
But export improvements are on month-on-month bases.
The textile and garment industry, for example, exported $14bn goods in June, up 13% from the previous month but 10% down on a year ago, said the National Development and Reform Commission.
Positive comparisons are also being drawn with 2006.
This was before capacity in many product chains was ramped up in expectation that 2007 to first half 2008 demand-growth levels would be maintained; synthetic fibres were no exception to this.
The longer the commodity-price rallies continue the harder the potential hard landing.
The Canton Trade Fair
Source of picture: Blawg.lehman.com
This interesting article from Bloomberg says that while petrochemical output in China rose in August, textile production actually contracted.
We don't as yet have any breakdown for specific petrochemicals.
If the overall increase includes higher aromatics-to-synthetic fibres output then the gamble that the chain has taken on improved sales of textiles and garments will have so far failed to pay off.
As we discussed earlier on this blog, there is evidence of higher output down the entire synthetic fibres chain.
A key measure of improvement in exports to the West of textiles and garments will be the next Canton Trade Fair which takes place in October-November.
Source of picture: Wikipedia
Because benzene has so many end-uses it's widely seen as a pretty good barometer for the overall health of the industry.
As C6 led the recovery last time are recent declines a sign of another broad-based retreat?
See the slide below:
Or is it more the problems we highlighted earlier in the week that are specific to the aromatics and fibre-intermediate chains?
PX and PTA have also been on the retreat of late.
Before winding up for the weekend, see this report from the New York Times.
More later......
Deep in the heart of the great wealth gap
Source of picture: Blogmlive.com
....the more convincing seems to be the argument that financial and commodity markets have got way ahead of the recovery in the real economy.
Take a recent Credit Suisse report, for instance.
Its analysis of monthly apparent demand in China, up until June, for a few key commodities such as polyethylene (PE), asphalt, copper and iron ore show that they were above underlying real demand.
Are we about to be undone by what has undone is so often before, and as recently of course as Q4 last year?
By this I mean the banks and the speculators. Public money, used to bail out the banks, is being poured into oil and gas speculation, creating dangerous bubbles.
And to repeat yet again, there's all the hot money deceiving us over China. In this case its through state-owned banks which have been instructed to attempt to compensate for the mess made by Western lenders.
China, and indeed the rest of Asia, is busy trying to remake much of its economy in order to be less reliant on export trade which saw unsustainable growth.
The problem for the average worker in the US and Europe is that salaries have been stagnating, or even declining, in inflation-adjusted terms due to the great drift of manufacturing east.
Combine this with the loss of perceived wealth caused by recent harmful financial "innovation" (I'd say that's too flattering a word to use. How about manipulation or fraud now being paid for by the tax payer?), and real demand could take many years to recover to 2004-07 levels.
This article from the UK's Guardian newspaper asks whether we have learned anything from the financial crisis.
A new report from the United Nations Conference on Trade and Development (Unctad), referred to in the same article, concludes that we haven't.
"All these rises in markets are said to reflect economic recovery but it is just another bubble," Heiner Flassbeck, Unctad's chief economist, told the Guardian. "These markets are reflecting a recovery that is not there. Wage deflation is a huge danger everywhere and this is not being recognised.
"Banks have been rescued by the taxpayer and are just returning to casino-style speculation that brought us trouble in the first place. We need to focus banking on supporting investment in productive businesses."
This reminds me of a trip through rural Texas I made in March last year. No luxury condos, country-club memberships and multi-million dollar bonuses were evident there.
Polyolefin producers doing RMB business in China were delighted when price increases on the Dalian Commodity Exchange linear-low density polyethylene (LLDPE) futures contract started leading the physical market on the way up.
"We used the exchange to justify charging higher prices for real deals because in the heady days of February-early August the general trend was up or at least stable.
"The trouble is that prices on the exchange have become more volatile in both directions. Physical trading is also slowing down on what I think are high distributor and trader inventory levels.
"The few buyers who remain interested are picking days when Dalian is on a downtrend in order to ask for discounts.
"It's too early to call this as the correction we've been all been waiting for since April.
"This will become clearer after the long Chinese holidays which take place from 1-8 October.
"At the moment it's hard to decide whether the drop in sales is down to a traditional pre-holiday lull or something much deeper."
August volumes on Dalian were down 58% from their peak so far this year, which was in April.
According to Paul Hodges, who prepared this chart for his Chemicals & Economy blog last week, this indicated that the smart money was flowing out of Dalian and commodity and equity exchanges in general.
His view is that equities, commodites and the real-estate and auto sectors in China have risen way out of line with the underlying demand we keep referring to. As a result, he believes we are heading for a sharp correction.
The polyolefin producer understandably hopes he is wrong but concedes that first-half imports into China, and overall demand, were "highly deceptive" because of the temporary boost from domestic production cutbacks and speculative inventory building.
But still, he added: "I went to China two weeks ago and the mood was bearish because of a decline in Dalian. I came back the next week and the mood was bullish and now it's bearish again!" (he was speaking on Monday this week).
"It's all been driven by sentiment and speculation and by Dalian because nobody has a clue about the fundamentals.
"The big question now is that if the stock market declines continue and liquidity tightens up further, will Dalian volumes go into a long-term decline?
"Less volume might mean has relevance, but with markets so opaque even a market with very low volumes might remain valuable."
His big fear is that buyers will get the most value out of Dalian in future, using it as a big stick to beat their suppliers.
What goes round comes round.....
The US back-to-school buying season
Source of Picture: theglobeandmail.com
As regular readers will remember, last Friday I linked through to this article from the New York Times on the likelihood of a disappointing back-to-school sales season in the US.
I had promised some more thoughts on this article and so here goes....
......This is a sign of the belt-tightening in the US and Europe resulting from the long-term shift in consumer behaviour - as discussed before on this blog - which will lead to:
*Greater dominance of low-priced retailers such as Wal-Mart, which has started selling a Toshiba laptop for just $348. More outsourcing to the developing world seems inevitable as cost pressures increase. The squeeze will work its way up to marginally cost-efficient chemical and polymer producers
*A rise in protectionism: Western manufacturers are likely to respond with more anti-dumping petitions - and perhaps an increase in ex-WTO measures such as complaints over labour and environmental standards. If a cap-and-trade bill is passed in the US we could also see carbon-import taxes for imports from those countries with no comparable systems. Such measures can be politically popular
And what does a 17-inch laptop for $348 mean for innovation in the chemicals industry? Are companies going to bother with expensive R&D?
But to cut back on R&D would show a lack of vision by any company that cannot compete in pure commodities.
More rather than less differentiation is likely to be the key for survival as chemicals and polymers with marginal "added value" will face tougher scrutiny from buyers.
Source of Picture: pupillageandhowtogetit.wordpress.com
And now for something completely different.
I am launching an new and occasional series, hopefully fed by anonymous contributions, on the daftest examples I come across of company strategies.
A friend works for a global training company.
Pass rates are awful at the moment in Asia because students are struggling to grasp the subject matter, which has a very western-focus.
The solution? Less lectures so the delegates concentrate harder in the more limited time available.
Goldman Sachs is talking about crude oil at $85 a barrel by the end of the year.
Sound familiar? Not quite forecasts of $200 a barrel, but is there a danger of repeating the mistake that the James A Baker III Institute on Public Policy claims was made in 2008?
In a new report, the institute claims that in the spring of that year financial speculators - out of touch with physical oil storage - missed the amount of floating storage that contributed to the subsequent collapse.
EF-pub-MedlockJaffeOilFuturesMarket-082609.pdf
Speculators don't care about the effect on the real economy, only in making money their money and getting out at the right time.
"In 2007-08 dramatically rising oil prices fed US indebtedness. This led to an even weaker dollar, driving oil prices even higher," write the authors of the report.
Index funds linked to the value of the greenback have increased their activity on the Nymex fourfold since January 2006, they add.
Non-commercial players as a whole have been lead indicators of pricing - again from January 2006 - thanks to market liberalisation introduced in 2000.
So do we need governments to use strategic petroleum reserves, as did President Clinton in the 1990s, and the use of spare capacity by producers to take the power away from the speculators?
Source of picture: rateyourmusic.com
...steal a lot and they make you a King," wrote the great Bob Dylan in A Sweetheart Like You on his great 1980s album, Infidels.
This seems appropriatea as we commemorate exactly 12 months to the day since the West's financial system imploded.
Obama is talking tough on new regulations - and I am sure he sincerely means it - but Wall Street seems to control the overall Washington agenda.
Why does it matter for the chemicals industry? Because the distortions in energy, other commodity and equity markets are creating a false impression for the industry.
As the president says: "It is neither right nor responsible after you've recovered with the help of your government to shirk your obligation to the goal of wider recovery, a more stable system and a more broadly-shared prosperity."
Hear, hear.
Source of picture: millermmccune.com
How quickly is China shifting its economy away from exports towards stronger domestic consumption?
The answer to this question is, of course, critical to the global chemicals industry.
On the surface it looks good: Retail sales grew by 16.6% in the first half of 2009 and by a slightly more modest 15.4% in the year-to-date.
The problem is how retail sales are calculated as they include government purchases and shipments to retailers before any sales to actual consumers (could these healthy figures include, therefore, lots of unsold washing machines, fridges etc? China's government has introduced a huge subsidy scheme aimed at encouraging rural residents to buy more white goods, but is unsure of its success).
Michael Pettis - on his always-pessimistic China Financial Markets blog - believes this leaves retail sales as a poor proxy for overall consumption.
He quotes Jim Walker's 14 September issue of Asianonomics, where Walker points out that retail sales have grown at 13-24% over the last six years - well in excess of the increases in GDP (gross domestic product).
Real consumption has, in fact, being growing at only 8-9% over the past few years, concludes Pettis.
This would mean consumption as an arithmetical share of GDP has fallen as GDP has been expanding by 10-12% per year.
A lot of money is going into investment in more surplus capacity, much of which might be inefficient because of the low cost of capital, he warns.
Consumers are subsidising lending costs through low-wage growth and low deposit rates, he adds.
Low-wage growth is obviously no good for encouraging greater, genuine domestic spending.
But low deposit rates versus better returns on local equities and the property market have been partly behind the recent booms in both.
Pettis is gloomy about the long-term ability of China's government to re-balance growth.
The Chinese Economic Quartely's view, however, is "worry - but don't kill yourself" over the pace of and extent to which re-balancing will occur.
Temporary setbacks are possible, but the CEQ believes the government has the financial muscle to get there.
China never gets any easier.
Forget supply and demand, just record the index cards....
Source of picture: Heatusa.com
This amateur pundit is beginning to think he got it very wrong.
"I've been thinking the same thing - I was as gloomy as you a few months ago," said an oil-and-gas consultant friend of mine this morning.
"The Singapore property market is close to its all-time highs of 1997.
"The consumer-confidence indices have seen a complete about-turn from 12 months ago.
"Could the improved sentiment itself result in this being a U rather than a W-shaped recovery?"
"Maybe the Chinese government will continue spending as much as it can to stimulate the economy as a hedge against the US dollars.
"Why buy more Treasuries when dollar weakness seems to be a long-term factor with the risk that the dollar might also be replaced as the reserve currency?
"It could well be in China's longer-term interests to keep investing heavily in moving the economy from an export to a domestic focus.
"This will need to involve winding down policies that have provided temporary relief from the global crisis (i.e. huge increases in bank lending and other stimulus policies) in favour of reforms that will boost the pace of genuine, underlying consumption growth.
"These need to include better healthcare and pension systems, financial sector liberalisation and deregulation of distribution and logistics."
"It seems amazing that only a year ago we were talking about something as bad the Great Depression of the 1930s.
"Perhaps the problem is that we've been looking too much at fundamentals - at supply and demand from oil down to finished goods.
"The focus instead should perhaps have been on international capital flows.
"We need to more carefully study how money flows between borders and between different equitiy markets, commodity futures markets and over-the-counter (OTC) trading,"
Here are my views...
Electronic trading systems have revolutionised the speed of capital flows.
The IntercontinentalExchange website, for example, says that transactions on its wide and ever-expanding range of markets each take only two milliseconds.
You have dollar and oil markets sitting on the same exchange. Movements in both markets are presented in real time.
Has this contributed to the correlation between a weaker dollar and higher crude prices -along with the rise of index funds linking the two?
Energy prices have been virtually divorced from stock levels since 2003 and so recent historic-high storage of oil, refined products and natural gas is nothing new.
The current bull-run in crude might well last until real demand catches up.
It seems unlikely that interest rates will rise before then. The US government will want to avoid banks - which are benefiting from public fundingand less competition - in trouble again.
Ironic, isn't it? Bail-out money is being used to make more bets. The bigger the bets the less the risk for a financial institution.
And maybe even the speculators have done us a favour by pricing in future tight supply now.
An issue for chemicals companies is controlling their production and stock levels to reflect the genuine needs of their customers.
The task of separating market froth real and immediate demand would surely benefit from some harder thinking.
MOVING IN THE RIGHT DIRECTION (SORRY, OUCH....!)
Source of Picture: www.autospies.com
The automobile industry in the West has been bought more time by economic stimulus, as this article in The Economist points out.
But some of the discussions at the Frankfurt International Motor Show, which takes place on 15-27 September, will be about the future of the industry over the next few decades.
Producers face big economic, demographic and fuel-efficiency challenges - and capacity is way ahead of current and projected demand. (separate leader from The Economist with some more useful numbers).
So what might this mean for the polymer industry? Here are a few thoughts:
*Demand for smaller cars will increase. Automakers will need to focus on either ferocious cost cutting and/or adding more sophisticated features if they want to achieve anywhere near the same returns for these smaller vehicles compared with big, luxury lines
*This creates a big opportunity for innovation through both lighter plastics (with stricter fuel-efficiency regulations another motive) and plastics which deliver other design benefits. Added value will no longer be defined by a little bit of extra customer service and the odd clever additive. Breakthrough products will be needed
*Feedstock-advantaged producers will be in an even stronger position to meet what commodity-polymer demand remains
*The Western polymer industry's own cost-cutting will have to be accelerated in the search for higher R&D funding, and as auto plants close down (since this recession started, there have been no closures in Europe, according to The Economist). Those with their own advantaged-feedstock positions in the Middle East and/or strong footholds in China will be in a better position to generate enough revenues
*The decline in US and European gasoline demand might lead to short-term feedstock advantages as the value of light-ends declines. Longer term, though, refineries will be shut down - potentially pulling the proverbial rug from beneath even those polymer producers with the right technologies (Note: Western gasoline demand is expected to keep falling after the economic crisis is over on tougher fuel-efficiency regulations and ageing populations, etc)
Source of picture: Chinaenvironmentallaw.com
Talk around the water-cooler in Shanghai offices at the moment is the fall in the cost of a car-license plate in September to a lowest bid of Yuan 27,000 ($3,953) from around Yuan 36,000 in August.
"It surprised everyone because the forecast had been for the price to actually go up to Yuan 42,000," said an ex-pat based in Shanghai.
This has created one of those agonising "if only" moments as he registered his car last month.
But more importantly, the surprise reduction might be an indication of softening auto demand after months of heady growth.
Domestic sales rose by 29.18% during the first seven months of this year over the same period in 2008 to 8.33m units, according to the China Association of Automobile Manufacturers.
The monthly price for license plates is set by auction so this could be an early pointer of the effect of reduced bank lending.
Instead, though, it might be merely a lull ahead of the long Chinese national holidays, which take place on 1-8 October.
"The decline in the price happened despite new regulations making it harder to buy a cheaper plate from outside Shanghai for use in the city," the ex-pat worker added.
"There were around 13,400 bidders for 8,500 license plates this month as against 18,000 for 8,000 plates in August."
Petrochemical prices are also on the slide, according to ICIS pricing.
Fibre intermediates had fallen for four weeks in a row as of last Friday.
Raffia-grade polypropylene (PP) was at $1080-1120/tonne CFR China main port compared with $1130-1200/tonne CFR China a month earlier.
Again, though, it's hard to discern to what extent these falls are due to a pre-holiday business wind-down against something much deeper and more fundamental.
"There are a lot of official statements in the local press about how too much lending went into speculation in real estate, in stock markets and in commodity markets in general. Lending rules are getting tougher," the office worker continued.
"I think there's also a danger of China following the US by enjoying a dangerous 'wealth-effect' from rising property prices. This seems unsustainable as real-estate costs are rising much faster than incomes.
"As was with the States again, leverage is on the rise through grey loans. State-owned enterprises (SOEs) borrow from the banks at preferential rates and then re-lend to less creditworthy companies and individuals."
Even pig farmers are involved in speculation through stockpiling copper and nickel, according to this article from Bloomberg.
Should we now be searching pig sties and farmers' fields for bags of polyethylene (PE) pellets?
"China, please please do what we did and spend what you might not be able to afford..."
Source of picture: The Daily Maily
Whether or not China's pace of economic recovery will be maintained would have become an intensely boring topic of discussion if it wasn't so important for all our livelihoods.
More data specific to polymers and chemicals has emerged as to just how staggering the rebound has been: Imports of un-compounded polyvinyl chloride (PVC) were up by 100% in the year to June compared with 2008, according to International Trader Publications Inc.
Benzene, vinyl-chloride monomer (VCM), methanol and propylene imports were up by 100-550-% during the same period, the publishing company added.
"During the last recession, when prices bottomed around December 2001-February 2002 period, there were also spikes in imports of some products into China," said Jean Sudol, the company's president.
"What was different then versus now is that fewer products were involved, the spikes were nothing like the magnitude we are seeing now, and the surge only lasted 1-3 months. This time it's endured for 7-8 months."
Evidence of weaker demand has emerged over the last few weeks.
At the risk of boring you yet again (if you are not too worried about your job), is this demand-decline partly the result of too-much of inventory re-building of chemicals, polymers and of semi - and finished-goods?
All will hopefully become a little clearer after the very-long Chinese national holidays from 1-8 October. It is hard to discern to what degree recent sales dips are due to business winding down ahead of this break, overstocking and bleaker economic prospects.
On the surface, a lot of the macro-economic numbers look terrific: Retail sales grew by 16.6% in the first half of this year and by 15.4% up until the end of August.
But scratch the surface and you find that retail sales include government purchases and shipments to shopkeepers before any sales to consumers are recorded.
"This makes them a very bad proxy for consumption," writes Michael Pettis on his blog, China Financial Markets. Pettis is a professor at Peking University's Guanghua School of Management.
Retail sales-growth was in excess of the expansion in GDP (gross domestic product) over the last six years, he adds.
"Consumption (real consumption and not the retail-sales numbers) has been growing over the past several years by about 8-9% a year, while GDP has been hurtling forward by 10-12% a year," he argues
"Not surprisingly, this implies arithmetically that consumption is declining as a share of GDP."
The China Economic Quarterly (CEQ), an online research publication, agrees that the retail sales numbers aren't much use in tracking genuine consumption. Even government officials don't attach much credence to them, it adds.
But, unlike the more-pessimistic Pettis, the CEQ believes it's well within China's capability to maintain GDP growth at 8-9% in 2010 (growth is expected to easily reach 8% in 2009).
The reason is that there is still plenty of money in China's state-owned banks to support high levels of lending with equal oodles of cash around to maintain investment in public infrastructure.
As to asset bubbles which might lead to drastic government slowdown measures, the "hysteria is premature", writes the publication in its third-quarter issue.
"Price-earnings ratios are well under half their truly speculative October 2007 peaks.
"Our detailed analysis (of the housing market) suggests that the pool of prospective upgrading -and investment buyers is so large that the market can continue to rally for another year or so."
But it warns: "Continued growth at 8-9% in subsequent years will depend on whether the government uses the time it has bought through monetary stimulus to push through domestic market reforms."
"We are pretty optimistic about financial sector liberalisation; less so about service-sector reform."
China has finally created a bond market, meaning capital is being more accurately priced rather than always handed out virtually free to state-owned enterprises (SOEs).
A new stock market for small -and medium-sized enterprises will probably begin trading in Shenzhen in the fourth quarter this year.
These measures should help shift the economy away from dominance by the SOEs towards what in theory are more-efficient private companies.
Extra credit mechanisms are also being created to increase the availability of consumer finance.
"But we have yet to see much evidence of a serious effort to deregulate service sectors, notably distribution and logistics, that remain sink-holes of state-dominated inefficiency," the publication adds.
Liberalisation and deregulation are crucial in re-balancing the economy away from exports and towards a genuine growth in consumption as a share of GDP.
"Don't trust the government, any doctor or any lawyer," I was once told by a drunken tour-guide in Greece before he started reciting poetry.
In this case we have to trust the Chinese government in the hope that it can do a better job than certain White House administrations.
You could argue that wouldn't be particularly difficult.
Source of picture: zerohedge.blogspot.com
It might seem a little melodramatic (and it's a wonderfully melodramatic name), but what kind of threat do dark pools - and other off-exchange trading mechanisms - present to all our livelihoods?
You can see that the World Federation of Exchanges might have a financial motive in making their complaint to the G20 over the threat these mechanisms represent to their "macro-economic role".
But after the role that the shadow banking system played in the financial crisis you have to be worried.
The $64,000 dollar question has to be how you regulate dark pools etc.
And for the sake of melodrama: Unseen forces, unaccountable and anonymous, might start determining all our livelihoods.
Sudden and entirely unpredictable shifts in global commodity markets could push countries into financial ruin and even wars.
At least in the case of the exchanges, because pricing is transparent, you can challenge the logic of say the futures price of oil being way out of step with supply and demand fundamentals.
But the problem with these dark pools etc is that you won't have a clue on what might happen until it hits you.
I thought I would publish Michael Pettis's reply to my piece yesterday here rather than approve as a comment:
Good piece but one correction.
I don't think 8-9% growth this year and next is impossible. On the contrary, I think that if the government keeps up its stimulus they can force high levels of growth for at least another year or two.
My concern is different -- that unless consumption picks up signficantly this kind of growth is not sustainable without continued government pumping, and if it leads to wasted investment, which it almost certainly will, the cost of cleaning it up will fall, as always on Chinese households.
This will make even the consumption growth of 8-9% of the past few years tough to maintain. Since GDP growth must be less than consumption growth over the next decade, ultimately this is the number that has to be boosted.
Thanks, Michael
SWIMMING IN OIL?
Source of Picture: fashionfunky.com
The threat posed by Iran test-firing its Shahab-3 missiles and a rally in US equities on increased M& activity in the drug and technology industries pushed crude slightly higher yesterday after last week's steep declines.
This is yet further evidence that the oil market is why out of sync with real demand for the black stuff and just about all its derivatives.
"July's Vehicle Miles Travelled (VMT) figures were released last week, with total miles driven clocking in at 263.4 billion miles, up 2.3% from July 2008," writes today's Schork Report, the daily online data and analysis service for energy and shipping markets.
"That is a solid increase but keep in mind: Gasoline prices have decreased by 38% since last year.
"Further, July 2008's VMT figure was 3.5% lower than July 2007. Therefore, this year's 'increase' was 1.3% below 2007 and 0.5% below the 2003-07 time-step, thereby continuing a steady VMT decline."
This is more evidence that we are miles away (excuse the pun) from the credit-fuelled demand levels of 2003-07 for everything from barrels of oil and gigajoules of natural gas to synthetic dog coats.
Chemicals demand in the UK might not return to pre-recession levels until as late as 2020, Oxford Economics has warned.
But don't bet against speculators pushing crude prices back up again, especially if conflict breaks out with Iran over the missile testing and the alleged development of nuclear-weapons capability.
This is despite weak demand, as the Schork Report has pointed out, and deeply oversupplied crude and crude products markets.
Such is the oversupply that even a disruption in Iranian production (Iran is the world's fourth-largest producer) might not make much of a difference, assuming that the conflict doesn't spread to elsewhere in the Middle East.
"Saudi Arabia was running just about flat out in 2007. Now it has 6m barrels a day of spare capacity," said an oil industry observer last week.
Recent falls in gasoline mean that its pricing could be close to "meltdown", according to this report from Bloomberg.
And as my fellow blogger Paul Hodges pointed out last week, the historically high amount of oil in floating storage is now being delivered to refiners due to a narrowing of the contango.
So I am with those who believe we are heading for $45 a barrel before the end of this year.
Still, a two-way bet might be advisable - just in case there is another rally.
Source of picture: Time.com
Yesterday I talked about lack of willingness by western banks to lend money because their focus was on rebuilding reserves.
But Steven Major, Global Head of HSBC's Fixed Income Strategy Team, puts a different spin on the problem.
In the Fragile Recovery video from the Financial Times' View From The Markets section, he said banks would dearly love to be earning 8-10% from loans rather than the paltry interest rates on leaving cash in reserves or on low-yield government bonds.
The demand for loans simply wasn't there because the "real economy" had yet to recover to the extent of financial markets, he added.
Stock markets have long been lead indicators, pricing in recoveries before they reach consumers and companies. The same has also become the case with energy markets where price discovery is now driven by futures contracts.
Equities had already priced in strong growth in consumption and company profitability in 2010-11, Major said.
Neither, of course, is guaranteed - meaning that investors entering markets now "are not being paid for the risk", he continued.
The same is true for oil, but fundamentals are set to catch up very soon with a dip to $45 a barrel on the cards before the end of the year.
Here are a couple of questions anybody attending this weekend's European Petrochemical Industry Association (EPCA) meeting in Berlin might want to put to chief executive and chief financial officers etc:
*How much of your recovery over the last few months has been the result of cost-cutting and restocking?
*When both come to an end (and this may well have already happened for restocking) how confident are you on a scale of 1-10 that you'll be able to continue delivering quarter-on-quarter improvements in 2010-11? In other words, can you grow volumes?
The answers could be very telling.
....what do these environmental issues mean for Thailand as an investment destination?
The Map Ta Phut refinery-petrochemicals complex
Source of picture: Pattaya News
By Malini Hariharan (Malini is now joint blogger for Asian Chemical Connections)
Here's yet another unexpected project delay that could prop up markets in the fourth quarter.
The Thai Central Administrative Court decided to halt construction of 76 projects at Map Ta Phut on environmental grounds last week.
The long list of projects includes new crackers and derivative projects by PTT and Siam Cement/Dow Chemical.
PTT was due to have started commissioning a new 1m tonne/year cracker complex in the fourth quarter, while Siam Cement and Dow Chemical's 900,000 tonne/year cracker and downstream plants were scheduled to commence operations next year.
Both of the Thai companies have issued statements that the projects are likely to be delayed, and PTT has even decided to delay a maintenance shutdown at one of its crackers from October to January 2010.
Thailand is already a net exporter of PE and PP and the new projects would have increased the country's export burden.
One local newspaper report said that projects could be delayed by a year, although the two companies have not yet declared revised start-up dates for their projects.
PTT issued a statement that it was working closely with government authorities to resolve the crisis and that it had submitted a petition to a higher court. The prime minister has already asked the industry ministry to appeal against the ruling.
The Bangkok Post reported that the appeal would be made in two parts.
The first section would ask for court permission to allow industrial projects that have no impact on the environment to continue, while the second would seek a temporary halt to projects that had problems with environmental impact assessment (EIA) studies.
The story did not identify projects that had EIA problems.
There is no doubt that the government will have to act fast. But it faces a tough task of balancing public opinion and expectations while protecting the interests of local and foreign investors.
Public opinion - seen in some of the comments that the Bangkok Post report has drawn - will be difficult to ignore.
It might be even harder to address growing concerns about Map Ta Phut as an investment destination in Southeast Asia.
This latest crisis in Thailand is also a fresh reminder of the growing power of the people in many parts of Asia to influence chemical-project activity.
Protests against construction of mega projects on environmental grounds are getting louder and louder.
.....and a January collapse
PERHAPS commodity and equity markets will continue to keep denying the weak fundamentals until bonus cheques for fund managers etc have been signed and are in the bank.
Fund managers, because of the way they are benchmarked, will be desperate to stick close to the performance of stock market indices, said John Authers in this article from the Financial Times.
"It is a disincentive (the benchmarking) to making a big move either into our out of the market even if a fund manager has a strong view that we are heading for a rally or a fall," he wrote.
"This behaviour may yet allow the current stock rally to persist in spite of the disappointing economic data."
The same, I guess, could apply to crude - blowing the case for $45 a barrel by the end of the year out of the water.
Barclays Capital is, in fact, predicting a rise in oil to $70-80 a barrel over the next month with Goldman Sachs forecasting $85 a barrel by end-2009.
So once the bonus cheques have cleared, a combination of sobering economic facts and investors getting out while they are ahead could cause a steep dip in January.
Might we then see another temporary bottom to crude, equities etc and further buying opportunities?
This will depend on government cash remaining cheap and plentiful and an improvement in the real economic outlook.
My bet is on a prolonged trough because we are back to 2006 demand levels in chemicals and presumably lots of other stuff - before the credit-fuelled false-bottomed boom.
Britain's last generational shift: The 1980s Miners Strike:
Source of picture: www.wsws.org
My late parents hated even the concept of debt - let alone the insanely irresponsible error of actually borrowing money.
This is not surprising as my father could remember, when he was a boy, queuing for free food handouts during the Great Depression.
My mother was slightly less poor when she was a child (but still poor by any normal Western modern-day standards), but believed in thrift just as fervently.
Their attitudes were shaped both by the Great Depression and the deprivations of Great Britain during and immediately after the Second World War.
So when I ran up an overdraft of few hundred pounds Sterling when I was student they were less-than-impressed - especially as the bank manager phoned to ask for my cheque book and cheque-guarantee card back!
Their approach to debt, aside from an expensive passion for beer when I was a student, is ingrained.
Despite my fascination with commodity and financial markets, I would rather observe from the sidelines.
The question now - as the West still struggles to cope with high levels of personal debt left over from the current crisis - is whether we have undergone another generational shift.
Quite possibly, thinks Paul Hodges of International eChem.
A whole generation has grown up with easy and cheap money being the norm and markets and assets only heading, on the whole, in one direction - that's up, of course.
In Britain, the last big shift in attitudes to debt and spending began back in the 1980s with the Thatcher revolution.
Millions of council tenants started buying homes for the first time and dabbling in shares, as the very nature of British society moved away from collectivism towards a greater "me" culture.
Financial deregulation also took place on both sides of the Atlantic and bubbles were kept inflated by central banks.
The rest, as we know, is very painful recent history.
How will the children of parents now facing foreclosures, personal bankruptcies and long-term unemployment respond over the coming decades? Will they start keeping their money beneath the proverbial mattress?
Can we also expect a permanent shift to more prudent forms of banking?
What will this mean for growth in chemicals demand?
"THIS IS RIDICULOUS. I WAS SITTING AROUND UNSOLD FOR MONTHS AND THEN WAS FORCED TO JOIN A SANTA FLEET-HIRE SCHEME. HOW HUMILIATING"
Source of picture: www.diytrade.com
BEWARE the prophets of recovery in exports of Chinese manufactured goods during the current Christmas buying season.
Labour markets in the key export-processing provinces, such as Guangdong, are reported to be tight as production of everything from I-Pods to Barbie Dolls is ramped up.
It would be easy to misinterpret this as a recovery in Western demand, but how can this be when the real economic news remains bleak?
On a month-on-month basis there is bound to be an improvement because, of course, this is the Christmas buying season for the big retailers.
And any comparison with sales to the retailers in October-November is bound to look pretty stellar compared with the exceptionally bad same two months in 2008.
But will the retailers overstock only to find Western shoppers less-than-eager to empty the shelves? (Is this is a bigger-than-usual incentive to wait for the traditional January sales?).
And/or will too gung-ho manufactures in China be left with high inventories?
There have been plenty of extra incentives to import raw materials, including polymers and chemicals, to make finished goods in 2009 - from easy credit to increases in export-tax rebates.
This has contributed to the very high import volumes we've seen across a broad range of chemicals and polymers for the last 7-8 months.
China is in danger of only growing one export, therefore: Deflation.
Offsetting the risk of being over-optimistic?
Source of picture: thetradingpit.net
MAYBE there should futures contracts in realism versus recklessness. That way any senior company executive who wants to take a punt on next year being better than 2009 can offset the risk by going "realistic" on the futures markets - and, of course, vice versa.
How on earth you would design futures contracts around such abstract and subjective concepts as realism and recklessness is a challenge I feel only able to deal with this weekend - over a few beers.
This post is not all nonsense. Stories posted by my colleagues from ICIS news indicated chemical industry leaders were going long on realism in physical markets during this week's European Petrochemical Industry (EPCA) conference in Berlin.
Margins will not be back to 2007-08 levels until 2011, said Tom Crotty, INEOS Olefins and Polymers CEO.
Europe has yet to feel the full impact of new Middle East capacity, much of which has so far been sucked into China, he added.
The capacity down cycle will hit very soon as China's broad-ranged overstocking leads to more of these Middle East volumes heading to Europe.
"Anyone who says that the industry is going to be in great shape in the middle of next year is fooling themselves," said Shell Chemicals vice president Graham van't Hoff.
"We're still waiting for the major impact of excess capacity from the Middle East that we have to be braced for and ready to manage."
Demand wouldn't return to earlier levels for 2-5 years, he added.
Now that's what I call wide-ranging scenario planning.
ExxonMobil, as they often do, talked about feedstock innovation and cost savings; hardly surprising as they are rather good at both.
And Albert Heuser, president of petrochemicals for BASF, expects overcapacity in the market in 2010-11.
If only this realism had been around in sufficient quantities during the boom years.
Will the experience and knowledge gained from this recession be retained to prevent another down cycle of recklessness?
At an investors conference call yesterday, Indira Nooyi, the chief executive of PepsiCo, said she expects the 'age of thrift' in consumer spending to continue into next year.
As consumers in the developed world are placing value at the top of their agendas, the company's efforts in the future will be on developing lower priced products. Pepsi has, in the past, been quick to spot and adapt consumer trends such as the introducing healthy snack food. And if it now believes that consumers will not be interested in pricey products, others too will follow.
So what does this mean for the chemical industry? Will companies such as Pepsi move to cheaper packaging formats? Will these companies be less interested in packaging innovations?
Picture source: PepsiCo
This will have implications for innovation in the chemicals industry - especially development of value added grades/products? Many of the leaders in the industry have been using innovation as a platform to differentiate themselves. Is it time to reconsider this strategy?
Or will consumer product companies simply use this trend to drive an even harder bargain when purchasing raw materials?
Flying the flag for Q3...
Source of picture: etftrends.com
Yes, Q3 earnings season is almost upon us with the usual headline-grabbing improvements in carefully selected reported numbers.
What this season might tell us about the overall direction of everything is, to start the week on yet another pessimistic note, hardly uplifting.
John Authers is once again worth quoting from his Long View column in this weekend's Financial Times.
The S&P 500 enjoyed bounces of 2-3% in 2000-2008 immediately after the first - to third quarter results were announced, according to a study by Andrew Lapthorne of Societe Generale in London.
But the index, when you take these increases out of the calculations, fell on an average annualised basis of 1.2% - suggesting some economy with the truth in company reporting.
This year's Q3 season might help to support equity markets until the end of the year if, again, the clever bean counters have been at work - and companies follow their usual practice of under-promising and therefore appearing to over-deliver.
Next year is the problem.
Price/earnings ratios on an operating profit basis are way ahead of where they were in any previous economic recovery since the Second World War, said David Rosenberg of Gluskin Sheff in Toronto.
In other words, companies will have to deliver spectacular profit and/or revenue growth next year to justify current valuations.
The mood in bond markets - where yields indicate expectation of a slow and non-inflationary recovery - is very different.
As we've said before on this blog, commodity and equity markets have priced in a recovery which might well not happen in 2010 or even 2011.
Companies across many industries, including chemicals, have made improvements mainly on re-stocking and cost-cutting this year.
It's hard to see how they can make similar gains in 2010 - particularly in commodity chemicals where we are only just beginning to reach the bottom of a prolonged supply-driven down cycle.
And when equities go in the New Year so could crude, potentially creating another mini de-stocking crisis. This will be nowhere the near the scale of Q4 2008, though, due to much-tighter inventory management policies.
Company performances might get worse never mind better, making current valuations seem far to premature.
The Chinese government appears to have an important objective to achieve while promoting commodity futures trading in the country?
A report in today's Wall Street Journal says that the government is positioning its futures markets in setting world prices for metal, energy and farm commodities. Jiang Yang, chief futures industry policy maker and assistant chairman of the China Securities Regulatory Commission is quoted as saying that the government has a long-term goal of increasing China's influence in pricing. Yang also says that futures may assure Chinese commodity importers of 'fairer deals'.
Pic source: Xinhua
The big implications are for the oil market as China imports huge volumes every year. The Shanghai Futures Exchange is said to have plans of introducing its own contract for crude oil next year. This may not be an immediate threat to the Nymex contract but the development needs to be watched closely especially if it has the support of the Chinese government.
"Beijing believes hosting big futures markets will enhance the country's economic security by essentially advertising what the world's biggest customer for some commodities considers a fair price. For the rest of the world, the exchanges could mean less guesswork about China's buying habits, possibly reducing volatility in the global market."
The strength of Chinese buying in the physical market has for some time now guided global petrochemical prices. But with the lldPE and PVC contracts turning out to be spectacular hit this year on the Dalian Commodity Exchange will these contracts soon become a reference for global pricing?
"Take it from me, peripheral vision isn't all it's cracked up to be, especially if you want to get a decent annual bonus...."
Source of picture: www.whipnspurs.co.nz
Here's a rant for Tuesday - with thanks to Paul Hodges for informing some of the thinking (I'd like to lay credit to certain parts of this...)
Purchasing managers are professionally required to wear blinkers. All they care about is making sure that they are ahead of the game because of the way their performances are measured.
So up until Q4 2008 they ignored headlines such as "US auto demand slumps on surging gasoline costs and slowing economy" and "western house prices plummet on sub-prime mortgage crisis."
Oil prices seemed to be on the forever-up and liquidity was abundant. The result was purchasing in big volumes ahead of anticipated further price rises until the great unravelling post-Lehman Brothers.
Senior strategists - whose job it was to worry about the big picture - were also wearing blinkers, deluded in the belief that 2006-07 demand levels would go on forever.
Cracker operating rates were going to remain comfortably above 80% during the coming down cycle, was the consensus view in the first half of last year.
Now the industry is going to have to live with global averages of between 60-70% over the next few years.
The chemicals industry has lost three years of demand growth as global production is now back to early 2006 levels. It is unlikely to budge much in a favourable direction until at least 2011.
The reason is that real western growth, minus all the froth of commodity and equity markets, is going to remain weak on unemployment and high personal debt problems.
Another concern is unwinding government subsidies.
Too many people might have been misled by Chinese imports over the last 7-8 months.
The strength of these imports wasn't sustainable and was due to temporary factors that have now come to an end.
Banking on China as the leader of a global recovery is utter nonsense when you look at the country's low per capita chemicals consumption and its heavy export dependency.
Any Northeast or Southeast Asian producer high on the cost curve is likely to find it harder to penetrate western markets in 2010.
How can these producers - when they import crude oil - export, say, PE to Europe at fair market prices in the face of much-stronger Middle East competition?
Trade lawyers should do very well from anti-dumping cases in 2010.
This is a protracted supply-driven U-shaped downturn, and we are only just getting towards the bottom of the U.
Lots of Middle East capacity has been delayed - and the next big wave of Chinese start-ups is only just beginning.
Studying the tone of Q3 results statements will be a good indication to what extent senior execs have taken on board this new reality (actually it's not that new - we've been waffling on about this on this blog for months).
I have been digging a little deeper into the Map Ta Phut issue and it looks like expectations of major delays to projects at the site were a little premature.
Construction has not stopped despite a ruling by Thailand's Central Administrative Court to stop work on 76 projects at the site. The ruling was directed at the government which has so far not asked companies to halt work as all the projects have received environmental clearance. The government has now appealed to the Supreme Court and Thai companies are also planning to approach the court.
Although work is ongoing companies may not receive permission to commission their projects if the issue is not resolved quickly. The first of the major projects due at Map Ta Phut is PTT Chem's 1m tonnes/year cracker. The company is still hoping to commission this at the end of the year though it is unlikely to run at full capacity until a new gas processing facility is brought onstream in first quarter of 2010. PTT Chem's plan is carry out a maintenance shutdown at one of its smaller crackers to divert feedstock to the new cracker during the commissioning period.
Pic source: Wikimedia Commons
Nobody is very clear on how quickly the government will be able to sort out the Map Ta Phut problem. I was told by one Thai analyst that anyone giving dates is surely bluffing. But he believed that it is likely to take months rather than years to work out a compromise.
The government is certainly under a great deal of pressure - investment, employment and GDP will be hit if projects at Map Ta Phut get delayed but at the same time it cannot afford to ignore the demands of the local people.
And what the people want is full implementation of Section 67 of Thailand's 2007 constitution. This guarantees Thai people the right to participate with the State in preserving the environment and stop any project or activity which may damage the environment unless it has been evaluated and approved by an independent body made up of representatives from private environmental and health organisations.
But the government has yet to form an independent body or pass a law that companies can follow while seeking environmental clearance for their projects.
It will certainly do so now which means that companies will need to carry out a Health Impact Assessment (HIA) study besides the Environmental Impact Assessment study (HIA). And this, in the words of the analyst, will not only take more time but will also be a tougher hurdle to clear.
Source of picture: www.textually.org
The political sensitivity surrounding Iran is so great that US-based companies are not even allowed to attend presentations by Iranian officials at conferences, a source said.
"I witnessed a recent walk-out during a presentation by the National Iranian Oil & Distribution Company (NIODC)," he said.
But a European office of a US company is able to do business with the Middle Eastern country, provided an entire technology and project is developed by that office.
"If as much as one email passes Europe and the US headquarters, that's enough for an investment to become technically in breach of sanctions," the source continued.
These nightmarishly difficult restrictions come as Iran attempts to build no less than seven grassroots refineries in a attempt to rectify deficits in fuel products - one each at Shahriar, Anahita, Caspian, Khuzestan and Pars and two at Hormuz.
Numerous other expansions at existing refineries are being planned with the likely investment costs running into many billions of Euros.
Scepticism is easy following big delays in previous natural grass processing, refining and petrochemical investments due to sanctions that limit financing and technology and skills transfer.
Doubts have also been raised over the level of investment in maintaining output from the oil fields that would supply this new refinery capacity.
In the case of the two crackers finally brought on-stream at Assaluyeh, the slow pace of growth in gas-processing means that they suffer operating rate cuts and even shutdowns during the winter.
All the gas being processed during the winter months has to be diverted to domestic use because of a big shortfall in supply.
Honest and hardworking company officials on both sides of the political divide deserve solutions.
"YES, I HEAR YOU - I'M LISTENING...."
Source of picture: New York Daily News
How ridiculous does crude-oil pricing have to become before regulatory reforms occur that limit the role of financial speculation in a helpful way?
This was the question being asked by a refining industry source today after he had read this story from the Financial Times.
Call options are about to kick in which could drive the price of oil even higher even though the fundamentals are "mildly bearish", according to the FT.
Put options, when they take effect in significant numbers, have the opposite effect.
Real demand is still a long way from catching up with oil markets so heavily influenced by the financial or non-commercial players.
"Whatever too ridiculous is, and I'd argue last year was a stupid as it can get, the Saudis are likely to get on the Bat Phone to the White House at some point and demand some changes. The US government will be obliged to listen," added the source.
Inability to plan an economy because oil is so out-of-sync with the fundamentals is playing havoc with the Saudi budget-planning process, he continued.
The same applies to every government. If the other major oil producers backed Saudi Arabia, we might seem some useful changes.
This year is a positive for the world's biggest crude producer - as we discussed on Monday. The Saudi government had budgeted for an average oil price in 2009 of $40 a barrel, but this is likely to be closer to $70 a barrel, giving more leeway for infrastructure spending.
But the unpredictability of a market skewed by short-term financial sector interests could just as easily work against the Saudis.
They are pursuing a hugely important economic and social agenda which requires constant and steady funding.
At a chemicals industry level, tracking activity on the Nymex, the International Continental Exchange and the Dubai Mercantile Exchange is critically important if you want to make meaningful financial forecasts.
These forecasts should influence chemicals pricing decisions. Why push for an increase that isn't in line with the fundamentals in your markets if you believe that a spike is entirely paper-trade driven and won't last?
The danger is that if you ignore what might be underlying weaknesses in your markets, you will suffer on the downslide as customers attempt to recover their losses.
I am still thinking, as we've also mentioned before, that this rally will continue until the New Year at least - when all the fund managers' bonuses will be in the bank.
Profit taking could take place in Q1. Positions could then be rebuilt when another bottom has been reached in crude and equities ahead of the 2010 bonus payouts!
Confused Direction
Source of picture: China Daily
A TIGHTER monetary policy is being evaluated by China's State Council, one of the country's most-powerful legislative bodies, according to numerous media reports - including this one from Reuters.
And the chairman of China's sixth-biggest lender was quoted in the Financial Times today as saying that the government should not be afraid of a "moderate slowdown" in the economy.
"Monetary policy must not neglect asset-price movements," added Qin Xiao, chairman of China Merchants Bank.
These comments follow bank loans surging by 149% in the first nine months of this year over the same period in 2008 to $1,260bn.
Economists are divided between those who think that the surge in lending will be inflationary and those who believe it will be deflationary because of new industrial capacity.
But it seems clear the government is getting worried. It faces the hard job of easing back on stimulus without causing a double-digit recession (overhasty increases in deposit rates caused a sharp and painful slowdown in 2007).
The rate at which lending is increasing has already been slowed with stricter guidelines on preventing easy money from being channelled into speculation.
Now that something bigger appears to be in the offing, when can we expect the big policy shift?
Not before next February's Chinese New Year, said Stephen Green - economist at Standard Chartered in Shanghai.
Expect chemicals markets to be blighted (or blessed if you are trader who makes the right moves) with rumours and counter-rumours about policy changes until official announcements are made.
The longer the details remain unconfirmed, the more likely it is that buying ahead of the holidays will be quieter than anyone had expected.
Even when the announcements are out there, debate could rage on the impact of the measures - making it even harder for producers and buyers to read the tea leaves.
Source of picture: www.todaysfinancialnews.com
China's feverishly fast construction of roads, power plants and new industrial capacity has been designed to offset the decline in exports - and what a short-term success the policy has been.
Of the 7.7% of GDP (gross domestic product) growth recorded for the first nine months of this year, 7.3 percentage points was accounted for by investment and ONLY 4 percentage points by consumption growth, according to today's Lex column.
ONLY is in capitals because this seems at odds with the headline 15.1% increase in retail sales recorded for January-September.
But as we've mentioned before (click here on the link for the September archive and go down to the 16th), even the National Bureau of Statistics (NBS) thinks retail sales are a bad proxy for real consumption growth because they take into account wholesale deliveries; in other words stuff that might be sitting in warehouses or on shop shelves unsold.
And what if the government's assumption that it can tide the economy over until exports bounce back proves to be unfounded?
September exports fell, even though the decline slowed from August. But shipments were still 15% worse than they were in September last year - when Lehman Bros went belly-up.
The size of government stimulus has been enormous - probably set to be more than 15% of 2009 GDP - with bank lending registering big growth in September over August.
This led the State Council to indicate earlier this week that monetary tightening might take place because of concerns over asset bubbles.
This won't be before at least the Chinese New Year, which takes place in February 2010, according to economists.
Today, though, the NBS - which announced the nine month GDP number and other statistics that have led to lots of reports of a sustained recovery - said that current economic policies will be maintained.
So who is right, the State Council or the NBC?
Should the government be worried about debt-fuelled asset price bubbles?
Could these bubbles get out of hand forcing a withdrawal of stimulus before exports have recovered?
House prices are up by 73% so far this year, according to this article from the New York Times.
"Not even Alan Greenspan managed that," said my fellow blogger, Paul Hodges - referring to the former Fed chairman's famously lax monetary policy.
Evidence also continues that commodity stockpiling is still taking place.
"We do not expect the (stockpiling) trend to last. China's recovery is being driven by investment, but the recent pace of commodity import growth has been much faster than justified by the rise in current demand," said Mark Williams of Capital Economics in research report earlier this month.
"Inventories of many metals have more than doubled since the start of the year. Copper inventories are up 500%."
And, according to the latest entry on Michael Pettis's blog, concerns about stocks that don't make it into official data are growing as the search for some way of measuring these hidden inventories continues.
Pettis quotes a Wall Street Journal article which says that as much as 900,000 tonnes of unreported copper stocks could have built up in China.
One could argue that the surge in commodity imports indicates strong underlying demand.
But how can this be if imports are down and consumption as a proportion of January-September GDP growth was so low?
And what about all these reports of high inventory levels?
Further - a front page article in today's Financial Times points out that growth in nominal terms for the first nine months was 4.7%, meaning deflation was behind the higher headline number.
Falling prices hardly suggest a domestic economy in the midst of a consumer boom.
The bubbles in real-estate, equities and commodity markets such as the Dalian Commodity Exchange - which provides polymer futures contracts - are a separate ossue.
These bubbles are being pumped up by the speculators with access to easy bank lending - different, of course, from the average guy in the street who might have lost his job because his factory has closed down.
September chemical import data is due out any day soon - and we'll give you the details as soon as we can via our friends at International Trader Publications Inc.
Positive statistics might well be seized on by chemicals traders going long and chemical companies trying to talk-up share prices.
But the numbers will need to be analysed in light of all the above.
Source of picture: www.msnbc.msn.com/id/23512037/
CHINA is making export gains at the expense of other higher-cost competitors that might not be sustainable because of reasons including rising trade protectionism and economic rebalancing.
Chemical companies need to factor in this risk - and take into account how overall demand might merely be shifting location rather than increasing.
Knit apparel is a good example where, according to this article by David Barboza in the New York Times, American imports from China jumped by 10% in July this year compared with the same months in 2008.
This was as US imports from Mexico, Honduras, Guatemala and El Salvador fell by 19-24%. Barboza was quoting data from Global Trade Information Services.
It is not just emerging markets that are suffering as a result of China's increasing dominance in textiles.
The beleaguered European industries are also in the firing line with the EU evaluating extending antidumping duties on imports of shoes from China and Vietnam.
"Reductions in raw-material import tariffs and increases in export-tax rebates have helped Chinese apparel producers push their prices down," said said Ying Min Ye, president of Beijing-based Chem1 Consulting at the Downstream Asia Roundtable Asia oil and gas event in Kuala Lumpur. Malaysia.
The conference, organised by the World Refining Association, took place earlier this month.
You can add to these advantages a Yuan which is now being pegged to the US dollar, resulting in steep depreciations against other Asian currencies. Between March and September, the Yuan had fallen in value by 10% against a basket of Asian currencies, said Barclays Capital.
A further huge advantage is, according to Nicholas Lardy of the Peterson Institute for International Economics (quoted in the same Barboza article), flexibility in labour markets.
This means the ability to cut wages without worrying about troublesome trade unions or restrictive employment legislation.
The biggest comparative boost of all might well be the flood of cheap lending. China has pump-primed its economy through a huge increase in bank loans.
The US removed safeguard duties against imports of several categories of Chinese clothing last December, according to a new report from Textiles Intelligence, providing China with another edge.
The EU removed similar safeguard duties in December 2007.
Both sets of duties were the result of damage caused to local industries when The Agreement on Textiles and Clothing (ATC) came into effect on 1 January 2005
Here, therefore, could end some of the head-scratching over steep increases in fibre-intermediate pricing in 2009.
Restocking and crude oil have been important factors.
What might have also benefited the market are China's gains at the expense of others.
The country's yarn output grew by 9% in the six months to June 2009 over the same period last year, Yin added at the same event.
Fibre output rose by 10% and polyester production by 13%. Click here for a copy of his full presentation - .5 Yingmin Ye 1.pdf
It's not just in low-end clothing where China is making gains, but also in electronic goods - at the expense largely of the Japanese.
Japan has seen its share of electronic-good exports to the US fall by 18% in 1999 to 7%, added Barboza.
In the last year alone, China's market share of the US electronics goods market has doubled from 10% to 20%.
Sales of electronic materials to China were up by 15% in Q3 over the second quarter, said Andrew Liveris, CEO of Dow Chemical, when the company's third-quarter results were released last week.
Coatings and infrastructure sales rose by 16%, polyethylene (PE) 10% by and the automatic sector 5%, he added.
From a Dow perspective, if it's taking sales away from Japanese electronic chemicals companies all well and good.
But displaced demand doesn't necessarily add up to greater overall demand.
Another important point is that when all is said and done, China's exports as a whole are still down on the first half of 2008.
China exported $521 billion worth of clothes, toys, electronics, grains and other commodities in H1 2009, according Barboza.
Although lower than declines suffered by other exporters such as Japan and Germany, this figure still represented a 22% fall over the first half of last year.
Returning to the theme of winners and losers from China's boom, Australia - despite seeing its currency rise in value by 40% against the Yuan in March-September - has made big net gains through a surge in commodity exports.
It's the same story for Indonesia.
"Commodities and high-tech goods have gained [because of the recovery in China]. But anything in between, China can often produce itself, so countries in these areas are under more pressure," said Tai Hui, an economist at Standard Chartered in Singapore in this article from the Financial Times.
Malaysia and the Philippines were losing out because they competed directly with China in many export markets, he added.
"Market stability has improved, but we continue to remain cautious about the ability of some economies to sustain growth," continued Liveris when the Q3 results came out.
"This is especially true of the US and Europe, and until these economies return to 'normal', we believe global growth will be muted."
This is also especially true of China.
Last week we discussed how domestic consumption was much less than investment as a driver of January-September GDP (gross domestic product) growth.
The relatively high investment component of GDP points to several risks and concerns:
*An increase in export-based industrial capacity. Now that it's on the ground, China will be tempted and able to keep this capacity running, even in very weak market conditions
*At the moment the US seems to be more worried over China's willingness to keep on funding its huge deficits than damage to jobs caused by aggressively cheap imports. But how long will this last as unemployment climbs towards 10%? Could we see a big increase in trade protectionism?
*Bubbles in real estate and equities. Real-estate prices have risen by 73% so far this year. Confusing signals are emerging from the government over whether or not monetary tightening will occur in 2010. Leave it too late and these bubbles could get more out of hand; act too hastily and the economic rebound will be set back
*Assuming that the investment number reported for Q1-Q3 also includes money spent on stockpiling oil and other commodities, will the high levels of imports continue? Monetary tightening is a threat along with sudden dips in import demand as China starts running off inventories
*Meagre underlying growth in domestic consumption. Nominal GDP only increased by 4.7% in the first nine months of this year, indicating that deflation was behind the higher headline number of 7.7% Although a lot of people might have made theoretical and real money out of real estate and equities, this doesn't suggest a healthy state of affairs for the average worker.
A weaker currency, import tariff rebates, increases in export taxes and soft and plentiful bank loans for new capacity hardly suggest rapid economic rebalancing towards domestic growth.
Has China put in place the right policies to move quickly enough towards this rebalancing to keep the rest of the world happy?
Can it move any quicker given the country's social and economic pressures?
More of the cheap stuff?
Source of picture: www.thelocal.de
Some of the China import data for September is now available - showing record-high imports of monoethylene glycol (MEG), ethylene vinyl acetate (EVA), polyacetal, polycarbonate (PC).
"I have given up trying to figure this out. There is not sufficient accurate information anywhere to read a trend. Reality is that they continue to buy to put SOMEWHERE," said a senior polyolefin industry source last week.
"Physical and future markets are continuing to show strength, but export and domestic consumption data continues to be weak."
Now he is beginning to think, like this blog, that a lot of these extraordinary volumes have to do with China making gains in specific finished-goods export markets. A lot more data-crunching is needed to stand this up.
A note of caution and context - a lot of these September imports might have been booked in July/August before the recent price declines.
There could have also been some stock building ahead of the long October holidays (when we get the October figures any dips will also need to take into account the holidays).
If China is making big gains in finished-goods export markets thanks to all of its competitive advantages, you can read the latest US Conference Board confidence index results either way.
The failure of US consumers to respond to better equity and housing markets could indicate a deeper shift in the way Americans spend, said Ian Shepherdson, chief economist at High Frequency Economics - in this FT article on the last Conference index.
More thrift might give the Chinese the ability to cost-cut their way into bigger slices of export markets.
Such a weak level of confidence, though, points to a poor Christmas sales season. This would leave a lot of goods left stacked on US shop shelves, pointing to a big New Year dip in commodity chemical exports to China.
But again - this would have to be put in the context of the Chinese New Year in February!
By Malini Hariharan (Malini is now joint blogger for Asian Chemical Connections)
It helps to have a commodity bull on your side and that's just what the Dalian Commodity Exchange (DCE) has succeeded in doing. Jim Rogers, the noted investment guru, will be a senior advisor to the exchange.
Jim Rogers is, as always, positive on the future of China and also commodities (see TV interview below).
It is not yet clear what Rogers will be doing in this new role but his appointment will help DCE realise its ambition of becoming a leading commodity exchange in the world. The Futures Industry Association (FIA) says that the DCE is the largest futures exchange in China and is ranked ninth in the world. It has the world's biggest trading market for plastics (lldpe and PVC) and the second-largest for agricultural products.
This blog has been regularly highlighting the growing volumes of lldPE and PVC transactions on the DCE. Lldpe contracts totalling 75.719m tonnes have been traded on the exchange so far this year, up 185.67% from last year. PVC contracts, which were was introduced in May, totalled 21.829m tonnes.
And the exchange could see more action in the coming months. China Daily reports growing interest from major foreign traders to participate in Chinese exchanges. They will have to work their way around government regulations but leading banks such as Goldman Sachs, JP Morgan and Barclays Bank have compelling reasons to invest in China. The paper says that the Shanghai exchange's copper futures now rivals that of the LME while DCE's soyabean volumes already exceed that of CBOT.
Source of picture: Businesweek
More evidence is emerging of the big rebound in Chinese exports resulting from government subsidies, including a Yuan now pegged to the dollar, soft and plentiful bank loans and export-tax rebates.
More than 9,000 quality control inspections of goods set for overseas shipment took place in Q3 this year - a 32% increase over the same quarter last year, said AsiaInspection, which carries out monitors these inspections.
Book and stationery inspections were up by 24%, toys 32%, shoes and fashion accessories 58% and textile apparel 63%, according to this news report on the latest AsiaInspection findings.
A further boost to China's textiles industry was the EU's removal of restrictions requiring companies to source a percentage of their textile business from within the EU in January 2009, the report added
.
But Q3 2008 saw the collapse of Lehman Bros and the virtual grinding to a halt of the global economy, so comparisons with the third quarter of this year were always likely to appear good.
Export trade has bounced back from its low point. It is widely recognised, though, that it could be a very long time before shipments to Western markets return to 2007 levels.
Still, the October Canton Trade Fair reported a 20% increase in electronics, hardware, tools, transport vehicle and building material exports orders from overseas buyers as against the April Canton Fair.
Together, these products account for around 60% of China's total exports.
And the damage done to China by the crisis is far less than elsewhere.
For example, the country's semiconductor market is expected to fall 6.5% by value to $68bn in 2009, down from $72.9bn last year, according to this report, quoting iSuppli.
This compares with a forecast 16.5% fall in the global chip industry.
Consumer electronics exports by volume are, however, expected to be down by 10% to 30% in all categories except LCD-TVs and Set-Top Boxes, where growth is expected.
What on earth does this all add up to then?
Here's what I think:
*China's exports have rebounded from their low points more quickly than other countries due to all the government support.
*Because of its ability to aggressively discount, China is gaining bigger market shares from other countries in certain export sectors - most notably textiles and garments.
*China is likely to be able to grow market share even further as it can cut costs by even more, notwithstanding a big increase in trade protectionism
But, as we have already said, demand in the West is unlikely to return to 2007 levels for a very long time and so China is only gaining bigger slices of a much smaller overall pie.
The country's export trade has also been boosted by cheaper raw materials as result of import tax cuts and lower pricing.
The dramatic increase in chemical import volumes is partly due to both the above factors - and, of course, stronger domestic demand.
Take methyl methacrylate (MMA) and polymethly methacrylate (PMMA) as examples. Pricing remains way down on its July 2008 peak, as this graph MMAPPMAPricing200809.ppt from ICIS pricing shows.
MMA imports have risen by 293% in January-September over the same month last year, according to China customs. In September, overseas shipments increased by 87% to 16,309 tonnes.
PMMA imports were up by 67% in January-September with September cargoes totalling 20,829 tonnes - a 22% increase.
By John Richardson
Manufacturers yesterday reported rising output and improved employment prospects in the US, Europe and Asia.
China's Purchasing Managers' Index (PMI), involving a survey of more than 700 manufacturers, increased for the eighth straight month in a row - and is now back to where it was in May 2008. This is exactly the same length of time that China's chemical imports have been booming.
In the US, too, the Institute of Supply Management (ISM) survey for October showed that the employment index had expanded for the first time in a year.
But dig a little deeper and the same old doubts and muddle re-emerge.
New orders rose at a slower pace in October than in September, added the ISM. This could be an indication that the process of re-stocking is coming to an end, points out the Short View in the Financial Times.
The rate of bank lending to private companies has turned negative in the Euro Zone for the first time since the data was first gathered, according to this post on The Economist's Buttonwood blog.
Nobody in the chemicals industry is getting excited about the prospects for 2010, least of Jurgen Hambrecht of BASf on the release of the German giant's Q3 results..
He warned of the need for more concerted efforts by governments and industries, as there was no easy way out of the crisis.
One easy way might be China. But as we keep going on and on about, what are all the chemicals being shipped to China going into?
As long as this uncertainty lingers, so will the fear that it will come to a sorry and sudden end.
If you're selling in China and merely looking towards your year-end bonus, this endless head-scratching might not matter if China can hold its ground until end-December.
But anyone with a slightly longer-term perspective needs to be a little more worried.
By Malini Hariharan (Malini is now joint blogger for Asian Chemical Connections)
Japanese chemical majors have raised their sales and profit forecasts for the second half of the fiscal year ending 31 March 2010, but the revisions are marginal and companies are still holding a conservative outlook.
Earnings in the first half of this fiscal year have been better than expected but the stock market is not impressed. It appears investors are being guided by the cloudy outlook for H2.
A Tokyo-based analyst highlighted three major risks that Japanese companies foresee:
• Inventory adjustments in China for petrochemicals and globally in the auto and LCD sectors
• A rise in naphtha prices led by higher crude oil prices
• Rising availability of product from new petrochemical capacities in the Middle East.
Mitsui Chemicals has forecast sales of Yen1,210bn as compared to Yen1,487.6bn in 2008-09. Operating loss is expected to narrow to Yen15bn from Yen 45.5bn last year.
Sumitomo Chemical expects to post petrochemical sales of Yen500bn in 2009-10, down 9.6% from the previous year. Total sales are projected at Yen1,620bn, down 9.4%.
At an analyst meeting yesterday Sumitomo Chemical disclosed that operating rates at its joint-venture PetroRabigh complex in Saudi Arabia are still quite low, especially for polyethylene (PE). Although the situation is improving the company expects full operations only at the end of this year.
PetroRabigh has posted losses yet again. Third quarter losses had widened to Riyals844.7m from Riyals155.9m in the same period last year.
Japanese companies are continuing their efforts to widen their footprint in China. Mitsui Chemicals and Sinopec have agreed to proceed with a joint venture for production of phenol and ethylene, propylene diene terpolymer (EPT). At a recent analyst meet, Mitsui's ceo disclosed that the project would be a 50:50 joint venture. Asked if the jv would be expanded to include ethylene and propylene production, the ceo said there was no immediate plan but there was some potential.
Mitsui's ceo is also reported to have said that the company was interested in acquisitions in agro-chemicals or speciality chemicals. Among the Japanese majors, Mitsui is most exposed to commodity chemicals and is under greater pressure to diversify if product portfolio.
By Malini Hariharan (Malini is now joint blogger for Asian Chemical Connections)
It pays to have a domestic focus and Reliance Industries has shown this again in its results for the first half of fiscal 2009-10.
Its petrochemicals division delivered Rs43bn in earnings before interest and taxes (EBIT), a 23.8% growth over the same period last year. The company attributed this to higher margins on improved domestic realisation. The concentration on India helped the company maintain nearly 100% utilisation and hold inventory at low levels.
The Indian market often gets lost in the larger Asian/global picture which is very much dominated by China. But this market has been seeing steady demand growth since last year and it is one of the few markets to have expanded despite the economic crisis.
Reliance estimated PP demand growth at 28% in the last six months; PE at 15%; PVC at 36% and polyester at 15%. Packaging, infrastructure and auto sectors were the key drivers.
The company anticipated a stable margin environment in 2010 as India is expected to keep growing. It also emphasised that it would continue its 'predominantly domestic market orientation in order to sustain high operating rates' - a plan that will no doubt be helped, in the case of PP, by hefty anti dumping duties imposed on imports from Saudi Arabia, Singapore and Oman. A second investigation on PP imports from South Korea, Taiwan and the US is due to be launched soon and there have also been reports of producers asking for an investigation into PE imports.
Expanding the domestic focus will not be easy. India is oversupplied in PP and likely to remain so for another couple of years despite the high demand growth numbers. PE would also be oversupplied once Indian Oil Corp starts its new cracker complex.
IOC expects to achieve mechanical completion of the cracker by the end of this month and start commissioning activity in December. The derivative plants (PE, PP and MEG) are likely to start at end-March or early April.
This is the schedule on paper. But given the many project delays around the world, don't be too surprised if this one also slips.
Source of picture: www.prisonplanet.com
Misleading perceptions can be very dangerous - especially when they apply to the crude-oil futures markets.
"The price has more than doubled this year partly because of the belief that the recovery in Chinese oil-import demand is all about booming local consumption" said a source on the sidelines of this week's APPEC oil and gas conference in Singapore.
But China is adding around 25m tonne/year of refinery capacity in 2009, which, of course, requires a lot more oil to operate.
Liberalisation of fuel-price controls has raised refinery profitability, resulting in recent operating rates of more than 80%.
This high throughput hasn't been matched by an equivalent increase in gasoline consumption, despite the humongous increase in vehicle sales.
"People seem to be buying lots of new cars, driving them home to impress the neighbours but not driving them much after that," said Jason Feer, vice-president and general manager, Asia Pacific, of the Argus Media Group in a speech at the conference
Fuel-price liberalisation has pushed the cost of gasoline close to US levels, he added afterwards.
This miss-match between supply and demand could be a factor behind China becoming a bigger exporter of gasoline and diesel.
China exported 505,505 tonnes of gasoline in September - 153% higher than a year earlier, according to China Customs.
Diesel exports have also risen, reaching close to 400,000 tonnes in August and 293,759 tonnes in September.
This led to talk of overseas refinery margins being put under pressure for the long-term by China's exports.
But another source said: "This is just one of those conspiracy theories about China. Any company will export when it makes more economic sense.
"China's refiners are listed, remember, and so operate like listed companies. Exports are not a long-term strategic objective."
Another factor behind the rise in fuel exports was unwinding of big inventories built ahead of last year's Beijing Olympics, he said.
What's clear is that the rise in oil imports this year - expected to be around 5% - isn't just a sign of an immediate surge in domestic consumption.
And as we've already covered on this blog, China's overall growth story is not as straightforward as crude and equity markets appear to believe - another nail in the bull's coffin.
A further misleading view was that we were already in a V-shaped recovery, believed a number of delegates.
"I expect the recovery to be W-shaped," said Gati Al-Jebouri ,Chief Executive Officer of Lukoil, in a speech to the conference.
One of the economic threats he highlighted was fiscal tightening.
Australia has twice raised interest rates over the past few weeks, Norway recently raised rates and India has tightened reserve requirements for the country's banks because of inflation concerns.
A string of comments from US Fed hawks indicate a possible change in direction.
If fiscal tightening isn't timed properly, it might come too soon for a fragile recovery.
Higher interest rates could narrow the contango that's helped make storing crude, gasoline and diesel etc a low-risk option.
Very high storage levels don't fit with current crude prices.
On the New York Mercantile Exchange, light, sweet crude futures for delivery in December traded at $79.71 a barrel this morning, down 69 cents in the Globex electronic session.
December Brent crude on London's ICE Futures exchange fell 70 cents to $78.19 a barrel.
I found it hard to find any delegate who found much logic in today's price of oil.
"It could easily more or less half to $40 a barrel in the New Year. That's where it should logically be," said one delegate.
Admittedly, though, one tends to seek out those who support your biases - and I could be described as a tad pessimistic about this recovery.
By Malini Hariharan (Malini is now joint blogger for Asian Chemical Connections)
The Indian government has announced 17 November as the date for a public hearing to discuss the provisional anti dumping duties that it had imposed in June on imports of polypropylene (PP) from Saudi Arabia, Singapore and Oman.
The hearing will give a chance to all affected parties to present their case. Such hearings are usually a formality and do affect the end result which is a confirmation of the provisional duties.
But I have been told that it may be different this time as the Saudis, led by Sabic, are likely to put up a spirited defense. The Saudis have been busy pulling lots of government strings for the duties to be revoked.
Sabic and Advanced Polypropylene were hit the hardest - duties on their PP exports range from $440-$820/tonne. I was told that one of the reasons for the high level of duties was 'the lack of cooperation in sharing data' when the Indian government had sent its questionnaire earlier in the year. However, this attitude appears to have changed.
There's a lot at stake here and this is why the 17 November hearing is crucial. India is already in surplus and looks likely to be in this position for the next couple of years. So there's every reason for Indian PP producers, Reliance Industries and Haldia Petrochemicals, to check competition. On the other hand, many Indian processors are unhappy as the duties would force them to rely on local supply.
For the Saudis, and also other Middle Eastern producers, India is not such a big market for PP. But the ADD threat is a worrying global trend that they want to ensure does not take off.
Besides India, China is investigating methanol and 1,4-butanediol (BDO) imports from Saudi Arabia. And the European Union (EU) is investigating on polyethylene terephthalate (PET) imports from United Arab Emirates (UAE) and Iran.
The growing protectionist measures have provoked a long chain of protests with the most recent one being in October by the Gulf Petrochemicals and Chemicals Association (GPCA).
The GPCA Secretary General Dr. Abdulwahab Al-Sadoun has said that the association will strengthen coordination with Gulf Cooperation Council (GCC) Governments to ensure that exports of petrochemicals and chemicals from the Gulf region are not restricted by anti-dumping regulations and other trade restrictions
"The GCC industry and our governments will not accept the application of anti-dumping regulations against exports of petrochemicals and chemicals from the Gulf. We have seen a surge in protectionist actions brought by countries to block imports. These cases are baseless and violate international rules," he said.
The investigations may not sound fair to GCC producers but they face an uphill task in convincing the Indian and Chinese governments to ease protection to local producers. A lot will depend on what the GCC governments can offer or withhold.
By Malini Hariharan (Malini is now joint blogger for Asian Chemical Connections)
Talk of Reliance Industries acquiring LyondellBasell is once again gaining momentum. A report in today's Economic Times says that the company is close to announcing a major overseas acquisition with the target being part of the assets of LyondellBasell. The announcement is likely to be made on or before Reliance's annual general meeting on 17 November. Reliance shares rose 3.1% in morning trade.
Citing a banking industry source the report states that the transaction could be around $6bn, nearly double the estimate made by another media report in September.
One my industry sources says that something is brewing and Reliance is on a shortlist of companies that will be participating in LyondellBasell's reorganisation. The source was unable to give names of others on this shortlist.
Details about the proposed buy are still sketchy and today's media report, like the previous one, raises more questions than answers. In what form is Reliance likely to participate - will it be by acquiring an equity stake that LyondellBasell's creditors will soon get through the company's rights offer? Or will it be an outright purchase of some/all assets? Can it happen before LyondellBasell completes its reorganisation or will Reliance be participating in the reorganisation by buying assets/equity?
One analyst thinks that today's report of an imminent announcement is a little premature and a major development is likely only after LyondellBasell emerges from Chapter 11.
It is difficult to evaluate how beneficial the deal would be to Reliance without knowing much of the details. There are certainly parts of LyondellBasell that would be a good fit for Reliance - its PP assets, a global marketing and distribution network and the technology portfolio.
Reliance certainly has the cash for a big ticket acquisition. But the company is not known to be very aggressive when bidding for overseas assets and this is one of the reasons why it lost out on acquisition opportunities in the past. Will it be the same story this time?
Singapore's Jurong Island
Source of picture: www.pcs.com
Qatar Petroleum International (QPI) sees Singapore as a good base for expanding in to the Far East, said CEO Nasser Al-Jaidah yesterday after the announcement of the new partnership with Shell.
QPI and Shell signed a series of agreements on Wednesday to jointly own 50% of Petrochemical Corporation of Singapore (PCS) and 30% of The Polyolefin Company (Singapore) Pte Ltd (TPC), to be held through a joint venture company called QPI and Shell Petrochemicals (Singapore) Pte Ltd.
Sumitomo Chemical's 70% stake in PCS and 50% share of TPC remain unchanged.
Singapore is becoming an increasingly important energy-storage and trading hub. QPI's closer relationship with the island state - through the Shell deal - could be key in helping to market and sell big new volumes of liquefied natural gas (LNG) and liquefied petroleum gas (LPG).
Qatar's enormous LNG ambitions, through joint ventures with the likes of Shell and ExxonMobil, also leave the issue of getting maximum value out of co or by-product LPG.
There are several options for LPG.
The LPG (propane and butane) can be extracted during natural gas and LNG processing.
It could be used by Qatar for petrochemicals in Qatar itself or elsewhere in the Gulf Co-operation Council (GCC) region.
Another option is to ship the LPG to petrochemical and other customers overseas.
"One of the critical success factors of any petrochemicals facility, whether it is in the Middle East or here in Singapore, is access to competitive feedstock," said Ben van Beurden, executive vice-president of Shell Chemicals, when the deal was announced.
"I'm hopeful that condensates and liquefied petroleum gas (LPG) would flow from Qatar to Singapore as a result of [Qatar Petroleum] taking an investment in these joint ventures."
As we discussed yesterday, this would enable the PCS-TPC joint ventures to better compete against the new wave of bigger feedstock-advantaged Middle East crackers.
Singapore is building an LNG terminal due for completion in mid - to late 2012.
Another probably very unlikely option is to ship "wet" LNG and then extract LPG on arrival. This extraction also involves removing ethane - and so again there's a petrochemical option here.
And finally, some LNG customers - such as power generators - prefer their gas delivered as "wet", creating competing economics for extracting LPG and ethane for petrochemicals.
The QPI-Shell deal raises several more questions which this blog is seeking to answer:
*Will this give extra feedstock flexibility to the new Singapore cracker, due on-stream next year? We understand it will be run mainly on hydrowax from an up-graded hydrocracker. But will an option now be to use condensate/naphtha feedstock via Qatar? How would this work as, if at all, as Shell Eastern - which operates the cracker project - is a separate subsidiary?
*The Pearl gas-to-liquids project (another joint venture between Shell and Qatar Petroleum) will produce condensate as well as ultra-low sulphur diesel. Will this condensate, split into naphtha, be sold directly into the merchant market or used for producing petrochemicals in Qatar? Is this still a possible feed for the Shell cracker project in Qatar and/or are other petrochemical options in Qatar? The background to this we understand that there's a shortage of new gas allocations available from the North Shelf due to an extended moratorium, making it difficult for all the cracker projects in Qatar to go ahead.
*Could the condensate/naphtha from Pearl be supplied to Singapore instead?
*Is developing a new project in China now a priority with QPI over petrochemicals in Qatar?
In China, QPI has a joint venture with PetroChina and Shell (China) Ltd to build a refinery and petrochemical complex at Taizhou in Zhejiang province.
"We are hoping to get approval [for the project] by the end next year," said Al-Jaidah.
Perhaps the biggest of all the priorities might be this joint venture.
But whether or how the closer relationship between QPI and Shell will accelerate this project is not clear.
China is on the whole looking for one of two things from future petrochemical joint-venture partners: Energy supplies (oil and gas) and technology.
The existing QPI and Shell relationship already firmly ticked both of these boxes.
It seems as if Lex of the Financial Times is finally catching up with this blog by questioning the validity of some of the official data coming out of China. We take this as a compliment.
In today's column it talks about how the total for first-half Gross Domestic Product (GDP) growth numbers for China's 31 provinces was almost 10% higher than the overall figure put out by the National Bureau of Statistics.
This suggests that provincial officials are being encouraged to report high numbers to help create the impression that everything is coming up roses. How can we trust micro numbers, on chemicals production and consumption, for example, if distortions in big headline numbers are taking place?
Retail sales growth of 16.2% in October was also questioned by Lex. These numbers are not a good proxy for real consumption growth because they include shipments to retailers and various types of corporate and government spending.
Strong year-on-year petrochemical production growth recorded for September might be believable because in the same month last year the world economy came to a halt as Lehman Bros folded. Ethylene output grew by 29.4% and polyester production by 33.9%.
The polyester sector might have benefited from market-share gains made in export markets as a result of the 2009 depreciation of the Yuan against other developing-world currencies.
This is the result of a re-pegging of the Yuan to the US dollar, which on Wednesday hit a 15-month low against a basket of trade-weighted currencies.
But China's Central Bank, ahead of a visit to China by President Obama, yesterday acknowledged there was a case for a stronger Yuan.
As if often the chase with the Chinese government, though, only a few days earlier commerce minister Chen Deming had called for the creation of currency stability in order to protect exports.
So it's far from clear if and when China will let the Yuan rise in value, which would likely reduce the volume of chemical imported to be re-exported as finished goods.
As we've said before, lack of clarity on real over apparent domestic demand-growth continues to prompt a nagging suspicion that re-exports are more important than some people think in the recovery story.
The International Monetary Fund (IMF) said at the weekend that the Yuan had become "significantly undervalued" since it was linked again to the dollar.
If insufficient ground isn't given on the Yuan to satisfy the West, how long before politicians start targeting other "unfair" advantages such as this year's reductions in raw-material import tariffs and increases in export-tax rebates?
On an individual industry level, pressure for anti-dumping and other trade measures is likely to only grow - a long with measures outside the control of the World Trade Organisation (WTO) such as safety and environmental standards - if developed economies don't achieve sustained recoveries.
By Malini Hariharan (Malini is now joint blogger for Asian Chemical Connections)
Sumitomo Chemical and Saudi Aramco appear to be in a generous mood. After successfully launching the first phase of their joint venture and starting work on the second phase the two are willing to welcome others to the Rabigh party.
Pic source: Saudi Aramco
Ziad Al-Labban, president and ceo of the joint venture Petro Rabigh, is reported to have said that discussions are underway with companies, including Japanese firms, to invest in production synthetic fibre and other products at Rabigh. He expects a total of 50 companies, including some from Japan, to eventually set up operations at the site.
The product slate for PetroRabigh's second phase, due to be completed in 2013-14 includes aromatics, synthetic rubber, nylon 6 and speciality chemicals. What more can be produced and what makes Rabigh so attractive?
There is of course the feedstock that will be readily available from the PetroRabigh complex and the benefits of shared world class infrastructure. But local markets are small with not very exciting growth prospects, especially for products like synthetic fibres. I certainly can't see a big textile industry developing in Saudi Arabia or the GCC.
I have often heard that the attractiveness of the Middle East fades as you move down the product chain. The closer you are to the cracker the more profitable it is as you then get full advantage of cheap feedstocks.
But Saudi Arabia's plans for a diversified chemical industry are slowly but steadily progressing. And Abu Dhabi is also working on a similar model. What incentives are being offered to make these countries an oasis for downstream chemical production?
Stay cool and don't panic!
Source of picture: www.wired.com
By John Richardson
THE growth of the carry trade US dollars - leading to a sharp depreciation of the greenback and possibly of many other unintended consequences - represents a major threat to the chemicals industry in 2010.
Any corporate planner with her or his salt should factoring in, and hedging against, the danger that the many warnings about the damage from this trade come true.
Warnings have been issued over the last few weeks by the Chinese government, the International Monetary Fund (IMF), Hong Kong chief executive Donald Tsang and Dallas Fed chairman Richard Fisher.
Economist Nouriel Roubini, who accurately predicted the current economic crisis, has been proclaiming loudly from every available rooftop that this is the "mother of all of carry trades".
He believes that, potentially, it could cause even more damage to the financial system than the crisis from which are still struggling to recover.
But this blog was able to find two people who disagreed: A UBS analyst and a hedge-fund trader. Nothing to worry about, then!
Just as a reminder, the carry trade involves borrowing at zero interest rates in dollars (because of the ultra-loose Fed monetary policy) - and also shorting the US currency on the assumption that it will depreciate.
As the dollar has tumbled - creating extremely good returns - investors have also piled into equities and commodities, incurring very high leverage.
Oil increasingly moves in inverse correlation to the dollar these days so, I suppose, this whole business has gained its own self-perpetuating momentum: The more that investors short the dollar, the more it goes down and the more crude goes up. Sounds like daylight robbery.
Stronger crude - which we've frequently said doesn't reflect current supply and demand - is seen as a false sign that the world economy is in firm recovery.
And so, hey presto, equities rise in response to higher oil prices, resulting in yet more fat profits for the speculators.
The dollar could appreciate by as much as 25% if, all of a sudden, traders are forced to cover their shorts (a phrase that, I am afraid never ceases to appeal to my puerile sense of humour), warns Roubini.
He predicts that one of four events could trigger this new financial calamity:
*The dollar value cannot fall to zero and at some point it will stabilise. The cost of carry would then become zero rather than negative (no more money being made on shorting the greenback)
*The Fed cannot suppress volatility forever. Its $1,800bn purchase plan of mortgage-backed securities and government agency debt such as Fannie Mae's etc will be over by the Spring
*If growth is on the upside in the third and fourth quarters, markets may start to expect Fed tightening sooner rather than later
*A flight from risk could occur due to concerns over a double-dip recession or a geopolitical crisis - e.g. a US/Israel and Iran conflict
Before listing some of the possible implications for chemicals, it's worth adding the following context.
Big increases in Asian property prices (for example, Hong Kong's are up by 28% this year) start to add up in light of the Fed's ultra-loose monetary policy that's prompted the carry trade.
Asian countries have been forced to follow the Fed in order to prevent their currencies from appreciating too much.
This is creating dangerous real-estate bubbles in Singapore and South Korea as well as Hong Kong, with all the associated higher levels of consumption which come with the property wealth-effect.
China is different as it's re-pegged the Yuan to the dollar.
But the country's huge economic stimulus package has created the well-documented big rise in property prices and a boom in auto, home appliance and other retail sales.
Meanwhile, China is also benefiting from improved export competitiveness as a result of its currency being reconnected to the weaker greenback.
So those chemicals corporate planners worth their salt should be worrying about:
*The risk of being on the wrong side of overbuilt inventories, or even just the normal 45-60 days of working capital tied up in raw materials, when and if crude takes a tumble
*Confusion over sustainable levels of chemicals demand-growth in housing, autos etc in Asia. If the Fed tightens in response to worries over the impact of excess liquidity so will the rest of the world
*Damage to underlying, or fundamental, demand caused by crude being too high at this point in the economic recovery. My fellow blogger, Paul Hodges, points out that this concern is high within OPEC.
*Chemicals import volumes into China destined for re-exports as finished goods have been supported by the weaker Yuan. These imports could obviously decline if the dollar lurches upwards
*US petrochemicals producers have benefited from dollar weakness and the fall in natural-gas prices relative to crude (70% of US ethylene is derived from natural-gas liquids). Thermoplastic exports are up 16% in the year-to-date with domestic sales down nearly 14%, according to the latest American Chemistry Council (ACC) weekly report. So, again a surge in the greenback would threaten this much-needed compensation for a weak home market.
When might the carry trade unwind? Nouriel Roubini is not prepared to offer any prediction, but warns that the longer this bubble inflates the worst the consequences will be when it deflates.
Source of picture: www.walletpop.com
By John Richardson
In his own words Paul Hodges of International e-Chem - and also a fellow blogger - puts in a nutshell some of the dangers confronting the chemicals industry as we approach the New Year, with a few interspersed further thoughts from this blog:
"If crude were to fall back to $40 a barrel - where based on fundamentals it should be - this would further cloud visibility about the real state of end-user demand. It would become hard to distinguish between a fall in demand down the chain because of de-stocking and greater caution, and a fall in the final consumption of chemicals.
"Oil at its current price is hindering rather than helping the recovery because we are seeing demand destruction again. This is because we are already seeing greater caution on the part of those companies that recognise the risks of lower demand for chemicals. "For example, as the gasoline price has gone up, people are driving less to the shopping malls in order to buy stuff made from plastics - i.e. discretionary spending."
There are even reports of this happening in China as a result of higher crude and fuel-price liberalisation.
"In Our Feedstocks for Profit Study, and I think this still holds, we saw a green light for growth was $25 a barrel, an amber light $50 a barrel and red at $75-80 a barrel.
"It's generally accepted that demand destruction occurs at $80-100 a barrel."
The last US recession began in December 2007 when crude touched $100 a barrel. This came at the same time as the sub-prime crisis. An important question now is with real wages in the West in decline and unemployment rising are we talking about demand destruction much closer to the $80 a barrel level?
"The crude price is being driven by irresponsible bankers, who are simply focused on generating maximum short-term trading profits (and personal bonuses for themselves). The money to support these trading activities is effectively being provided by taxpayers, as a result of the bailouts that have taken place," continued Hodges.
"The strength in crude oil is directly correlated to movements in the value of the US$, often on a minute by minute basis. This is not about free markets. It is about bankers using the low interest rates now on offer in the US, caused by their earlier greed and reckless lending, to once again bite the hand that feeds them.
"Bankers need to behave more responsibly, especially at a time of crisis such as today. If they are not prepared to do so of their own will, we need effective legislation.
"When this unwinds you could see a big return to dollars, strengthening the currency significantly," Hodges continued.
"This is hardly going to help progress in the US government's effort to make the economy more export-based - part of the global rebalancing efforts."
"Today's oil prices are not the fault of chemicals companies, but they will suffer as a result."
The risk is that the unwinding of these trades causes further disruption. As oil prices fall, so will chemical volumes as everyone de-stocks.
"This is why chemicals companies need good hedging strategies," said Hodges.
"Another problem is the cost in terms of working capital. This will lead to a further problem as demand recovers. When demand is really weak, it's possible to conserve working capital by cutting operating rates and other costs - hunkering down until the recovery arrives.
"But when the recovery does arrive, the difficulty is estimating how much to ramp up rates at the expense of working-capital preservation.
"Demand visibility - even without as yet a collapse in crude - is already extremely poor, making planning very difficult. "
"More companies go bust in an upturn than a downturn, because of the inevitable increase in working capital. This is a major risk in 2010, given the fragile state of the financial system, and banks' unwillingness to lend."
"They are so cheap, I might even buy one as a hedge against global warming"
Source of picture: www.formalwilderness.blogspot.com
This blog has spent a lot of time tormenting itself over the sustainability of China's extraordinary economic rebound during 2009.
"Just where are all those imports of chemicals and polymers (polymers up 50% year-to-date) going?" we keep on asking.
Perhaps we've got completely the wrong end of the stick, a source politely suggests.
"There's no real need to worry about where this stuff goes because as long as the government is solvent - and it still has massive cash reserves - it will keep GDP (gross domestic product) growth at a minimum of 8-9% per year. The reason is the need to create enough jobs to maintain social stability.
"Quite frankly, if they had to they had to bury polymers and unsold washing machines, fridges and autos etc in landfills, they would do it to keep industrial production moving along at the right level.
"And quicker than you imagine, they will wean the country off too much depedence on industrial production and exports towards better local consumption."
But in the meantime, he has heard of Chinese refrigerators, which contain polymers including polycarbonate (PC), acrylonitrile butadiene styrene (ABS) and polypropylene (PP), flooding export markets.
"It seems that some refrigerators were manufactured for domestic sales and so benefited from government subsidies - but still found their way on to container ships."
By Malini Hariharan (Malini is now joint blogger for Asian Chemical Connections)
The 17 Nov public hearing arranged by the Indian government at Delhi to discuss provisional anti dumping duties levied on PP imports from Saudi Arabia, Singapore and Oman was postponed at the very last minute causing a great deal frustration among lawyers and industry executives who had flown in from out of the country.
The hearing was postponed because of bereavement in the family of the government bureaucrat heading the hearing. Efforts to get another bureaucrat proved to be futile. A new date has yet to be set but I am told it should be soon.
And I have received some information from Japan on the likely candidates for the Rabigh party. One of the products being considered by Petro Rabigh for its second phase is superabsorbent polymers (SAP). As Sumitomo Chemical does not have technology for this product, it is rumoured that Nippon Shokubai or Sumitomo Seika could be joining Petro Rabigh for this project.
Abu Dhabi ahead in the race?
Source of picture: www.gulftrackservices.com
By John Richardson
The global basic chemicals industry is likely to end up under the dominant control of the Middle East, and possibly Asia, within the next 3-5 years, a senior chemicals industry source told this blog.
"We have known for a long time that the centre of gravity is shifting from West to East, but the economic crisis has accelerated this whole process.
"It was easy credit that enabled the West to keep on growing despite high oil prices with some of that credit going into speculation that helped drive energy costs higher.
"Now that the credit bubble has burst we are left with deeply entrenched and very long-term problems, while the Middle East is sitting on a hydrocarbons cash-pile thanks to the extraordinary global economic growth of 2005-2008."
The only barrier to acquisition of a lot more Western assets - including quite possibly high-value technology positions that have to date remained off the table - was politics, he said.
But a second source added: "While I agree that the shifting of ownership has been speeded up by the crisis, I think the West will keep hold of technology positions - especially in downstream specialities.
"Chief executive officers (CEOs) of US and European countries are under pressure to move away from basis chemicals, and so differentiation needs to be preserved.
"But it is true that we have already seen transfer of very valuable polymer technologies."
SABIC's acquisition of GE Plastics was one such transfer with the renamed SABIC Innovative Plastics now seeking to buy high-end polycarbonate (PC) technologies.
The economic recovery, which the second source believed would be sustained, would also give the CEOs some breathing space to negotiate better terms with prospective buyers of basic petrochemicals.
These comments came after ICIS reported that the Abu Dhabi-based International Petroleum Investment Co (IPIC) was in talks with Bayer MaterialScience and four other global petrochemical groups.
But an IPIC spokesman later said: "At present there are no firm plans to do anything with Bayer MaterialScience, or any other chemical company. A number of initiatives are under consideration internally, but nothing has been decided."
IPIC has already acquired Canadian-based polyolefin major Nova Chemicals and is planning the huge Chemaweyaat chemical city in the new Mina Khalifa Industrial Zone.
It also has a 64% of Austria-based polyolefins group Borealis.
"What's interesting about the Chemaweyaat project is, first of all, its sheer scale (it includes several crackers, including a 1.45m tonne/year one due to start-up in 2012) and the fact that the range of derivatives downstream will be more diversified than is already common in the Middle East," the first source added.
"On a straight cost competitiveness basis, you might think that liquids cracking, which is going to happen at Chemaweyaat, doesn't make sense. But this is more than being about straight economics - it's about economic development and job creation."
And my colleague, Nigel Davis, recently wrote: "Dow Chemical on 12 November laid its cards on the table regarding its so-called 'asset light' strategy.
Dow is working through an arbitration process following its failed deal in Kuwait. The company says it is now talking to two potential partners for a proportion of it olefins assets and its polyethylene business. "
The future ownership of US petrochemicals assets in the US is also attracting a great deal of interest because, despite what could be deeply ingrained economic problems, it's a huge polymer and chemicals market.
And as Nubuo Tanaka - executive director of the International Energy Agency (IEA) - said in a presentation in Singapore earlier this week, shale gas had resulted in a "silent revolution" in US natural-gas supply since 2007.
With 70% of US ethylene production based on natural-gas liquids, according to the American Chemistry Council (ACC), the ground has shifted thanks to this unconventional shale-gas supply.
"Gas supply has become tight in the Middle East and abundant in the US perhaps for the long term, meaning that US petrochemicals is not dead and buried," claimed the first source.
"I expect export competitiveness from the US to be strong for at least the next three years on the comparatively low prices of natural gas over naphtha."
Thermoplastic exports from the US rose by 16% in the year-to-date as a against a 14% decline in domestic sales, said the ACC in its latest weekly report.
SABIC's GE Plastics acquisition gave the Saudi giant a foothold in this huge market, where handling and distribution costs can act as an effective trade barrier.
There have also been unconfirmed reports of Reliance Industries being interested in acquiring LyondellBasell.
Source of picture: www.managingthedragon.com
By John Richardson
I love the phrase used by Andrew Peaple of the Wall Street Journal in this article on China's property "bubble": Getting a straight answer is like "nailing jelly to a wall", in other words xxxxxx impossible. I will be in Shanghai next week on a business trip so will attempt to do some first-hand nailing.
The World Bank, Peaple points out, says that income growth in China is keeping up with price rises. This is a view supported by the China Economic Quarterly, which also makes the point that there remains a lot of pent-up demand for housing.
Property prices rose by 3.9% in 70 of China's large and medium-sized cities, but there does seem to be the possibility that highly localised much bigger bubbles are being inflated. Housing affordability in Beijing looks to stretched and prices in October rose by 13.8% in Shenzhen.
Still, in three of the 70 cities surveyed property prices actually fell.
The again, though, Zhang Xin, chief executive of Soho China - one of the country's most successful privately owned property developers - was quoted in several media reports as saying that a big bubble was, indeed, being pumped up. She blamed this on the big increase in bank lending, the cornerstone of the government's economic stimulus.
"Real estate prices should only go up because people want to actually use the space, but at the moment we can see more and more empty buildings across the whole country and in every real-estate segment," she was quoted as saying.
Vacancy rates in the Pudong district of Shanghai are as high as 50% as more buildings keep going up, Zhang added.
"In Manhattan they have vacancy rates of 10-15% and they feel like the sky is falling."
The danger for chemicals consumption is that changes in government policy for the property sector could have a big detrimental effect.
Tax breaks, low interest rates and smaller down-payment requirements have fuelled this year's boom - along with the plentiful bank lending.
Another connected issue is assessing how much chemistry goes into China's construction sector.
In the US, for example, the American Chemistry Council (ACC) assesses that the construction sector purchases $8 of every $1,000 of chemicals output.
"A big problem in China is the huge variance on what people do to their homes, from very basic equipping of steel and concrete box-like apartments to, of course, the super-rich who are ripping out tiles and refitting kitchens almost as often they change their underwear," said a Shanghai-based office worker.
Nailing jelly to the wall would no doubt have been a fair description of getting reliable data out of the US economy during the early part of the last century.
But back then it mattered far less to the rest of the world.
Reliance Industries has made an offer for LyondellBasell says an official statement released yesterday on the LyondellBasell website:
"LyondellBasell has received a preliminary non-binding offer from Reliance Industries Limited to acquire for cash a controlling interest in the company contemporaneously with the company's emergence from Chapter 11 reorganization.
"This offer is in addition to the previous non-binding equity financing proposals received by the company and represents a potential alternative to the initial plan of reorganization previously filed by the company."
This confirms months of rumours to this effect. According to an unnamed merchant banker quoted by the Times of India, Reliance would have to pay at least $12bn - double an earlier estimate by the Economic Times.
India could be playing a major role in the shift of basis chemicals ownership from West to East - along with the Middle East
After failing in its efforts to capture Innovene and then
Dow Chemical's commodity petchems unit, this is Reliance's fresh attempt to
move into the global top league. The ICIS top 100 places LyondellBasell at the
No 4 slot of top chemical companies globally.
Reliance, it appears, is evaluating other opportunities too
in its core businesses.
Reliance Industries - which is attempting to buy LyondellBasell - is offering $10-12bn, according to this report from Reuters quoting two sources with direct knowledge of the deal.
This would be one of the biggest-ever acquisitions by an Indian company. In 2007, Tata Steel bought Corus for $13bn.
Reliance raised $660m through a share sale in September.
It has $4bn in cash, $8bn in treasury stock that can be sold and if it doubles its current net debt-to-equity of 0.35x it can borrow another $10bn, the Reuters report adds - quoting a recent Macquarie research note.
He's not bad at making money
Source of picture: www.dealbreaker.com
SOME of the logic behind Reliance Industries' bid for LyondellBasell could be a recognition that the globalisation of petrochemicals markets may have gone into partial reverse.
A climate bill passed by the House of Representatives has a provision for taxing imports from countries where emissions standards are more lax than the US.
This defensive measure, no doubt the result of pressure from heavily polluting industries such as refining and chemicals, recognises that the business-as-usual scenario outlined by the International Energy Agency in its World Energy Report 2009 won't come true.
The scenario involves no significant improvements in energy conservation and no great shift to renewables, leading to a rise in global temperatures of 6 C.
Even if an international carbon tax and/or cap-and-trade system isn't established, individual countries seem likely to step up their efforts to lower hydrocarbons consumption.
Whether or not global warming is man-made, energy security is by itself a big enough reason to boost energy efficiency and develop green technologies.
Then there is what Nubuo Tanaka, Executive Director of the IEA, calls "the silent revolution" since 2007 of increasing US gas supply.
Breakthroughs in shale-gas technology and very long global liquefied natural gas (LNG) supply are contributing to what the IEA describes as a worldwide supply glut that could have "far-reaching consequences for the structure of gas markets".
This will put LyondellBasell's US polyethylene (PE) assets in a strong position in the medium and possibly even the long term.
It has long been assumed that when the US polyolefin market is eventually in deficit, the shortfalls will be supplied by the Middle East and Latin America - notwithstanding extra logistics costs that amount to effective trade barriers.
But a sufficiently high price on carbon would undermine this assumption, along with cheap US natural gas.
This is still the world's biggest economy and therefore the world's biggest chemicals and polymer market when all the hot air about China has been expelled.
What was right for Warren Buffett could prove to be right for Reliance.
By Malini Hariharan (Malini is now joint blogger for Asian Chemical Connections)
Reliance's bid for LyondellBasell is likely to be a long drawn out affair with potential for complications from competitive bids.
I talked to some sources familiar with the transaction and they say that Reliance is unlikely to be the only company interested in LyondellBasell. There is no official confirmation yet but some obvious names are being suggested -IPIC, Sinopec and Saudi Aramco.
One source says that the strongest contender would be Len Blavatnik of Access Industries who is trying to regain control of LyondellBasell.
This report also talks of offers by private equity players too though these are in the form of equity financing proposals to LyondellBasell's plan of a rights issue and not a cash offer like Reliance. The rights issue is part of the company's proposed reorganisation plan.
But Reliance still stands a good chance as some of the other probable contenders are likely to be busy working on other acquisition opportunities, he adds.
One opportunity is Dow Chemical's basic chemicals and plastics unit. Andrew Liveris, CEO of Dow, recently said that the company is in talks with two potential partners, although no timeframe has been set for striking a deal.
Dow's senior vice-president of hydrocarbons and basic plastics has also said that Dow's partner would have substantial hydrocarbon and refining assets.
Any company that is successful in partnering Dow would have to forego the LyondellBasell opportunity because of antitrust issues in the US and Europe. It would not be possible for a single company to own all the assets of Dow and LyondellBasell.
Then there is IPIC's stated interest in Bayer MaterialScience. Although the company has said that it is evaluating other opportunities it might be preoccupied in seeing this through, says the source.
He also adds that there are not too many companies globally that can prove that they have the capacity to run LyondellBasell.
Meanwhile, there are already indications that the transaction could stretch through 2010. LyondellBasell asked the bankruptcy court yesterday for time until 6 September 2010 to get sufficient creditors to vote for its reorganisation plan. The current deadline is 15 December.
Until the deadline, LyondellBasell has sole right to file a reorganisation plan. Once it expires, creditors can file their own reorganisation plans for the company.
Creditors, who are keen to recover as much money as possible, would be keen to see alternatives to the company's plan.
By John Richardson
A lot of the projects which have pushed the world into severe overcapacity were based on the assumption that China would remain in big deficits for many basic commodity chemicals and polymers.
It was thought that the world's most-important market would remain a sink for surpluses for a very long time at a time when tough questions over financing were rarely asked.
But it's become clear over the past few years that many of the assumed deficits won't be there.
China is seeking very high levels of self-sufficiency through building a big wave of new refineries integrated downstream with crackers, polymers and other derivatives.
Now the search for what to build - and what to provide storage and other support services for - outside China to supply China is likely to be a great deal more rigorous and selective.
The usual approach to this problem would be to conduct a study looking at the announced projects while also examining where China lacks the economics and the technology in a particular product.
"I am afraid this won't work in the political context of this country," a Westerner based in Shanghai told me last week.
"If a chemical looks like being in big deficit and even if China has no obvious competitive advantages or technology to start production, this doesn't mean it won't be built.
"The government would rather haemorrhage money than be dependent on imports for anything they regard as strategic."
Those able to read the minds of China's senior leadership should therefore be able to do very good business.
Another approach might be one of bitter regret if you haven't already got substantial capacity on the ground in China.
More constructively, if you have missed the boat what would be better is to take China's demand largely out of the equation when deciding your strategy for basic chemicals.
On A Very Sticky Wicket
By John Richardson
As one my colleagues said - it's a good job the US stock markets were closed for Thanksgiving.
Lots of efforts are being made to talk the Dubai World crisis and down - and despite drops in Middle East market equities - Asian markets rallied today.
But the next few days could still be important with a lot depending on how neighbouring governments respond.
Oil markets have been pretty much out-of-sync with real demand since 2003.
But with the rise in the US dollar carry trade and Western growth so fragile, the risk of another sharp correction is higher now than when the world economy was in good shape. Such a collapse would be a mini version of what happened in Q4 last year.
I did a very unscientific survey of 30 traders, producers, buyers and logistics people at the APPEC oil and gas conference in Singapore a few weeks ago.
Twenty three said oil prices, based on fundam
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