Asian Chemical Connections

I am bored to death, sick to my back teeth, of attending conferences where the only view on China is one of almost exponential continued growth. Read this from Will Hutton, a top China sceptic for a sobering reminder that China has some major structural weaknesses. You thought the Asian Financial Crisis was bad? If he's halfway right, this will make 1997 seem like a sunny stroll in the park

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

Produce too little energy over the next 35 years, says the International Energy Agency in this article from the Guardian Weekly, and there will be price hikes and a financial crash; produce too much and the increased rate of global warming will also result in economic disaster. The rest of the article leaves you with the feeling that we have just gone too far, that nothing will or can be done to reverse the environmental catastrophe we seem to be heading towards. To what extent will the chemical industry be blamed for this disaster?

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.

I am involved in this running email debate with the only person I know who is as stubborn and as pig-headed as myself - my old schoolmate in the UK. He is convinced that global warming is indeed a load of hogwash and has evidence to support his theory in this series of articles from the UK's Daily Telegraph. Quite frankly, if either us were to be proved wrong we would never admit it.

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 huge amount of petrochemical capacity - some $12bn worth - is being built in Thailand, way in excess of the quantity added before the Asian financial crisis.
This is all predicated on Thailand becoming a manufacturing hub for Southeast Asia with, for example, huge ambitions to grow auto production.
But can Thailand attract the FDI it needs for this industrial growth, given lack of confidence in the government? If it fails to attract this FDI, then most of its new petrochemical capacity could end up flooding overseas markets, just as in 1997-98.
The latest blow to the credibility of the government is the potential collapse of a Thai-Japan Free Trade Agreement due to pressure from environmentalists.

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.

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.

Maybe, if the mystery blogger at the excellent http://www.theoildrum.com/ site knows what he is talking about. I've pasted in his arguments below.
You need to register at this site, which takes only a few minutes, if you want to get into the wider debate about how energy issues will have a critical bearing on all those wonderful demand and supply predictions available at a high premium from petrochemical consultants.
And while we are on that subject, just how many of those predictions take into account a sharp decline in Chinese growth on the failure of its energy policy combined with the inability of the world to meet its crude oil import needs? This could occur as soon as 2010, say some crude oil exports, the year when Peak Oil is forecast to finally arrive.
Once you've registered at the oil drum, go to http://www.theoildrum.com/node/2270 for some miserable reading on this very topic.
Happy 'Depression Economics' - a new concept I think I've just invented.

And also a whole host of other chemicals if this article on the excellent All Roads Lead to China blog is correct and incentives that have encouraged the real estate boom are removed.
This serves of the dangers of overheating. What goes up must come down and, in this case, the real sector has a long way to fall. Lots more PVC for export might be the end-result

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.

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

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.

Standing in the queue for Starbucks (not McDonalds - no way, and my son's going nowhere near that place) it's so easy to opt for the half bucket-sized Grande option because, after all, we are all rich these days and anyway it costs hardly anything to "Upsize". Walk around Starbucks and you'll notice numerous Grande Lates have been left only half-drunk.
And why not buy yet another car, an even bigger one, or an even bigger house (maybe one that's been repossessed in the US?).
Also, thanks to the ferocious cost-cutting efforts of the likes of Walmart - made possible by the developing world's hugely competitive textile industry - clothing has become incredibly cheap.
Move upstream from your wrack after wrack of cheap shirts and the feedstocks - crude oil, heavy naphtha. mixed xylenes (MX) and paraxylene (PX) - are becoming tighter and tighter.
Oil is at record highs, new refinery building has been delayed by soaring construction costs and MX is becoming an increasingly attractive blend into gasoline.
The picture for plastics might be slightly different because of all the gas-based capacity being brought on stream over the next few year.
But the polymer still has to be shipped and/or trucked, meaning yet more pressure on crude-oil pricing.
"Governments should try to limit the amount of synthetic fibres and plastics being consumed through taxation because there simply aren't enough raw materials around," said a delegate at the ICIS/International eChem Asian Aromatics Conference which took place in Singapore this summer.
This would be political suicide, of course, and so what seems more likely is that only inflationary pressures can produce the desired moderation in consumption.
But what if inflation gets out of control - perhaps more likely after the recent interest rate cuts in response to the credit crisis?
Back to bell bottoms, Ziggy Stardust And The Spiders From Mars, Ted Heath and the three-day week and football tackles that were really tackles - meaning, greivous bodily harm. God bless you, good Old Norm'.

This was the warning from Bob Bauman of Nexant ChemSystems at last week's 25th Annual Petrochemical Conference in Houston, Texas.

Read below for some rather gloomy predictions of where markets could be heading in 2011-12

I am having a go at the US here (see article below) - a pretty big target - but don't worry, Asia is the next in line on this blog: the opportunistic, shallow and downright unpleasant palm oil-based biodiesel industry deserves similar treatment.

As for ethanol, Rex Tillerson has a point. The CEO of ExxonMobil was quoted in a recent Forbes article as saying "we can't add anything to moonshine technology" - indicating the company's indifference to investing in the biofuel.

Now I never thought I would find myself agreeing with ExxonMobil on anything.

I was in India this week as the Times of India carried a front page cartoon of a bull dressed in a Superman outfit with an 'S' on his shirt to mark the Sensex surging past 20,000. All the talk was of the index taking 20 years to reach its first 10,000 with the second 10,000 added in only 20 months.
The belief among just about everybody you talked to at the first Asian Chemical and Petrochemical Conference* in Mumbai was that Asia had decoupled from the US - meaning, even a US recession would not have a major impact on growth in India, China and elsewhere.
Indeed, investors have been pouring cash out of western and into Asian markets in response to the sub-prime mortgage crisis, lower US interest rates, and the prospect of continued strong economic growth in Asia. *The conference was organised by ICIS and the Indian Chemical Council.
As far as petrochemical demand was concerned, delegates and speakers were forecasting double digit growth for the foreseeable future.
Is this just too good to be true?

If anybody can spot the blatant hypocrisy, or disturbing ignorance, which is a prominent feature of the extended entry below, please feel free to comment.

I expect the guy from Hood River will want to have his say.

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.

Click on the link here for a virtual way of boosting your green credentials without having to recycle one actual plastic bag, being knocked into the gutter by a gargantuam-bellied white van driver while cycling to work or cancelling one flight to the other side of the world to broaden your dinner party conversation - http://www.willyoujoinus.com/energyville/index.aspx?playagain=true

I discovered that on Simon Robinson's Big Biofuels Blog - visit http://feeds.feedburner.com/TheBigBiofuelsBlog

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…..

For three wonderful years, petrochemical producers have had the pricing power thanks to tight supply and demand balances and very strong growth economic growth.

Now with crude close to pushing past the pyschologically important $100 a barrel barrier and construction sectors in the West slowing down on the sub-prime crisis, the polyvinyl chloride industry in Europe has reported a sea change reports Nigel Davis of ICIS news.

Speciality chemical producers Rhodia and Clariant have both annnounced price rises. If they fail to achieve their targeted increases, it will be a further indication of the shift in dynamics.

It is too early to make a call on Asia. Maybe the economic decoupling that everyone talks about will leave producers here with the power to push through increases.

However, with naphtha in Asia at another all-time high yesterday of $888-890/tonne CFR Japan, any naphtha cracker operator would be bleeding money based on current product prices. Cost increases are necessary and so the next few weeks could be critical.

And nobody probaby needs reminding that from the second half next year, supply will begin to lengthen as new capacity is commissioned. We could face the perfect storm of persistently high feedstock costs, lower economic growth and longer supply.

Quite possibly not, according to a Deutsche Bank report.

However, as the report makes the clear, the same types of imbalances are building in the Chinese economy which led to Japan's "Lost Decade" of the 1990s.

Time to take stock and have a contingency plan?

China annnounced on Wednesday that it had shifted its monetary policy stance to "tight" from "prudent" in response to food-price driven inflation, soaring real-estate prices, the surge in local stock markets and continued strong growth in industrial investment.

How this policy shift will be implemented remains unclear, but media reports suggest that total bank-lending growth could be limited to 13% next year from 15% in 2007.

The concern is that this will affect working capital as well as funding for new projects.

The ICIS pricing team is already picking up anecdotal evidence of petrochemical producers and buyers struggling to afford and source working capital in China during this year. This is the result of several interest rate hikes and increased reserve requirements imposed on the banks by China's central bank.

Next year could therefore be even tougher for cash flow. But the greater danger is that if the government doesn't succeed in taking some of the heat out of China's economy, and that some of the froth might end up making one giant bubble - to quote Alan Greenspan.

Loss of working capital is a small price to pay for avoiding the popping of a bubble which would have huge consequences for the global economy.

See below for an extended analysis of why everything is about to go wrong.

Looking forward to picking up some bargain chemical shares over the next two years and some cheap US and UK property!

As the Asian head of M&A and acqusitions for a major bank told me this morning: "Wnen everyone tells me I must buy as the market will definitely keep going up I sell.

"When they tell me to sell, I buy."

Counter-cyclical advice that served the Huntsmans well for a long time, until they became over-leveraged.

Talking about over-leveraging, only interest rate cuts right down to zero will prevent the great unravelling of the paper-bottomed credit-fuelled boom.

There are strong rumours circulating that the hopelessly fragmented Indonesian petrochemical industry might undergo some more restructuring.

This would follow Titan Petrochemical's purchase of troubled polyethylene producer PT Peni, now renamed PT Titan, for a bargain price.

Common ownership between sole cracker operator Chandra Asri and its numerous downstream companies would go a long way to resolving the country's flawed petrochemical economics.

Meanwhile, talk of adding olefins capacity in Indonesia has gone very quiet. This time last year, there were cracker projects reported to be under evaluation.

Yes, if it persists despite the best efforts of the government to cool down the economy.

The point is that this is not just crude oil and food prices, but the pace of underlying inflation is picking.

As the Financial Times reports, inflation is now at an 11-year-high

Call me a bitter old cynic, but some of the talk in this ICIS news article about a government lending crackdown might be from a few traders taking positions.

But still, it does seem as if the government is taking some measures to restrict loan growth.

Earlier, it appeared unclear as to whether the restrictions would effect trade finance. Now it seems that quotas will set per quarter next year for total loan growth, whether it's trade credit or capital expenditure.

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.

India is already being held back in mass manufacturing by restrictive labour practices and poor infrastructure - meaning the answer to the above question is already a resounding no in some sectors.

The rise of the rupee is also a concern, as this article from The Economist highlights .

The problem for India is because it has spent the last 15 years gradually opening its capital account and liberalising its financial market, it cannot do what the Chinese do so effectively - intervene to keep its currency competitive.

Export markets are going to get a great deal tougher next year as the US, and probably Europe, enter recession.

And so how will Indian manufacturers cope in these tougher markets versus their Chinese competitors, given the handicaps of the rupee that could remain high and weak infrastructure etc? The answer is likely to be not particularly well.

Reduced export sales will weaken the stellar petrochemical consumption growth we've seen over the past few years.

It will be interesting to see the effect that this will also have on polypropylene. Reliance Industries is due to commission its 900,000 tonne/year plant in Gujarat in mid-2008.

Yet more gloom - the world's second-biggest economy appears to be slowing down as the effects of the sub-prime crisis spread.

What will this mean for Japan's chemical industry, which in the first half of the current financial year suffered badly from the highly cylical electronic chemicals sector?

All will, of course, hinge on the extent of the slowdown in the US economy.

What's clear is that nobody will envy Shinetsu's position next year, when it's due to bring on stream new PVC capacity in Louisiana.

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.

Shortly after I wrote this article (see below) on the doom and gloom surrounding China polyolefins markets, hey presto, prices rallied and I was wondering whether I needed to be wiping egg off my face.

But shortly after the slight rally occurred, a polyolefins trade told me it was likely to be the last margin grab, the last push to maximise earnings on the back of stronger crude as stock markets around the world tumbled and investors piled into commodities. However, prices did enter new territory - in the case of most grades of PP, for example, breaching the US$1,5000/tonne barrier on a delivered basis.

I think he could've been right. Based on the assessment of PE and PP markets by ICIS pricing last Friday, it certainly seems as if the recent retreats in crude (brought about by a realisation that weaker economic growth will ultimately undermine demand for oil and other commodities) and concern about the impact of the likely US recession has led to greater caution among buyers.

And, as I keep saying, this caution comes as the buyers prepare to benefit from the great supply surge.

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.

Very interesting speech from Alan Kirkley, Vice President of Strategy and Portfolio for Shell Chemicals, which first of all goes over the predictable ground of where we are in the cycle and the threat from the Middle East.

However, he then makes the valid point - which I made earlier this week - that the end of the world has not necessarily arrived for the US and Europe.

There are some big question marks over how much more capacity the GCC region will be able to add post-2012, and perhaps even further afield as global LNG markets take off. Gas cracking may no longer as consistently benefit from feedstock at virtually give-away prices.

The likes of Shell and ExxonMobil have existing technology and know-how to make more highly competitive basic petrochemicals - and to take maximum advantage of the petrochemicals/refining interface.

Kirkley predicts that there will be an increasing use of hydrocracking to make petrochemicals, tapping into light ends that have a diminishing value in the gasoline pool and more revamping of catalytic cracking capacity towards olefin production.

Given the likely continued high cost of EPC and raw materials, anybody with a fully depreciated refinery requiring only relatively modest investment could be in a strong position.

But, of course, the first task is to survive the current downturn in one piece.

Economists refer to externalities as those factors that can influence growth but that are beyond the influence of humans to determine. As ar result, the members of this esteemed profession tend to ignore externalities.

If we've left it too late on the environment, then the environment is clearly such an externality that could limit demand growth in the future.

How will China provide enough water to ensure that growth spreads from east to west?

What happens if the environment has reached a dangerous tipping point where the damage we've inflicted leads to an out-of-control acceleration into catastrophe?

Take, for example, corn-based ethanol.

William Laurance of the Smithsonian Tropical Research Institute in Panama writes in the 12 April issue of the New Scientist that the huge increase in corn planting in the US to feed ethanol has led to less soya being planted.

The resultant rise in soya prices has led to forest destruction in the Amazon as Brazilian farmers clear trees to plant soya. "

The Amazonian forests help to generate their own rainfall, because the dense vegetation quickly recycles moisture and returns it to the atmosphere. As deforestation proceeds, however, less water vapour is recycled, so clouds and rainfall decrease. No one knows how far the Amazon can be pushed before it collapses in rage of droughts and forest fires."

Blimey, if deforestation already accounts - as we are told - for 20% of global emissions, what would this mean for the habitability of our planet?

Never mind - I don't care. I am off to read some wonderful analysis about the endless demand-growth prospects presented by China. Who cares as long as I can get my bonusby building this analysis into a report I can present to my boss?

An overused word - tragedy - but the events of the last week justify the description.

But what a relief that the Chinese government has reacted so promptly and so efficiently, in complete contrast the callous incompetence of the thugs who run Myanmar.

Worth clicking through to ICIS connect - our chemicals industry community forum - for discussion about the disaster and what the chemicals industry can do to help.

Click here also for the latest from ICIS news on the earthquake.

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.

First of all, apologies to readers for my complete neglect of this blog over the last six weeks. I can only plead overwork and being too stunned by the collapse of the global economy to think about the blogosphere.

I promise regular posts from now on, provided I am not once again dazzled by the headlights of the advancing global-calamity juggernaut.

Now to the actual first post since early June: The recent fall in crude prices provides some hope for hard-pressed liquids cracker operators confronting the squeeze of higher feedstock costs and weaker demand.

But the pricing decline is partly a reflection of just how bad demand has become - surpassing all estimates of reductions in fuel consumption in both Asia and the West. It's not just energy efficiency triggered by high prices that has driven crude down, but also the credit crisis.

Another reason why crude has fallen was the decision by the US to meet with Iran.

Fundamentally, crude supply remains constrained and it would only take an Israeli attack Iran (a strong possiblity over the next six months) for oil to reach $200 a barrel.

Commodity chemical companies need a different approach to customer management, new methods to deal with with highly volatile raw material costs and fresh ways of keeping costs down. Otherwise those without feedstock advantages are in danger of going bust.

ICIS training plans to run hands-on courses, complete with exercises on customer management, negotiation skills and price assessment with our partner - International eChem.

....that's the case - in the Middle East case because of advantaged feedstock and in China's case because it will be strategic.

In previous downturns, far more capacity was western, or other Asian, and liquids based and so rate cuts brought markets more quickly into balance.

The graphs below from ICIS Plants & Projects data show that while only 14.8% of existing capacites comprises the M-E and China, this will rise to 62.3% of the new capacities being brought onstream in 2008-12.

This will leave M-E and China accounting for around 27% of total gobal ethylene capacity.

ME gas crackers + China.ppt.....

This article from The New Scientist suggests we might have to develop a whole new way of asssesing what drives all commodity markets.

Intuitively, everyone knows that the herd instinct matters. But to measure this mathematically, or statistically, seems a mountainous but fascinating challenge.

At least it will keep the a few academics off the streets for a few years and journalists busy writing articles.

The momentum of opinion might be about to shift in favour of the belief that this year's crude-oil price surge is more to do with speculation than fundamentals.

No less than 15 bills targeting speculators are circulating around Washington at the moment.

This same article details an investigation of allegations that Optiver, the oil trader, manipulated the market. In the public's perception "manipulators" seem to be confused with the legitimate role of speculators and companies who need to hedge their raw-material costs.

The danger is that politicians will latch on to this idea and introduce harmful legislation in order to win votes.

Does the objective external truth - if there ever such a thing and you believe in following what others say rather than making your own internal reality - really matter in such a debate? Or is it all a question of perception. Me pretentious? No, come on....

Referring to my post yesterday, how much does perception shape both short and long term price movements? Should we abandon equilibrium economics for new sentiment-based methods of quantifying how markets behave?

Listen out for the stampede of sheep in Prada shoes as the analysts and journalists jump on the "speculation" bandwagon. Standing out from the crowd can make you feel al little lonely.

Let's assume that supply is hugely challenged as this excellent blog constantly argues.

If prices fall to - or there is a significant fear that they might fall to - $70-80 a barrel, interest in exploiting hard-to-get at reserves such as the Alberta Oil Sands could diminish. Prices need to be at a minimum of these levels to justify costly investment in oil and tar sands and deep-sea reserves. Exploiting marginal reserves is essential for a secure energy future.

The end-result could be that we are storing up an even bigger supply crisis for ourselves in years to come - by believing that the speculators are to blame and thus driving prices down.

Companies might then be forced to draw back from the heavy expenditure and innovation necessary to get at difficult sources of oil and gas.

Baaaaaaaaa.....

The expression "tthis really gets my goat" is in common usage in Northern England, where I hail from. Indeed, despite spending 11 years in Singapore, few people other than my wife (who is Scottish and has an even worse accent and some even stranger expressions) can understand a word I say.

Anyway, the point is that the US, to use a more familiar expression, loves to tell the world to "Do as I say, not do as I do", especially when it comes to free-market economics as this article from Meghnad Desai from the London School of Economics so eloquently highlights.

This is the Asian century - and this doesn't get my goat at all.

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.

Now The Eonomist has written about neuroeconomics - the emerging science of using magnetic resonance imaging (MRI) scans to study how emotions affect behaviour.

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.

This excellent entry in the New Scientist environment blog by Fred Pearce, senior environment correspondent, makes the point that if the world cannot agree on further trade liberalisation, what hope for global climate-change legislation?

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.

Just look at the money being made out of "splash and dash" in the US as an example of how rules can be exploited.

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.

A starting point might be reading Doris de Guzman's excellent blog, Green Chemicals. This focuses on all the renewable, or maybe less unrenewable, products out there.

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.

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.

In the same BASF Segment Day Chemicals event I wrote about yesterday, he was asked whether China would remain a location for export-based low-cost manufacturing. The question related to rising transport, labour and oil costs.

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.

And even the Japanese wish they could break free of their consensus shackles, according to this week's issue of The Economist -- hence, the huge popularity of management hero Kosaku Shima of conglomerate Hatsubishi Goya Holdings.

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?

Nicholas Carr of The Atlantic.com argues that the Google age is making us think and behave differently.

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.

In this clip from his wonderful series, Connections, he envisages such an era because knowledge will be freely available.

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.

I was driving to work this morning when I heard, for the first time, the re-broadcast of a BBC World Service from April. Reporter Mukul Devichand interviewed environmental activists in Beijing who quite understandably claimed not to understand his questions when he uttered the dreaded "D" word (democracy).

You can click on this link and read the full transcript, but unfortunately the Podcast seems to have been removed.

What struck me most of all about this programme, though, were some closing comments from the famous enviironmental campaigner, Ma Jun.

He says:

"You know when you sit there in a Western country blaming China every
day - you know the Chinese Government, Chinese court - blaming them every
day for this and that, the result will be very very limited. Legal responsibility
is on our side but it's also in the meantime, you know people in the Western
countries enjoy cheaper clothing products from China. Why? Probably you
know the cost is on our rivers. You know the rivers have been turning to you
know black, yellow and all kinds of colours sometimes several times a day. I
think you know we got to recognise you know the cheaper products have its
own impact. We recognise there are gaps in our governance, in our
enforcement structure and we try to improve that. But in the meantime, do we all want to allow this multinational companies to take advantage of the loophole?

We've pushed for strengthening the enforcement, we push for the use of market incentives to deal with our problems, but in the meantime I think all the citizens who care about the environmental issues should also think about what we can do to deal with
this problem. Otherwise when China has strengthened its enforcement, these
companies when they sit across this table, they literally say we're going to
move to Vietnam if you keep doing this."

Note the paragraphs in bold. It's easy to criticise China from a Western standpoint, but how much are western shoppers - who are used to cheap, cheap and more cheap from China - to blame for the multi-coloured rivers, poisoned water supply and unbreathable air that are causing hundreds of thousands of premature deaths a year?

And how many chemicals companies, hands on their hearts, can really say that they check the environmental standards all the way down the line to the finished-goods manufacturers in any product chain?

You can make sure your chemical plant has state-of-the-art technologies and adheres fully to Responsible Care requirements, but you will still want to build that plant where the competitive advantage lies.

So if China has become too expensive because of higher environmental and labour costs, the choice might be Vietnam.

What hope is there for a new global climate change deal when corporate interests are allowed to override the bigger picture?

Enough of a rant. I am going home to play with my 19-month-old son and make sure he doesn't suck too hard on any of his plastic toys that are made in China. (likely nearly all of them!)

China and the environment might not be only about rivers changing colour several times a day and factories belching out air pollution that kills hundreds of thousands of people prematurely every year.

Elizabeth Economy outlined the extent of China's environmental problems in her book, The River Runs Black.

In what could turn out to be the ultimate irony of ironies, the very economic system which has caused the crisis in the first place could end up resulting in China becoming the world's leader in clean technologies.

Ample evidence already exists to this effect, according to the Climate Group - a London-based non-profit organisation, the members of which include BP and Dow Chemical.

The group's latest report - China's Clean Revolution - claims that China's transition to a low carbon economy is already well underway. This is the result of supportive government policies which are driving innovation in low carbon technologies and diverting billions of dollars into energy efficiency and renewable technologies.

The huge energy that was poured into industrialisation, once Deng Xiaoping declared that getting rich was glorious, seems to have now been turned to wind, solar and other forms of renewable energy - along with conservation.

China now ranks fifth behind Germany, the US, Spain and India with six gigawatts of wind turbine capacity, says the Climate Group. Some experts believe that this could climb to 100 gigawatts by 2020.

As was the case with industrialisation, State backing might overcome that nasty burden of capitalism - the need to return short-term profits, or even any kind of profits at all.

Lending from China's big banks is still largely directed by the government and the banking system is awash with liquidity - a drastic contrast with the Western credit blight.

Incentives are in place to boost wind power, but have yet to be introduced for solar energy. China. however, is second only to Japan in the global solar photovaltaic market.

Research is taking place in to carbon capture and storage and integrated gasification combined cycle technology.

China is also introducing fuel efficiency standards for cars which are 40 per cent higher than those in the US. Twenty one million electric bicycles and 1.64 million energy efficient compact cars were sold in 2007, the report adds. Clearly, the Chinese are doing a great deal more than just praying for lower gasoline prices.

This all sounds fantastic, but the old story about China is that what works at a central government level might not necessarily be implemented evenly across the country.

Arthur Kroeber of the China Economic Quarterly, however, believes that this old tale about China is total nonsense when the central government decides to take something seriously. The environment is one problem that Beijing is taking exceptionally seriously as it tries to build a more "harmonious society", he says.

But the task remains huge. According to The New Scientist magazine, if China's emissions continue to increase at 8 per cent per year, its per capita CO2 emissions will be double those of the European Union by 2020. While China's emissions keep on rising, EU member countries are making big reductions. For example, Germany reduced its greenhouse gas output by more than 19% between 1990 and 2003.

The problem for China is that it still has to create lots of new jobs of a rapidly urbanising society, whereas many of the rich people in the EU are desperate to return to the rural life.

But, of course, the Europeans are hardly likely to return serfdom. Instead it's all about four-wheel drive gas guzzlers, centrally-heated converted barns, and conveniently located supermarkets stocked with food and booze from the four corners of the Earth.

What planet are we all really on? We rich-world people are all desperately trying to get rid of that tiresome leftover venison as we insist on Afghan melon, to quote the Big Yin.

When I looked in the fridge the other day, my wife had bought Sicilian lemon juice. For pity's sake...

Another great article in The New Scientist talks about a new system for mapping much more precisely the impact of climate change on eco-systems.

Designed by The Nature Conservancy, the system - linked with Google Maps - will enable conservationists to work out expected changes in precipitation and sea levels in areas as small as four kilometres across. Previous technology only provided forecasts for areas ranging in size from 350-600 kilometres.

Why this breakthrough could be essential is that scientists believe that the impact of global warming will create millions of micro climates. Some of these climates will be arid and others subject to heavy rainfall. Areas very close together might also either be flooded or safe from the effects of rising sea levels.

The new technology is designed to protect endangered species such as the Bangladeshi Tiger.

But as the effects of global warming become obvious - even to the most short-sighted and goldish-brained members of the chemicals community - this or similar technologies might become essential when seeking finance for a new project.

Legislators will surely also demand that a planned coastal cracker in Guangdong won't end up as a cracker off the coast and under water, thereby creating an environmental disaster.

Lehman Brothers had a first stab at assessing how much ethylene capacity might be at risk from flooding brought about by climate change in a report published early last year.

It estimated that 46% of existing and 45% of planned ethylene capacity globally was at high risk from such flooding. The bank said that the world have 173m tonne/year of ethylene capacity by 2012.

As climate change accelerates, it might even be necessary to use these technologies to identify safe land where plants can be relocated.

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?"

Watson has warned that - regardless of what happens over the next decade - the earth could heat up by 4% before the century is over, with disastrous consequences.

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.

....said the joker to the thief..

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....

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

A full list of all those whose deaths were reported prematurely is included here in this A-Z of journalistic blunders from Wikipedia.

The same could be said of the US commodity chemicals industry. Until very recently, just about everyone was predicting that the States would fairly soon shift from a net export to a net import position due to higher gas prices, the build-up of very competitive capacity elsewhere and the constant drift of manufacturing overseas. The country's chemicals industry has lost 120,000 jobs with 3 million jobs lost in manufacturing over the last five years.

But what's changed over the last few months is gas prices which have become relatively cheap compared with crude and the weak dollar. This has created what consultants predict will be the "last hurrah" for the US styrene industry ahead of the big slew of new Middle East capacity due on stream soon.

Further consolidation is expected once the Middle East wipes out the advantage US styrene producers currently enjoy over competitors supplied by naphtha-based C2s.

From a carbon footprint point of view, it does seem ridiculous that oil is shipped from the Middle East to make benzene in South Korea and the C8s are then shipped to the US. The US combines the benzene with its competitive gas-based ethylene to make styrene which is then shipped to Europe - already a net importer of commodity chemicals.

But the carbon footprint argument, along with rising freight costs, could offer a lifeline to the US chemicals industry in general. There has been much talk of "reverse globalisation" recently. This might lead to the economic justification for building new commodity chemicals capacity in the US and elsewhere in the West.

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.

This follows the decision by Tata Motors to halt work on its Nano car plant in West Bengal following protests over land ownership.

Late last week Mukesh Ambani and other business leaders rallied to Tata's support as they realised that the protests threatened other investments.

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?"

....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.

Two new studies - one by the Asian Development Bank and the other by the World Bank - have raised the bar on definitions of poverty, largely as a result of rising food costs.

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.

In what could be the world's first fat tax, the State Employees' Insurance Board of Alabama is to charge extra insurance premiums for employees with a body mass index over 35 from 2010.

The southern state enjoys the dubious status of being the most obese in the whole of the US, just pipping Mississippi for the top prize.

Now before you make any jokes about fat Americans, there is a serious point here.

We are consuming too much, whether its pizza with extra cheese injected into the crust - that great invention of the Americans, gasoline or plastic bags.

The world's metaphoric waistline is expanding beyond its means and maybe this type of tax is the way forward to make us consume less.

But, of course, being overweight can be genetic and is very often nothing at all to do with overeating.

The giant portions in American restaurants don't help, however. Americans must throw more food away than Africa eats each day.

Perhaps the fast-food companies should be ones penalised.

Anybody who has had the misfortune to have to listen to me ranting on about Peak Oil of late might have heard - if they managed to stay awake long enough - that I predicted crude could not fall below $100 a barrel because of the fundamentals.

I must admit my first reaction when I heard on the radio this morning that Brent crude had slipped to $99.30 a barrel was "damn".

A calmer, more measured and sensible reaction came later - that this might be good news for my battered, bruised and badly depleted shares, most of which are on Asian markets.

Weaker crude might also help us all keep our jobs. Falling oil prices are occurring as reports of project delays, or even cancellations, in the Middle East and China keep emerging - meaning that the chemicals industry might get some relief from the twin squeeze of higher feedstock costs and oversupply. I'll be dealing with these reports on this blog in the next few days.

"Here's some news for you - you're often wrong and so get used to the idea," said my wife. She's very direct, being Scottish.

But still - and here goes the rant again - I still feel that the long-term fundamentals are of a tight market as we accelerate towards Peak Oil, possibly by as early as the middle of the next decade.

Maybe a persistent bout of lower oil prices would be bad news as this would make us conserve less and lower investment in renewables (which, admittedly, are only ever likely to provide a small percentage of our total energy needs. Hence, we need to conserve!)

A very interesting report by McKinsey (you can sign up free for their online newsletter which only takes a minute) expands on the theme of reverse globalisation which I talked about last week.

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).

Hence, last Friday a statement by Wang Tianpu led to a few days of excited speculation about the cancellation of several Chinese cracker projects.

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.

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).

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?

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?

Mr Obscenely Rich Got Out In Tiime Banker, please look into these eyes, see the pain from the last Great Depression and maybe you will give some of your obscenely huge bonus towards poverty relief.

And perhaps also you'll be willing to pay for all the counselling that the children of this new Great Depression will need when they grow up into adults. As a rich an educated breed, you should be aware that the first few years of a child's life, how secure and encouraged they feel, determines their entire future.

Anyway, see below for my take on the state of the crisis and its implication for chemicals, written for a good friend and contact.

Chemicals demand is being affected by frozen credit markets and the fall in export trade of finished goods to the West.

The credit markets are showing signs of easing thanks to all the government intervention.

But as you can see from this article, the feedback effect on the consumer, and therefore, manufacturing companies, could get a great deal worse before it gets better. Bad corporate results caused the declines in stock markets yesterday (Wednesday 23 October) and as more consumer loans turn soar and unemployment rises globally, corporate earnings will deteriorate even further - at least for the 12 months, I think.

The good news from the financial is that the much-feared credit-default crisis may not be severe as people had expected.

However, the chemicals industry will remain under severe strain for at least the next year, even if the credit crisis eases enabling letters of credit to be more easily obtained (a global shortage of LC's has left commodity shipments, including chemicals, stranded).

The reasons are:

1.) The export dependency of some economies. China's GDP growth will be around 9% this year compared with 11.9% last year, for example, largely due to the slowdown in export trade. Delegates at the APPEC conference in Singapore this week were talking about very quiet demand for fuel products and chemicals at a time when China should be ramping up manufacturing for exports to the West in time for Christmas. Economies such as Singapore are even more vulnerable
2.) The volatility in energy and chemicals pricing. You could probably produce a graph these days linking crude-oil price movements with the equity markets. So until everyone reaches a consensus that the bottom has been reached, we are going to see constant dramatic day-to-day fluctuations in equities and therefore crude. OPEC might cut production at its next meeting, but this will just mean the volatility is within a higher band ($70-90 a barrel is the prediction instead of the current $60-80 a barrel. You cannot rule out the possibility, even if OPEC does make cuts, of a lower range than today - $40-60 a barrel. This would indicate that the real economy has become a great deal worse). Volatility creates the danger of being caught on the wrong side of the deal for sellers, buyers and traders (e.g. high cost raw materials purchased one day that cannot be passed on in higher-cost finished product because of a sudden fall in crude). For resin buying patterns, the uncertainty over the direction of crude is a crucial factor - in a bull market they stock up and in a bear market they de-stock. Crude is in no-man's land and so, combined with LC issues, worries about the overall economy and cancelled orders from customers buyers are remaining firmly on the sidelines.
3.) Last but certainly not least, is the huge wave of new capacity. Polypropylene was supposed to lead the downturn this year but didn't because of start-up delays. Equipment-delivery problems are being blamed, but market reasons seem likely to be another factor. The problem is that with markets showing no signs of turning, producers with heavy debt commitments can only hold back for so long and so will have to commission capacity soon - even if at operating rates lower than planned. For the Middle East producers, now that there is no immediate sign of markets turning, start-ups might as well take place because at the very least on a cash-cost basis contributions will still be achieved on a cash-cost basis (because of low and fixed feedstock costs), just about no matter how low crude goes - and with it petrochemical pricing.

Conditions could get dramatically worse very quickly. One factor not included above is the run on Asian currencies, and possibly even some banking systems, because of the dollar ironically being used as a "safe haven investment".

In the medium term, (the next 12-18 months) the only upside I can see is short-term recoveries in chemicals buying on signs that government interventions are working (with more likely to happen). But these recoveries, as I said, could be short-lived as more evidence emerges of the delayed effect on the real economy (e.g. further falls in corporate earnings).

To be frank, all bets are off on demand-growth forecasts - (so I am sorry this is not going to help you much in coming up with firm numbers!).

Everyone has been wrong and so it's best to err on the side of extreme caution and with a bit of luck we might be pleasantly surprised.

To give you an example of how quickly things can change, a Chinese PTA producer had been forecasting overall polyester growth in China at 12% are recently as July; now it thinks the market will be lucky to get away with zero.

I'd suggest looking at your forecast numbers, going back to those who have supplied the numbers, and asking them if these take into account their worst-case scenarios. Any forecast that predates September cannot be trusted at all.

Hope this helps!

Best Regards
John

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.

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.

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.....

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?

...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.

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.

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.

China appears to be pumping money into ailing companies for social stability reasons, resulting in a build-up in inventory of unsold finished goods.

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.

Petrochemical markets, as is the case with stock markets, are I believe in the midst of a bear-market rally.

As chemicals consultant Paul Hodges predicted on his blog last year, restocking in Q1 was inevitable after the great inventory run-down of the fourth quarter.

Paul has consistently made the right calls on the economic crisis and on its implications for the chemicals industry. His accuracy in predicting the major events - from crude-oil pricing to the collapse of Bear Stearns - can be demonstrated by visiting his blog.

Read his post today which provides are summary of how we got we are and where the global chemicals industry appears to be heading.

Petrochemicals benefited from the Q1 restocking, of course.

We have also seen an across-the-board price rally sustained by a lot of speculation in China made possible by ample availability of credit. The question now is whether credit will be restricted as China becomes concerned over inflation.

Petrochemicals pricing has also been supported by stronger naphtha due to firmer crude, first of all because of refinery rate cuts when the Q4 crisis occurred and more latterly a huge programme of refinery turnarounds in Asia. According to oil and gas consultancy Purvin & Gertz, this turnaround programme is due to come to an end around June.

Naphtha supply will increase in H2 on more exports from India, higher production from one condensate splitter in the Middle East and the start-up of another splitter. Supply could increase in Asia by 20-30%.

I think crude is likely to trade around the $50/bbl mark for the rest of this year so this will set a floor for liquid-feedstock costs.

However,I don't believe that petrochemical producers will be able to use tight naphtha as a justification for maintaining current price levels because of the increased supply.

Petrochemicals supply will also lengthen when Asias' big cracker turnaround season ends after June.

Middle East project delays are likely to continue, but some further extra supply in polyolefins, MEG, aromatics and propylene oxide (PetroRabigh is in the process of starting up the region's first PO plant) can be expected in H2.

The second half of the year could also see the start-up of lots of capacity in China. But how much volume actually hits the markets will have to be closely tracked.

Demand will be better this year than in 2008, but hey, so what?

Last year was exceptional bad because of the destocking, and all the economic uncertainties will not be compensated for by the boost from government stimulus packages.

So, in short, expect feedstock-price support to weaken and for petrochemical supply to lengthen in a persistently weak demand-growth environment.

The big unanswered question is to what extent the recent price prices were also the result of speculation in China. In methanol, an incredible two-thirds of Q1 imports were for speculation on futures markets.

As Paul again points out on his blog, the volume of contracts being traded on the Dalian Commodity Exchange is nothing short of staggering (an average of 1Om tonnes a day during the first quarter!).

Has this contributed to LLDPE prices trading above LDPE over the last few weeks for the first time in two years?

How much of the chemicals and polymers that have been imported into China recently, or purchased locally, and are being held in inventory for speculation purposes? To what extent has this speculation been made easier by increased credit?

With as many as 30m migrant workers laid off in China and export-focused factories operating at only 50% of capacity, how can all this increased chemicals trade be justified by an improvement in the final demand for finished goods?

China's economic stimulus package is kicking in. Over the last few days I hear of improved sentiment in China that the worst might be over.

But given that 10-30% of China's economy (depending on who you believe) is dependent on exports, it would take a heck of an effective stimulus package to boost domestic growth sufficiently to replace all the lost export trade in the second half of this year.

We've also picked up anecdotal reports that factories are being kept running by soft loans from banks for social stability reasons.
It's unlikely that the total extra production will replace all the volumes lost through factory closures.

But at the end of certain product chains you could see China exporting deflation in H2 to relieve inventory - another reason to believe that chemicals pricing will decline in the second half.

However, it might not be in China's interests to flood oveseas markets with goods at bargain-basement prices if this triggers international tensions and a further rise in protectionism.

Overseas chemicals players seem to have benefited from the relative strength of China's market with volumes of benzene and polystyrene, for exampe, being shipped from Europe.

Large increases in polyolefin shipments from the US to China are also being reported, in the case of PE the result perhaps of comparatively cheaper ethane versus naphtha.

The word on the street, from our price-reporting team, is that nobody can really say for certain whether the recent price rises are the result of improved demand or speculation.

But add all the above factors together and it seems a sharp correction from June onwards remains very likely.

And the more uncertain that price direction remains the closer the correlation might be between oil and naphtha and chemicals pricing on a daily, weekly or perhaps even a longer-term basis.

In the absence of clear direction, crude and equities might end up as the only guides available (or perhaps chemicals might even move in the opposite direction to equities in China as a lot of traders traditionally move their money between the two - and also property - depending on where they think the next gains can be made).

For the traders in China and those who know know how to play the domestic markets extremely well, it's also a question of maximising returns from micro-price movements.

On a weekly basis, one trader estimates that domestic polyolefin prices have fluctuated by $50-100/tonne in 2009 compared with $40-50/tonne in 2007. Last year can be discounted as an exceptional year because of the inventory building and the H2 collapse so, hence the comparison with 2007.

The Dalian exchange must also be adding to this volatility.

Bear-market rallies are better than no rallies at all, of course, and we could several more rises and sudden dips in chemicals pricing before this crisis is over.

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.

The huge government spending programme planned for refining and petrochemicals could worsen the overhang.

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.

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

It would be nice to start the weekend with a little cheer, but I'm afraid no amount of gormless optimism would work.

DuPont, as you can see from this excellent piece from my colleague Nigel Davis at ICIS, has revised its forecast for 2009 global growth down to minus 2.5% from minus 0.6%.

Every chemicals end-use segment you can think off from automobiles to construction to electronics looks a lot weaker than in H1 2008.

We need a new way of thinking to get through this, but as I head for a weekend with my family where the plan is to avoid reading any financial news, I am short of any ideas - other than maybe working for an NGO and accepting a much-reduced standard of material liviing.

Making money in this climate remains extremely hard - although from a business journalist's perspective, it is of course a fascinating time.

The first stage of the 105th Canton Trade Fair - which involves electronic and electrical appliances, hardware and tools, machinery, vehicles and spare parts, building materials, lighting equipment and chemical products - concluded this week. Sales totalled $13.03bn - a 20.8% fall on the same stage last year.

I also read this other report about a surge in job creation in China's cities in Q1 over the the fourth quarter last year. What are all these extra workers doing?

Are they building dangerously high inventories of semi-finished and finished goods?

China's economy is showing signs of recovery, but not enough to replace the 20% fall in exports during the first quarter.

As the potential swine flu pandemi threatens more lives - and even more damage to the global economy - it's time to watch American Idol re-runs.

It would be great if we could all collectively retire to some paradise island where Manchester Utd and Chelsea have never won a Premiership trophy, or any kind of trophy for that matter, for the last 20 years - and where the anxiety of making and losing money is replaced by a new Affluenza--free style way of thinking.

In the mean time, the free versions of Adam Lambert's stunning version of the Tears For Fears 1980s song, Mad World, have been removed from YouTube. But it is so worth paying for an iTunes download.

Meanwhile, here are the lyrics. Makes you think, eh?

All around me are familiar faces
Worn out places, worn out faces
Bright and early for their daily races
Going nowhere, going nowhere
And their tears are filling up their glasses
No expression, no expression
Hide my head I want to drown my sorrow
No tomorrow, no tomorrow
And I find it kind of funny
I find it kind of sad
The dreams in which I'm dying
Are the best I've ever had
I find it hard to tell you
'Cos I find it hard to take
When people run in circles
It's a very, very
Mad World
Children waiting for the day they feel good
Happy Birthday, Happy Birthday
Made to feel the way that every child should
Sit and listen, sit and listen
Went to school and I was very nervous
No one knew me, no one knew me
Hello teacher tell me what's my lesson
Look right through me, look right through me

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.

But he warns, in this excellent video interview with FT journalist John Authers, that an extended boom in equities doesn't necessarily mean the economic fundamentals are sound.

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.

My fellow, Paul Hodges, points out that Wal-Mart is actually reporting a decline in consumer spending at its stores in China.

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.

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: The Guardian newspaper

Apologies for letting this bog slip again. I am on leave, but still pondering where on earth we are heading. This makes a welcome relief from staring up at the grey skies and thinking "summer? What summer?" Yes, I am on leave in the UK and Wimbledon is about to start. I would recommend moving the tournament to drought-affected areas of the world, maybe on an annual rotation basis, to guarantee rainfall.

Anyway, back to the business of oil prices.

If you succeed in making acrylic acid from enzymes and microbes, as the company Novozymes is attempting to do, then maybe you can worry slightly less about the long-term likelihood of very high crude prices.

But as oil hits $70/bbl again, the old concern about boom and bust cycles driven by energy costs has to be very much in the forefront of everyone's minds - whether or not they are trying to break the direct link between oil and chemicals.

As the excellent Buttonwood column in The Economist points out, we are back in a commodities supercycle.

The 45 cents a gallon rise in gasoline prices over the last month is costing the American consumer an extra $60 billion.

As confidence in the economic recovery increases, might we soon be back to square one?

What are the solutions for the chemicals industry?

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.

Have you ever been away on holiday and have cut yourself off from from work, only to return and find that nothing has changed?

So it seems in polyolefin markets. As this blog has been writing about for several months, the recovery in pricing seems to have been mainly feedstock-driven as this article from ICIS news points out.

Demand from converters in south China is reported to be weak; hardly surprising given the chart below from The Wall Street Journal which indicates that China's economy is 36.5% dependent on exports with south China the heartland of China's export sector.

No matter what the wisdom of the Chinese government's huge fiscal stimulus aimed at boosting local demand, a sustained recovery in Western consumer spending remains crucial for China's economic health over the next few years.

You have to doubt the wisdom of the stimulus packages because China could well be borrowing from the future to pay for growth today. And secondly, as we discussed earlier this week on this blog, the enormous increase in loan growth will put China's banking system under pressure.

Chemical prices have risen in tandem with crude prices and with the broader sense of optimism - reflected in equity markets - that the worst of global economic crisis might be over.

True, the rate of declines in the real economy might have slowed down but as Mohamed El-Erian, chief executive and chief investment office of Pimco, argues in this Financial Times article "it is going to take time to restructure an economy (the US) that became over-dependent on finance and leverage. Meanwhile, companies will use this period to shed less productive workers."

This could mean US unemployment will only peak at 10.5-11% and not until 2010. Yesterday saw the release of jobless figures for June which indicated a 467,000 drop in employment, raising the current jobless rate to 9.5% from 9.4%,.

I am sticking to my belief that a sharp correction in polyolefins pricing is likely very soon with markets set to get a dreal longer when the Asian turnaround peak season ends - and when new capacity comes online in China and the Middle East

Evidence of this is clear from the monthly ICIS Ethylene Worldwide Report, which was relaunched in May.

As this slide shows detailing China alone (and the picture looks equally disturbing for the rest of the world, also of course including the Middle East), available capacity is set to increase sharply as maintenance work tapers off and some of the new plants are commissioned.

View image

But there might be more start-up delays and of course we don't know the maintenance schedules for next year.

Clearly the risks are high, though, for any petrochemicals producer or buyer (I think what I've said for olefins and polyolefins applies to many other products) that has swung from the fear of Q4-Q1 last year to over-optimism.

If production or buying have been ramped up by too much and inventory levels have once again been badly managed, the risk of heavy losses from the bursting of this mini-price bubble remain high.

For the cautious and prudent company - and for the likes of Ineos and Dow Chemical that have taken opportunities to refinance during the current stockmarket boom - though, the prospects might not be that bad.

But for everyone, evidence of a real improvement based on stronger global consumer spending has yet to emerge.

Indeed, if El-Erian's analysis is correct overall consumer spending on the things made from chemicals might get worse in H2 this year and throughout 2010.

And as foor beyond the end of next year, again, since I've been away nothing has really changed.

This comment from the economist Nouriel Roubini - although a bit dated as it's from May - still rings true:

"We cannot rule out a double dip W-shaped recession with the wings of a tentative recovery of growth in 2010 at risk of being clipped towards the end of that year or in 2011 by a perfect storm of rising oil prices, rising taxes and rising nominal and real interest rates on the public debt of many advanced economies as concerns about medium term fiscal sustainability and about the risk that monetization of fiscal deficits will lead to inflationary pressures after two years of deflationary pressures."