Chemicals & The Economy

Its always interesting to see the news stories that are slipped out just before major public holidays, when media attention is likely to be low.

Only ICIS news seemed to spot the announcement by Moody’s that they were placing SABIC Innovative Plastics (the former GE Plastics business) on watch for a potential ratings downgrade. Yet this is a story with potentially major implications for the chemical industry.

SABIC bought the GE business in July, when it was already well known to be suffering from high feedstock costs and increasingly difficult market conditions. But Moody’s felt no qualms then about issuing a provisional Ba2 rating for the debt. Yet on 21 December, Moody’s said that Q3 results might lead to a downgrade.

The key to the story is Moody’s sudden concern over the fact that SABIC used ‘a highly leveraged funding structure', which it now believes could ‘put more pressure’ on the business. In July, this structure was the norm for chemical M&A deals. But as I noted in October, the subsequent credit crisis has caused lenders to become more risk-averse.

Nobody, least of all Moody’s, is really questioning SABIC's support for its new Innovative Plastics business. But the ratings agencies, including Moody’s, were very slow to recognise the developing problems in the banking world as a result of the subprime disaster.

By rushing out news of a possible downgrade on this debt, Moody’s are making it easier for themselves to downgrade more debt issued by less well-placed companies during 2008. They can point to the SABIC example as ‘justification’ for a tougher line. Existing borrowers should therefore prepare for similar actions, as well as higher interest payments, during 2008.

For the chemical industry, much depends on whether the US economy goes into recession during 2008. The signs are not encouraging, with even former Fed Chairman Alan Greenspan believing it is a 50:50 chance.

So how would any recession impact the current credit crisis? Writing in the Financial Times their banking editor, Gillian Tett, provides one answer. She has an excellent track record, as I have noted before, and in her forecast for 2008 she points out that current $100bn losses in the banking system could easily grow by a further $200bn if the housing slowdown leads to credit card and commercial property defaults. She then adds:

‘The nightmare scenario, however, is one in which risky companies start to default on their loans. Thankfully, there is no sign of this occurring yet. But if the US economy goes into recession, the chance of corporate defaults will rise - which could produce more losses for banks, and thus a second chapter in the credit crunch story.’

Finance Directors will also have taken note of Chrysler CEO Nardelli's comments recently to employees that the company is 'operationally bankrupt' and likely to have to sell assets quickly to raise funds. A policy of close monitoring of customers' financial solvency would seem to be a sensible precaution, gicen the uncertainties around.

I noted in late November that China’s policy towards its currency might be changing.

Now we have evidence of this change, with a rather spectacular 0.9% rise in its value versus the US$ last week. This was the largest weekly gain since it was de-pegged against the $ in July 2005. And it seemed to result from a desire by the Chinese authorities to boost the currency in order to help get inflation back under control.

If China is really changing course in terms of the renminbi's value, then we can certainly expect to be living 'in interesting times', as the Chinese saying goes, in the next few months.

Oil prices touched $100/bbl today, a new record in nominal and inflation-adjusted terms. At the same time, the US Institute of Supply Management (ISM) index signalled that the manufacturing sector ‘failed to grow in December’, with ‘industries close to the housing market struggling more than others’. All the ISM’s main indicators were negative, with inventories also reported to be moving in the ‘too high’ direction.

It is difficult to underestimate the psychological importance of oil reaching the $100/bbl level. I first identified the potential for this to happen 6 months ago on 5 July (just as this blog began), when I suggested $100/bbl could be reached ‘early next year’. But at the time, this was a distinctly minority view. The price then was only $71/bbl, and many expected it to retreat to the $50/bbl level seen at the start of 2007.

I noted on 14 July, as oil rose to $79/bbl, that leading retailers Wal-Mart and Tesco were already reporting that consumers had become more conscious of value-for-money issues. I commented that CEO’s needed to develop ‘a major cost-leadership programme’ for September rollout, in order to respond to this twin challenge of higher feedstock costs and increasing consumer price resistance.

By August, I had also become concerned that the combination of the subprime disaster and high oil prices could provide ‘a distinctly unhealthy cocktail’ for the global economy. With OPEC proposing only a small increase in oil supplies as we came into the northern winter, plus ‘weakening US demand and credit markets’, I worried that chemical company profits could well be hit.

I repeated this concern in mid-September, when prices were still at $79/bbl, and concluded that ‘higher oil prices have always slowed the world economy in the past. Their impact may have been deferred this time, but it is hard to believe that it has been avoided’.

My EPCA posting confirmed this concern. I found myself worrying that the consensus forecast was too complacent, expecting $70/bbl crude and reasonable chemical demand and margins for 2008. Instead, I suggested that the meeting ‘will mark a turning point in the petchem cycle’.

By mid-October, I was pointing out that crude had risen to $90/bbl, and worried that ‘this latest upward rush by the oil price will be the catalyst that finally causes the US consumer to cut back on non-essential spending’. I suggested that companies should develop contingency plans for a 2008 downturn, even whilst hoping these would not be needed.

By the end of October, crude had reached an all-time high in inflation adjusted terms of over $92/bbl. And I questioned the reliability of Western inflation figures that sought to portray inflation at ‘only’ 2%, despite massive increases in the prices of food and energy. I worried that we would see ‘margin compression’ in the industry, as central banks belatedly woke up to the risk that inflation might become a real problem again.

Paul Satchell, chemicals analyst at ING shared my concerns, believing that investors had become ‘dangerously complacent about the industry’s ability to cope with increases in oil prices’. Whilst TOTAL’s CEO added to my worries in early November when I reported his view that ‘increasing tightness of supplies will keep oil prices relatively high in the future’.

By December, I noted that ‘the dialogue between oil producers and consumers is starting to break down’. I suggested that ‘the price and availability of oil is absolutely critical to the chemical industry. Growing uncertainty around these key issues is already leading to increased price volatility, which in turn will reduce margins and profitability’.

During December, we had a significant fall in the price to below $90/bbl. But the experience of previous oil price surges in 1973-4 and 1979-80 was that when the rally finally ended, prices stabilised at the new, higher, level. They did not collapse. It would therefore be a triumph of hope over experience to expect the 2007-8 surge to be different. And, of course, the worst of the northern winter is possibly still to come.

S&P have quickly followed Moody’s in putting SABIC Innovative Plastics’ debt on creditwatch for a downgrade. As I commented with the Moody’s downgrade, this is not really to do with a newly discovered decline in the polycarbonate market. S&P have very competent chemical analysts, and must have been aware in August (when the original grade was announced), that Q3 was turning out to be a tough quarter, and that future profits were likely to slow.

Again, ICIS news have done a good job uncovering this story during the quiet holiday period. Most revealing is the comment from S&P analyst, Tobias Mack that ‘We expect that SABIC will likely have to offer some parental support in 2008 to protect its subsidiary SABIC Innovative Plastics from a distress scenario’.

SABIC is one of the strongest chemical companies around. In making this demand, S&P are clearly preparing the ground to put major pressure on less well-supported companies with high leverage. They are also signalling that life will be quite difficult for those still trying to finance deals completed towards the end of 2007.

My conversations over the holiday period suggested that lenders’ lawyers are already busy examining the fine print of loan agreements, even those supposedly ‘cov-lite’ with few covenants to enforce performance. Finance directors don’t want to be caught unaware, if a major downgrade is likely. They need to ensure their sales and purchasing teams are monitoring credit conditions at their customers and suppliers very closely.

A reader has kindly sent me an interesting analysis from Richard Bernstein, Chief Investment Strategist at Merrill Lynch (ML)*. He argues that ‘the Fed can lower interest rates quite a lot, but they will likely have minimal impact on the economy unless credit creation grows’.

Bernstein says their research indicates that US credit availability is now very tight. This leads him to conclude that ‘the Fed’s policies might be extremely impotent’ and akin to ‘pushing on air’. He adds that ‘lower interest rates do not always spur credit growth’, and points to the example of Japan for the past 15 years.

I noted back on 9 September that the then IMF head. Rodrigo Rato, had also warned that reducing interest rates might make the situation worse, not better. Rato argued that the real problem was that ‘systemically important banks may face constraints in extending credit.’ Four months later, it seems even more likely that the current lending crisis is about concerns over return of capital, not return on capital.

This analysis had led me to question whether ‘cutting rates (would) encourage lenders to lend more?’ I concluded that the answer was ‘Probably not. It might well make them more reluctant, by reducing their potential reward. It might also weaken the dollar, as overseas investors looked for higher returns elsewhere’.

Unfortunately, developments over the past 4 months seem to suggest that my concerns were correct. Key US chemical markets such as housing and autos have got worse, not better, whilst the US$ has weakened.

Another round of US rate cuts is widely expected this month. Although the Fed is undoubtedly well intentioned, ML’s research suggests that their actions may, in this crisis, be doing more harm than good.

(* I can’t link to this report, but will be happy to send a copy to any interested reader)

US autos are one of the major uses for chemicals. The ACC recently calculated that each auto contains $2441 worth of chemistry, with a wide range of companies supplying products such as antifreeze, sealants, coatings and plastics. In 2006, chemical sales to the industry were worth $32.6bn.

A downturn in auto sales is therefore not good news. As I commented in November, when reviewing Q3 sales, ‘domestic US markets could get very difficult next year, if core auto and housing markets don’t start to recover soon’.

Unfortunately, Ford CEO Mulally’s comments last night suggests that they are not optimistic about 2008 prospects. ‘Clearly, most of the parameters of our economy are associated with a real slowdown’, said Mulally. ‘Everything has deteriorated more than we expected’.

We can also see this in the newly-released sales figures for 2007. Sales by the big 4 (GM, Toyota, Chrysler, Ford) were down 5% overall versus 2006 at 11.1m, with only Toyota showing a sales increase.

• GM were down 6% in the year, with 3.9m sales
• Toyota took the No 2 spot for the first time, with a 2.7% increase to 2.6m sales
• Ford took No 3 spot for the first time since 1905, after a 12% decline to 2.57m sales
• Chrysler, now under Cerberus management, and offering major cashbacks to clear inventory, was down 3% with 2.1m sales

The only positive was that inventories do seem to have been cleared, with Chrysler reporting the lowest level going into January for 13 years. But even this good news came at a cost for the chemical industry, as it was only due to a 21% production cut in December.

Reaction to $100 oil has been swift. Yesterday, the Chinese State Council decided to freeze the prices of oil products, natural gas and electricity, as well as public transportation. A measure of the government’s concern is that the meeting to approve the freeze was attended by premier Wen Jiabao.

Chinese inflation is now at 6.9% and the Council noted that ‘China faces relatively large pressures of further price increases (as) prices of crude oil, grains and other primary products are still rising on the international market’.

So as expected, $100 oil prices are already having an impact on psychology. The Chinese government has been most aggressive in searching for new sources of oil imports. But even they are now starting to worry about the implications of unlimited consumption of oil and oil-based products.

Earlier this week, the State Council also announced a decision to ban ultra-thin plastic bags, and to charge customers for thicker plastic bags. China uses around 3bn plastic bags a year, which requires 37m bbls of crude per year. But even if the ban is totally successful, it will save less than two days of total oil consumption.

If major energy importers such as China have decided to prioritise oil use, and have started by banning plastic bags, what other petchem products will be next affected? And if other countries follow this lead, what will be the impact on petchem demand generally?

Financial investors are already quite disruptive in crude oil markets. And their influence is set to grow this year. That’s the message from surveys by Barclays Global Investors and JP Morgan. $120bn is now invested in commodities as a class, with oil a major target. Even your own pension fund may be about to invest, or to increase its exposure, after the stellar returns posted in 2007.

As a result, crude oil prices are becoming more volatile. Over the past month, they have been over $100/bbl on several occasions. Yet they were below $90/bbl on 18 December, and are currently back around $93/bbl. This is a major issue for petchems, making pricing and margins most uncertain.

Nothing has changed since mid-December in the ‘real world’ of oil supply/demand to justify this recent volatility. The mild weather forecast for the critical NE USA area seems to have been accurate. There have been no new geo-political tensions.

The cause is simply the behaviour of financial players. As I noted back in July, these do not set underlying trends. Rather, they jump on them after they have developed. The ‘weight of money’ then exaggerates any minor changes in either direction.

Worryingly for petchems, this influence seems likely to grow in 2008. The US pension fund, Calpers, is poised to invest $13bn (5% of its $250bn portfolio). It sees oil markets as a good ‘hedge’ against inflation and slowing stock markets. Calpers adds that ‘we believe energy will offer investors opportunities in coming years’.

In Europe, JP Morgan found that 31% of major investors were planning to invest in commodities this year. Belgium, Netherlands, Germany and Austria were particularly keen, with only France having zero interest. Europe is following the US pattern, with the largest Dutch pension fund ABP increasing its investment to 3% of its portfolio, matching Hermes (the UK’s largest fund).

There is little point in petchem producers or consumers trying to stand against this wave of new money entering the oil markets. And with a profits downturn probably already underway, it is instead important to ‘lock-in’ margins as much as possible. Companies routinely ‘hedge’ their currency exposure these days. Use of the LME futures contracts may well need to become a similarly essential tool.

The OECD produces useful leading indicators each month, which try to capture turning points in the global economy. Its industrial production indicator is very relevant to chemicals, as 85% of demand comes from this sector.

The latest outlook is summarised in Kevin Swift’s ACC report. The blue line is actual global industrial production, whilst the red line represents the OECD’s indicator. This is based on OECD countries plus the 6 main non-OECD countries. Kevin comments that November’s indicator ‘showed a marked deceleration’ versus previous data.

In terms of individual OECD countries, the indicator suggests a downturn now seems to be underway in the US, Germany and the UK, with Japan, France, Canada and Italy slowing down. China and Brazil are still expanding, Russia is improving, but India now appears to be weakening.

Reports from leading retailers such as Wal-Mart and Tesco provide the best real-time insight into what is really happening in the wider economy. It is clear from both companies’ recent results that US and some other western consumer markets are slowing very quickly. This has critical implications for chemical companies.

In the US, Wal-Mart see a ‘difficult retail environment’. Their core offering is now ‘Wal-Mart’s food performance…which helped drive traffic to other areas of the stores’. In response, their strategy is focused on ‘price leadership’, and they noted that ‘customers responded to our pricing and merchandise offerings’ over the holiday period.

Since the holiday season, US sales growth has slowed further. Tom Schoewe, CFO, said they were now seeing just 2% growth, compared to 2.6% during the holiday period. In real terms, after adjusting for inflation, this means that sales growth is now negative.

Tesco are seeing a similar pattern in the UK, reporting that sales growth is now just 3.1%. This is also negative in real terms. Andrew Higginson, Tesco’s finance director, said that ‘we have all been affected by the market, as it slows’.

Back in July, I noted that the same retailers were the first to spot that ‘consumer attitudes have shifted sharply in recent weeks’. At that time, they were reporting that price had become the critical factor, and said they were aiming to ‘lower prices by working with key suppliers’.

It is clear that core markets for chemicals - housing, autos, and now retail - are all becoming more difficult. It is therefore hard to be optimistic about the next few months. Feedstock costs are high, volumes are coming under threat from lower consumer demand, and so margins will suffer.

Back in October, I suggested that CFO’s might be wise to develop ‘contingency plans’ in case consumer spending weakened whilst banks stopped lending. It now looks as those plans will, unfortunately, be needed.

The German word ‘Zeitgeist’ describes ‘the ethos or mood’ of a select group of people. And the financial zeitgeist is clearly changing.

Back in August, I marvelled at the contradictory views then being expressed:

‘We see a lot of people on the Street who are scared. We are not scared. We are not panicked. We are not rattled. Our team has been through this before.’ We are ’still dancing’, said the then Citigroup CEO, Chuck Prince.

But at the same time, more sober voices could be heard, such as that of Jochen Sanio, head of Germany’s financial regulator. He felt that subprime could become ‘the worst banking crisis since 1931’,

There now seems little doubt that Herr Sanio was right. Chuck Prince is no longer at Citi. His successor, Vikram Pandit, said yesterday that ‘there is no doubt we are in the middle of a very challenging environment'. And Citi’s results led Bloomberg to comment that ‘The fourth quarter may be the worst earnings period for the financial industry since the Great Depression’.

Citi reported a $10bn Q4 loss, and took $18bn in subprime credit writedowns. Yet CFO Gary Crittenden was very downbeat in his comments, suggesting that ‘whilst Citi was no longer making optimistic assumptions, there are always circumstances under which things could get worse. No one can say this whole thing is over’, he added.

I have often wondered how the major investment banks arrive at their forecasts for long-term crude prices. Last night I found out how it is done at the biggest player, Barclays Capital.

Dr Paul Horsnell, Head of Commodities Research, said that when he started in the role in 2003, he began by keeping close to the mainstream with a forecast of $24/bbl. Since then, as the market price has risen, he has simply doubled the previous price, deducted $1/bbl, and this number has become his new long-term forecast.

So from a starting point of $24/bbl, he then moved to a $47/bbl forecast, and is currently forecasting $93/bbl. When he next revises the forecast, he expects it to go to $185/bbl.

The interesting thing was that in a room full of eminent energy economists, as well as many senior oil industry people, nobody took issue with his methodology.

I had the opportunity last night to learn current thinking within the oil industry on the current outlook for oil markets, by attending the annual lecture of the British Institute of Energy Economists, kindly hosted by BP.

A year ago, at the same event, the crude price was $51/bbl. Last night, the headlines were ‘major fall in oil price to $91/bbl’. This captures the extreme volatility that now exists in oil markets, and which makes life an absolute nightmare for anyone who buys or sells oil-based chemicals.

The consensus emerging from the discussion was that markets will remain strong, and that the activity of speculators will continue to create volatility. High oil prices are not likely to stimulate new supply in the short-term, as most reserves are in areas that are difficult to access due to politics or geography. Equally, demand will continue to grow in the Middle East and Asia, due to massive government subsidies on domestic prices.

Stock markets are usually good indicators of future economic conditions. Their savage downturn since the start of the year suggests that investors now feel a growth slowdown is almost inevitable.

Barrons (the major US investment paper) today highlights another very worrying development. It notes that ‘selling rallies aggressively is (now) more fruitful than buying every little dip’. This marks a complete change of behaviour by investors. Barrons suggests that the rationale is that now ‘overshoots tend to occur on the downside’ rather than on the upside.

The basis for the argument can be seen in the chart, which plots the relative performance of 5 main indices (the German DAX, UK FTSE 100, Shanghai Composite, US S&P500, Japan Nikkei) over the past month. All are down by around 15%, with Japan down over 20%.

These are major losses by any standard. Particularly at this time of year, when seasonal influences are strongly positive. And although rallies have taken place, these have soon given way to further falls. Last Friday, for example, news of the Bush stimulus package led to a major intra-day rally in the US, but the market still closed down. And today, more selling has taken place in Asia and Europe.

Unless something changes quickly, this synchronised downturn would imply that we are now in a fully-fledged global bear market. Strong rallies do occur in bear markets, just as corrections happen during bull markets. But they cannot disguise the fact that the overall trend has become negative.

In turn, this would suggest that chemical companies should not expect either that consumer demand will recover quickly, or that Asia will successfully ‘decouple’ its economy from western markets. They should also be very careful about credit risks, as if the economy does go into a slowdown, company defaults will rise.

The new ICIS Weekly Margin report on polyethylene is a goldmine for those who want to track the fortunes of the petchem industry.

The recent issue contains good news and bad news for producers:

• The good news is that PE margins have improved during January for integrated producers as a result of lower feedstock costs, higher cracker co-product values and higher PE prices.
• However, non-integrated producers are not yet seeing much improvement, as they have not been able to fully pass on the ethylene contract price increase.
• And the bad news is that the recovery in margins is starting from a low base. LDPE margins were down a massive 47% in Q4, versus the same period in 2006, whilst HDPE margins were down 55%.

Overall, though, 2007 was a reasonable year. Margins were down 9% for both LDPE and HDPE versus 2006, but this was mainly because of the Q4 downturn. As the chart shows, there was a dramatic fall towards the end of the year. Both European LDPE and ethylene contributions (the blue and yellow lines) hit lows in December that were last seen in early 2002 and late 2005.

Producers will certainly be hoping that today’s massive US Fed interest rates cuts, combined with the proposed Bush tax rebates, halts the current slide in consumer confidence and helps volumes and margins to recover.

CEOs seem to be following CFOs in worrying about the impact of the credit crunch and debt crisis. The annual CEO survey by PwC of 1150 executives shows that fears of a downturn now top their list of concerns.

US CEOs are much less confident than a year ago, with only 35% now ‘very confident’ about the short-term outlook. West European CEOs are also downbeat, with only 44% very confident about short-term prospects and just 36% confident about growth over the next 3 years.

This CEO gloom is based on a variety of factors that relate strongly to the chemical industry – the sub-prime mortgage crisis, the credit crunch, rising energy prices. It mirrors the record pessimism shown by CFOs last month in The Economist survey which (as I noted last month), found them worrying about ‘weak consumer demand, high fuel costs, rising labor costs and credit markets’.

The PwC survey is not all gloom, as it does reveal a striking difference between CEO attitudes in the western and emerging economies. PwC reports that ‘CEOs in Asia, Latin America and CEE are more confident’ than last year, and comments that this shows a belief that ‘their booming economies could insulate them’ from problems elsewhere.

However, PwC issue a mild health warning over the results, as the survey was taken at the end of last year. Since then, CEO confidence has probably declined, following recent financial turmoil. There are also growing doubts, as I discussed in December, about whether emerging economies really can ‘decouple’ from the West.

China’s ethylene and propylene imports have surged in recent months, as the country has diverted naphtha to supply gasoline and diesel needs.

ICIS news, reporting official China Customs figures, says 2007 ethylene imports were over 400% higher at 510KT, versus just 117KT in 2006. Ethylene exports also more than halved to 50KT in 2007, from 129KT in 2006.

Altogether, China’s net ethylene balance was therefore 472KT worse than in 2006. Propylene shows the same picture, with imports more than doubling in 2007 to 728KT versus 321KT in 2006.

Strong growth ahead of the Olympics is obviously part of the explanation. As is the fact that most of the country’s major new crackers won’t come online until 2009/10. But another key factor is the government’s need to prioritise gasoline and diesel production to ensure social stability.

As ICIS news reported last year ‘China has asked Sinopec and PetroChina to beef up their gasoline and diesel output to help relieve the country’s oil shortage since October’. And they quoted refinery sources as adding that ‘Diesel is tight in China. Reduced production of one tonne of ethylene would mean adding five tonnes of diesel.’

China’s dilemma highlights a wider problem for petchems. Crude supplies look to remain tight. This is driving up naphtha prices. But gasoline and diesel demand is continuing to grow strongly in many emerging countries, as governments such as China's instead subsidise domestic consumers.

Demand for transport fuels is therefore likely to stay relatively strong, as the world adjusts to a tighter oil supply/demand balance. Those petchem producers without access to advantaged feedstock may well face a difficult few years.

The credit crunch and associated debt crisis has elicited an unprecedented response from the International Monetary Fund (IMF). Today, the head of the IMF, Dominique Strauss-Kohn, told the Financial Times that the new IMF economic forecasts would ‘show a serious economic slowdown that needs a serious response’.

Just last autumn, the IMF was calling for ‘continued fiscal consolidation’ in the USA to reduce the budget deficit. Now, however, M Strauss-Kohn said he not only approved the US tax cut package, but also called on other countries to develop ‘a new fiscal policy to answer this crisis’.

Behind the IMF’s change of direction is a recognition that lower interest rates on their own ‘will not be enough to get us out of the turmoil we are in’. As I noted back on 7 January, many experts now believe that cutting interest rates is like ‘pushing on air’.

This is because the problem is not one of stimulating demand via interest rate cuts, but of trying to encourage lenders to resume lending. In this environment, lower interest rates may actually make matters worse, by reducing lenders’ incentive to lend.

Policy makers are therefore stuck between a rock and hard place. Higher rates might well encourage more lending, but would bankrupt all those many highly-geared people and companies who have borrowed beyond their means. The new head of Merrill Lynch, John Thain, has already ‘predicted that the problems in mortgage markets will spread to credit cards and consumer loans’.

If the IMF is right, then chemical industry sales to key consumer markets such as housing and autos look set to come under further pressure. Contagion from the growing crisis in financial markets may well now start to spread into the 'real economy' in which we live and work.

On my regular trip to Asia, the major news is the snowstorms battering China. These started on 10 January, and are expected to continue for at least another week.

The transportation system seems to have ground to a standstill in many areas as a result. and so essential coal and food supplies are not reaching the major cities. The NRDC reports that 17 of China’s provinces have already suffered electricity blackouts. Many factories have had to close as a result.

Premier Wen Jiabao has now gone further and called for ‘key enterprises to take social responsibility’ and shutdown their operations. The Wall Street Journal reports that 78 million people have so far been affected by the storms, with 24 deaths recorded and 107000 homes destroyed.

This will make for a miserable Lunar New Year in China, with food shortages reported. Clearly chemicals production and demand will also be badly affected.

Andrew Liveris, Dow’s CEO, commented today that Dow now have ‘a total clampdown on costs and capital expenditure’. Whilst other CEO’s told the Financial Times that ‘rising oil prices, sagging consumer confidence and the on-going credit crunch’ are causing them to put in place ‘contingency plans to protect against the expected economic downturn’.

Separately, Bill Gross of Pimco, who manages the largest bond fund in the world, has said that he doesn’t expect the US interest rate cuts and tax rebates to rescue the housing market. In his monthly client newsletter, he comments:

‘Mr. Bernanke – we have a problem. First of all these 6-7% 30-year mortgages now require a significantly higher down payment than in prior years. 20% down? Say what? Where does a 30-year-old couple get that kind of money?
Secondly, however, and just as important, what motivates a future homeowner to pay 6%+ interest for an asset that is going down in price?’

The difficulty now for CEOs and CFOs lies in judging just how deep current problems might prove, and how long they might last. Gross goes on to suggest that only the provision of ‘subsidized mortgage rates with minimal down payments’ will cause US housing markets to bottom. He suggests that this won’t happen until next year, when a new US administration is in place.

If he is right, then US chemical producers cannot look for any short-term improvement in their main market, housing. And with China in the middle of severe winter storms, demand in the Asian region is probably about to dip for some weeks. Transportation is being hit very badly, and even where chemical plants are still able to run, product is often having to be warehoused as a result. Equally, many customers are already shutdown by lack of power, as coal supplies fail to arrive.

A slowdown in both the US and China is a potentially lethal combination for chemical demand, particularly as we come into what should be the seasonally strongest period of the year.