US housing, China storms hit chemical demand

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.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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