The end of ‘stretch targets’

Growth Jul08.jpg

There is little doubt that chemical growth is weakening. The above chart, taken from Kevin Swift’s excellent weekly report for the American Chemistry Council, indicates that a serious downturn is underway.

Since January, world production growth (the solid green line) has halved – from 4.1%, to 1.6% in May. The 3 largest Regions have all been badly hit:

• Asian growth (the brown line) halved from 9.2% to 4.5%
• W European production (light green) actually declined by 1.4% in May
• N American production (blue) also declined, by 1.6% in June

Only the Middle East managed to sustain growth, rising from 5.2% to 7.4%, as its new capacity began to come online.

This synchronised downturn carries serious implications for corporate strategy. Over the past decade, many companies set ‘stretch targets’ for their senior executives at Budget time. They assumed that any downturn would be relatively short-lived, and so the aim was to position businesses for aggressive growth. Financial leverage increased to previously unknown levels, as a result.

Now, trends within the world economy have reversed. Instead, deleveraging has become the major focus. And when Boards start to finalise Budget plans in September, they will have to decide whether to abandon hopes for a resumption of growth in 2009. In the meantime, they would certainly be prudent to start developing contingency plans, in case a multi-year downturn is now underway.

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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