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Global downsizing needed to rebalance supply and demand

Chemical companies, Consumer demand, Economic growth, Financial Events, Leverage
By Paul Hodges on 06-Jul-2009
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The chemical industry has benefited from a benign paradigm over the past 25 years:

• Demographics in the west have encouraged consumption, as the baby-boom generation reached middle age
• Globalisation meant this could be achieved at lower cost, by outsourcing production to lower-wage countries in the east
• Workers in the east saved their money, which allowed banks to make good profits by lending it back to consumers in the west

Now, all three pillars of this paradigm are under threat:

• The baby-boom generation is starting to retire and a new, more frugal, type of consumption is emerging in the west.
• Asian countries are trying to rebalance their economies, to promote more domestic demand and replace lost exports.
• And many banks are amongst the ranks of the walking wounded, unable to resume lending at previous levels

What happens next, is therefore a key question. The Bank for International Settlements (BIS), the central bankers’ bank, suggests that “A financial crisis bears striking similarities to medical illness. In both cases, finding a cure requires identifying and then treating the causes of the disease.

Its analysis, in its newly-released Annual Report, suggests that investors, consumers and policymakers have been “fooled into thinking that trend growth was higher than it really was“. And the BIS’s conclusion is that “countries have been left with bloated financial sectors, the ability to build more cars than their populations need and, in some cases, surplus housing stocks.”

Housing and auto demand have, of course, been a key support for chemical demand in the past few years. If the BIS are right, then considerable downsizing awaits the industry over the next few years, as it adjusts to the new realities.