Chemicals & The Economy

The chemical industry is a well-known leading indicator for the world economy. Yet 18 months after the financial crisis began, the blog's review of quarterly company results reveals few signs of optimism that a sustained upturn is underway.

Q1 has certainly seen the forecast seasonal boost. But Asia, particularly China, remains the real focus of growth. PetroChina, Reliance and Sinopec all see a continuing boom underway, with Sinopec highlighting the importance of "state stimulus measures".

Dow Corning is certainly bullish, seeing "recovery in nearly every industry and geography". Whilst Cognis, also focused on 'green markets', detects improved demand in Europe. But although Dow sees "demand growth returning in developed markets", it notes significant "challenges" remain.

Equally, Akzo Nobel seems typical of the majority when noting it remains "cautious about the strength of the recovery". BASF also notes that "recovery is not certain". And several companies, including Rhodia, worry about the "uptrend in raw material and energy costs".

Air Liquide. "In a context that remains contrasted, this first quarter of 2010 marks the return to growth".
Akzo Nobel. "Expect pressure from further raw material cost increases during the year and remain cautious about the strength of the recovery".
Ashland. "Asia-Pacific remained the most difficult market for recovering raw materials costs; Europe remains tough due to the competitive environment".
BASF. "Limited supplies of certain chemicals as well as restocking of inventories among customers buoyed demand.... We expect that national stimulus programmes around the world will wind down. Further recovery is therefore not certain and surprises cannot be ruled out for 2010."
Bayer. "The decline in business momentum at HealthCare and CropScience was being offset by the recovery at MaterialScience".
BP. "Petrochemicals margins would come under pressure due to new capacity coming on stream".
Celanese. Asia is "the only region in the world that's growing".
Cepsa. "A more buoyant global operating environment with better product prices".
Clariant. "We expect the economic recovery to remain fragile and raw material costs to further rise heading into the seasonally weaker second half of the year".
Cognis. "Business conditions improved due to a pickup in worldwide demand, especially in Europe".
ConocoPhillips. "Chemicals experienced improved market conditions."
Cytec. "There is still some uncertainty about the recovery, and higher energy prices will show up in our costs for the second quarter."
Dow. "Demand growth was returning in developed markets, with strengthened consumer spending in areas such as electronics, appliances and automotive ...balancing out challenges in residential and commercial construction, inflation in emerging markets and sovereign debt issues in southern Europe".
Dow Corning. "Seeing this recovery in demand in nearly every industry and geography we serve".
DSM. "Uncertainties remain in the medium-term economic outlook."
DuPont. "Expected stronger sales growth operating margins as global economic improvements continued, with particularly strong demand in Asia Pacific.
Eastman. "Expected continued volatility in raw material and energy costs".
ExxonMobil. "Q1 chemical product sales were 6.488MT, up by 961KT in Q1 2009, primarily due to improved global demand".
Honeywell. "The timing and shape of the recovery is uncertain and we remain conservative in our planning assumptions".
Idemitsu Kosan. "Demand for petrochemical products recovered, assisted by China's economic stimulus package."
INEOS. "Just as the orders dried up suddenly in August 2008 so they have abruptly resumed in the past couple of months".
Kemira. "Uncertainty remained regarding the development of demand".
Lubrizol. "Do not expect full recovery to our 2008 volume level until 2011...also expect tight supply conditions for some of our raw materials that will result in upward cost pressure."
Occidental. "Significant margin erosion in 2009 carried over into the first quarter of this year."
Olin. "Had a Q1 operating rate of 75%, compared with 65% in Q1 2009."
PetroChina. "Ethylene output surged 37% year on year in Q1, with production of other petrochemicals also strong.
PPG. Saw continued "moderate recovery" in several of its global end-use markets over the quarter."
Quaker. "Anticipate somewhat lower product volume in H2 ...due to credit-tightening actions in China, seasonal factors, the ending of inventory restocking and the conclusion of tax incentives for auto purchases in several countries".
Reliance. "Domestic demand for most petrochemical products remained strong in the January to March period, with polymers demand up by 19% and demand for polyester and fibre intermediates up by 15%".
Rhodia. "The upward trend in raw material and energy costs is expected to continue".
Rockwood. "Difficult to determine what impact customer inventory rebuild is having on our sales."
SABIC. "Overcoming the impacts of the global financial crisis, as well as continuing our strategy of growth and investment in new industrial plants".
Shell. "Industry refining margins had significantly declined reflecting reduced demand for refined products".
Sherwin Williams. "Sales were slightly stronger than we anticipated, although domestic demand remains soft".
Sinopec. "In light of state stimulus policies, demand... grew steadily and the company took various proactive measures to expand the market and optimise the product mix".
Syngenta. "Expects volume growth from Q2 onwards".
Tessenderlo. "Visibility on H2 remains low".
TOTAL. "Chemicals has benefited from the economic recovery since the start of the year."
Trelleborg. "Warned that the demand scenario remains uncertain".
Unilever. "Commodity costs will increase in the second half, economies remain sluggish and competitive intensity will remain high".
Vopak. "We notice the first signs of structural recovery of the European chemicals market."
Wacker. Focused on " improving our cost structures and increasing our competitive edge."

A year ago, China's Dalian futures exchange was hitting its peak, in terms of polymer volume. The Linear Low Density Polyethylene (LLDPE) contract saw 80 million tonnes (blue line) traded in April. This was more than 3 times total annual world production.

But as the chart above shows, volume last month was 'only' 21MT - still high, but down 74% from the peak. A number of other signs also show that the 'China story', which has supported chemical, commodity and financial markets for the past year, may be coming to an end:

• LLDPE prices (red line) are down 4% versus the end-February peak, even though crude oil prices have risen 8% over the period
• Prices on the Shanghai stock market are down 6% over the same period

Plus, of course, the government is now scaling down its massive lending programme - the underlying support for all these markets.

The blog remains amazed, and worried, by the inability of many of those reponsible for the global financial system to provide the necesary leadership during the current Crisis.

They seemingly failed to grasp in March 2008 that Bear Stearns' bankruptcy was a clear sign that a major global financial crisis was around the corner.

Equally, Greece's credit rating was first downgraded back in January 2009. Yet it has taken until now for a rescue package to be finalised.

This only bears out the insight of investment manager, Jeremy Grantham. In July 2007, he coined the term 'slow motion train wreck' to describe the coming Crisis. And back in August 2008, the Financial Times helpfully pointed out that in economic crashes "there are pauses before the next carriage hits the one in front". It added that "this explains how we have since moved from crisis to crisis, with rallies in between, as participants persuade themselves that the worst is over."

Now the Greek carriage has finally crashed. The country will have to endure €30bn ($40bn) of cuts, whilst the rest of the Eurozone will provide €80bn in loans over the next 3 years, in addition to €30bn from the IMF. This will have a massive deflationary effect on demand, with GDP not expected to return to 2009's level until perhaps 2017. It would have been a lot cheaper to have acted earlier.

And, of course, the next carriages (Portugal, Spain and possibly Italy) of the Eurozone train are still heading for a similar crash. Greece may seem an expensive bailout today, as Bear Stearns did 6 months before Lehman Bros. But unless our leaders become more pro-active, there is almost certainly worse to come before the Crisis is finally contained.

US auto sales (black line) in April showed welcome improvement versus 2009, but were still a long way short of earlier demand levels.

They were up 19% versus April 2009. But even with this improvement, they were down by 24% by comparison with 2 years ago. On an annualised basis, they were only 11.2m versus 14.8m in April 2008.

And it seems that although companies continued to offer major incentives (an average $2800/sale in March), these had less impact in April. Analysts Edmunds.com, who monitor incentives, noted that "people are reining in their spending. We see the recovery as being very fragile".

They say that you learn more from your mistakes than your successes. In the blog's case, it will never forget the mistake it made when it began to build a long position in early May, soon after arriving in Houston, Texas. It was expecting product to go tight as the US gasoline season began on Memorial Day, at the end of May.

This was a completely wrong judgement. The scale of the US market means refiners have to move gasoline out of their systems before Memorial Day, if it is to reach the service stations in time. Luckily, a few kindly souls from the industry taught the blog the error of its ways, and little harm was done to ICI's P&L.

The memory of that near-miss was triggered this morning when looking at the above chart from PetroMatrix's valuable report. They note that US gasoline stocks (red line) are now "at an all-time record high" for this week in the year. Equally, stocks are actually building, rather than falling. I doubt this has ever been seen before in May.

The reason, of course, is the demand destruction being caused by today's high prices. US oil stocks have been building at 1.1mbd for the past month, whilst the Mastercard survey is showing a 1.1% decline in gasoline demand versus 2009. If the blog was trading now in Houston, it would be very nervous indeed about holding a long position.

Sell in May and Go Away" is the oldest rule in stock market investment. This week has certainly provided further support for it:

• The major Western stock markets are down c8%
• The major emerging markets are down between 4% - 13%
• Crude oil prices are down 13%

This May panic may well also mark the markets move into their 3rd, and most destructive phase. As originally identified by Merrill Lynch's analyst guru, Bob Farrell, "bear markets have three stages - sharp down, reflexive rebound, a drawn-out fundamental downtrend".

Greece, of course, and its debts, has been the catalyst for this week's panic. And the chart above (from the Bank of International Settlements), highlights the core problem. European banks have collectively lent $2663bn to the 5 euro countries at most risk of default, the PIIGS (Portugal, Ireland, Italy, Greece, Spain).

The vertical axis identifies the debt held by each country, showing that France has lent $79bn to Greece, and Germany $46bn. As my fellow blogger, John Richardson has noted, "if the whole of Greece suddenly vanished into the ocean, it wouldn't make that much of a difference to the global economy...including chemicals". Nor would Portugal, or Ireland.

But Spain and Italy combined are 6% of the global economy, with GDP of $3.6trn. Between them, they owe $1.8trn to banks in the rest of the EU. If markets become seriously worried about the prospects for economic recovery, then they will clearly be near the top of everyone's concerns. US banks, for example, have $3.6trn of loan exposure to Europe.

This suggests the world economy is now approaching a cross-roads:

• In one direction lies economic recovery, as argued by Larry Summers, US economics chief. His view was that government stimulus would provide, like a 3-stage space rocket, the "escape velocity" to stabilise the major economies and encourage consumers to begin spending again
• The blog, however believes with Pimco (the world's largest bond fund managers) that we face a "new normal" of lower spending and less debt.

As we move into Budget season, Boards will start to debate their outlook for 2011-3. Clearly they will hope, with Summers, for better times. But prudence suggests they should also plan for a less favourable, Pimco-type Scenario. Markets may well rally again short-term. But if Bob Farrell's analysis is right, the third phase of the Crisis still lies ahead.

Senator Dirksen's great one-liner in the US Senate, "A $bn here, a $bn there, and pretty soon you're talking real money" is beginning to seem sadly out of date, as the costs of the financial crisis escalate.

Today saw the Eurozone announce a €750bn ($936bn) bail-out fund, including €250bn from the IMF, to support its weaker members. This does finally provide the leadership that has been sadly lacking till now. But the news caused interest rates to rise in the zone's stronger economies, as investors worried about the costs of the move.

Against this background, another $19bn for the two US mortgage giants, Fannie Mae and Freddie Mac, seems hardly worth recording. Even the total $145bn spent so far on their 'rescue' seems chicken-feed. But, of course, it isn't. It is also real money that taxpayers will have to fund - either via increased taxes, or reduced public services.

Fannie and Freddie own or guarantee $5.5trn of mortgages, around half of the US total. They went bankrupt back in September 2008, but were nationalised, and are now the only major lenders left in the housing market. Politicans therefore daren't close them down but equally, as the blog noted in February, have no idea how to cap their losses.

Fannie and Freddie's continuing need for further bailouts is a reminder that the housing sector, so critical for chemical demand, is still a long way from full recovery.

Paul McCulley of Pimco, the world's largest bond fund managers, has been continually insightful about the lead-up to the current Crisis and its fall-out. He first alerted the blog to the work of Hyman Minsky, which is the best (and so far only) explanation for the disaster that is continuing to hit the world financial system.

Helpfully, McCulley today also provides a simple yet powerful explanation of why re-regulation is essential for the banking system. He argues that no bank can operate without the support of a central bank, as a lender of last resort when times get tough. And he parallels this as follows:

When my son turned 18, he said, "Dad, I'm now the age of majority and I can do whatever I want." I said, 'Son, that's absolutely true. However, I still control the Bank of Dad. And if you want to have access to the Bank of Dad, there are going to be rules. If you don't want access to the Bank of Dad, that's fine. But if you want access to the Bank of Dad, there are going to be rules.'

"The Federal Reserve and the FDIC and the Treasury, together, are the Bank of Dad. And Mom. I expect regulation to be similar to that which I have imposed on my son. It doesn't mean I want to stifle his innovation. That doesn't mean I want to stifle his creativity. I want him to be all he can be. But as long as he's banking at Bank of Dad, there are going to be rules."

Interestingly, Paul Volcker, who is now pushing through the Volcker Rule to re-regulate US banking, was in the audience.

India was the only major country to see auto production growing last year. With the Asian Petchem Industry meeting opening in Mumbai, it seems timely to look at the progress of the Indian motor industry in recent years. As the chart shows (data from the Society of Indian Auto Manufacturers) , the sector has been growing at 12% since 2003/4:

• Two-wheelers (blue column) dominate sales, with 9.4m sold last year
• Auto sales (dark blue) were 1.95m last year, 14% of total output
• Exports (purple) were in 3rd place, and have grown 25% pa since 2003
• Motor bikes are 63% of exports: autos are 25%

Encouragingly for the Indian chemical sector, the government provides strong support for the motor industry. As summarised in its 'Automotive Mission Plan, 2006-2016', the aim is to generate 25m additional jobs by 2016, when the industry should account for 10% of GDP.

The key focus is on smaller cars, such as the Tata Nano. It sells for $2k, with fuel efficiency of 26 kpl (73 mpg). As described by Ratan Tata at its 2008 launch, the concept is to provide an alternative for "families riding on two-wheelers - the father driving the scooter, his young kid standing in front of him, his wife seated behind him holding a little baby".

This growth should provide major support for polymer sales, as manufacturers look for new ways of improving fuel efficiency whilst keeping costs down.

As a very frequent traveller, the blog was intrigued by a flight attendant's tip for packing more clothes, without creases, in a carry-on bag.

The above photo from the New York Times shows her system, which involves rolling clothes tightly, with lighter items packed on top.

Does it work? The blog will welcome your comments.

The blog gained some key insights into the current M&A landscape this week, at the annual Pilko & Associates Round Table, co-organised with Shell Chemicals and leading law firm Allen & Overy:

• M&A has become a 'buyer's market', and this is not expected to change in the near future.
• Credit markets remain cautious. Liquidity exists for big corporates, but investors are not confident there will be a sustained profit rebound for petchems, given the amount of new capacity about to come online.
• Maximising the competitive advantage of their own specific operations is the only way for companies to counter this perception.
• Working capital is tight down the value chains, with banks still reluctant to lend, and this is adding to market volatility for many products, as CFO's seek to reduce inventory.
• Companies in emerging economies are looking to establish 'gateways' into developed economies, with a focus on acquiring routes to markets.

Significantly, a major amount of time was spent discussing the potential implications of the Deepwater Horizon oil rig disaster in the US Gulf. This is expected to create a sea-change in risk management. There are clear parallels being drawn with the banking Crisis, where self-regulation has also seemingly failed to provide the results expected by government.

Companies can therefore expect to see increased regulation, as part of the public's increasing distrust of business ethics. Regulators will probably set more rules, and become more pro-active in ensuring the required measures are being carried out. This will increase costs, and limit operational freedom.

10 years ago, Dow was in the middle of completing its $12bn Union Carbide acquisition. This made it the world's second largest chemical company, and a leading player in Basic petchems and polymers.

More recently, however, higher oil prices have made life increasingly difficult for chemical businesses that lack upstream integration. Dow's response, born of realism, has been to de-emphasise the Basics area, and instead focus on growing Performance businesses, as described back in July 2008 when the $19bn Rohm & Haas acquisition was announced.

Now, Dow has taken this strategy one step further, with the announcement of a new Vision "to be the most profitable and respected science-driven chemical company in the world". The chart above highlights the change, with new Dow's Business Model focused on Performance and Market-Driven businesses.

The move is seen as "transformational" by Vipul Shah, Dow's President for SEA, India, Pakistan in an ICIS news APIC interview. He notes Dow is "right-sizing" its Basics business, whose focus becomes to "provide the feedstocks for the needs of our Performance businesses". Whilst Dow will now start "investing heavily in R&D innovation platforms".

Shah notes that 2010 will see Dow "spending more R&D dollars globally than in manufacturing and engineering". And he sums up by noting that "what got us here over the past 130 years is not going to get us through the next 100 years".

The global economy and the chemical industry have been boosted, since the Crisis began in 2008, by massive government stimulus programmes in areas such as autos and housing. Now the International Monetary Fund (IMF) has released a new report, focusing on what happens next.

It warns that "general government debt is expected to rise by 36% in developed countries between 2007-14". And it notes that their costs for health and pension expenditure will rise by 4-5% of GDP by 2030, due to the aging population. It adds that most emerging economies also face the need for significant cut-backs, although their outlook is more favourable.

The IMF chart above shows the relative position of some major countries:

• The horizontal axis shows average GDP % "adjustments" ie cuts needed
• The vertical axis shows the additional costs of age-related expenditure

Top-right countries the USA, UK, Spain, Netherlands, Australia, are in worst position overall. Top-left Germany, Russia, Turkey, face lower cuts but high age-related costs. Bottom right Japan faces the most cuts, and its age-related spending rises by 3% of GDP. Even bottom left China and Italy need 4% cuts. Bulgaria and Indonesia are best-placed overall.

The IMF suggests governments might need to "freeze spending in real per capita terms for the next 10 years", whilst also introducing "bold reforms" to reduce age-related spending, as well as ending their stimulus spending.

This is further support for the argument that we face a 'New Normal' of lower growth rates and de-leveraging in coming years, rather than a quick return to the Boom years before the Crisis.

The blog is a great believer in the forecasting power of the major retailers. The top 3 global companies, Wal-Mart, Carrefour and Tesco all identified a change in consumer buying patterns as early as July 2007, when Tesco warned that "coming down the road is a tougher time".

Worryingly, their most recent comments give no sign that a strong recovery is yet underway:

Wal-Mart today reported their 4th consecutive quarter of same-store US sales decline. This closely watched measure indicates that consumers are still tightening their belts. And Wal-Mart added that their global customer base is "still concerned about their personal finances and unemployment, as well as higher fuel prices".

Carrefour saw a slightly better Q1, as same-store sales rose for the first time in 18 months, but only by 0.3%. CEO Lars Olofsson noted, however, that "the environment remains challenging".

Tesco, global no 3, reported in their latest annual results that internationally they continued to face "strong economic headwinds", although Asian same-store sales had turned positive.

On 6 May, the blog warned that "it would be very nervous indeed about holding a long position" in crude oil. And as the chart shows, its fears were well-founded. Since 4 May:

• WTI has fallen 19%, and $16/bbl, from its $86/bbl peak
• The euro has also fallen 8%, and 6c, versus the US$

The suddenness of the change highlights the extremely short-term nature of today's financial markets, where so-called 'high-velocity trading' now accounts for up to 75% of daily trading volumes.

This trading often has an average holding period of just 11 seconds, and makes no effort to understand market fundamentals. Instead, it uses high-speed computers to capture fractional changes in bid-offer spreads. And, of course, it creates the potential for extreme volatility, when markets suddenly readjust to the real world.

For months, markets have been trading positively on the assumption of a V-shaped economic recovery. This has focused on perceived strong growth in China, and led to expectations of a tight oil market. In turn, as noted in the blog, this has driven the 'correlation trade' where the US$ weakens as the cost of its oil imports increases.

Now, the basic flaw in this assumption has begun to appear. China's growth is slowing, whilst Europe is heading for budget cutbacks and austerity. Key elements of the US recovery, such as housebuilding permits, are also looking less than certain. If markets had focused more on fundamentals, none of this would have come as a surprise.

Instead, the chemical industry, and others who live in the real world, will be left to pick up the pieces. The rise of the US$ is already causing concern in China, as it makes its exports less competitive. Equally, falling oil prices may well encourage destocking down the chemicals value chain, just as we come into the seasonally weak Q3 period.

The blog has sometimes despaired of the cheer-leading and wishful thinking of too many leading policy-makers. As I argued in the Financial Times in March 2007, before the Crisis began, "they seem to confuse being market-friendly with being friendly to markets".

It therefore welcomes the realism being shown by the UK's new coalition government. Today, David Laws, Chief Secretary in the Treasury, argues that "we are moving from an age of plenty to an age of austerity in the public finances". And coincidentally, Nobel Prize-winning Paul Krugman suggested yesterday that most Western countries aren't really like Greece, but "are looking more and more like Japan".

The blog's own chart above, showing the relative movements of the US S&P 500 index, and Japan's Nikkei 225, illustrates Krugman's point:

• The black line and axes show the % monthly changes (basis September 1985) in the Nikkei 225, to 2004
• The red line and axes show the % monthly changes (basis September 1995) in the S&P 500, to today

The chart shows the parallel market tops in November 1989 for the Nikkei, and in August 2000 for the S&P 500. It highlights a remarkable parallel, first noted by market guru Alan Shaw in Barrons in July 1998, and this continued until early 2003.

The parallel then disappeared, before re-emerging briefly last year. And the recent market falls may well be a first sign that the two lines are reconnecting again. The rationale for the parallel is simple, that Japan and the West both face the problem of an aging population, with Japan's demographics being some 10 years ahead of the West's.

The difference since 2003 can also be explained by this "cheer-leading" by Western policy makers, who have tried to maintain perpetual growth in their economies. Every time markets dipped, their response has been to cut interest rates and inflate speculative financial bubbles,.

With a G7 government instead now talking about an expected 'Age of Austerity', chemical company Boards will clearly want to revisit their planning Scenarios. They need to ensure their strategies are robust enough for them to be confident of surviving a continuing Downturn.

April 2009 wasn't a great month for EU auto sales. Volumes (red line) were down 11.6% versus April 2008. But sales were starting to benefit from the introduction of government scrappage schemes.

A year later, as the above chart from ACEA (the European auto manu-facturers association) shows, this support has begun to fade:

• April 2010 sales were 7.4% below April 2009 levels
• This was the first fall for 10 months
• Germany, the largest market, saw a 32% decline

ACEA are not optimistic about the outlook for the rest of 2010. They note that "government support has ended or begun to fade out and the economic situation remains difficult".

The problems in US housing remain a major cause of concern for global chemical markets. As the above chart shows - from the American Chemistry Council (ACC) weekly report - housing starts (blue line) and building permits (red) are still at very low levels.

April's housing starts were up 41% versus 2009 to 672k. And this was the highest monthly figure since the Crisis began in October 2008. But they were still 15% lower than seen in any previous downturn, since records began in 1959. And building permits were down 12% versus March, as contractors foresaw a slower market now the $8k tax credit has expired.

Equally, as the Mortgage Bankers Association reported:

• 14% of all households with a loan are at least one payment overdue
• 4.63% of all loans are in foreclosure, up from 3.85% in Q1 2009
• States such as Illinois and Michigan are now seeing the highest increase in seriously overdue payments, as their local economy hits problems.

As the ACC note, "the housing sector is recovering slowly, but remains depressed as foreclosures continue to saturate the market".

A month ago, Nigel Davis called attention in his ICIS Insight column to the alarming fall taking place in US ethylene values. He noted that "inventories seem to have filled", and presciently concluded that "buyers have been on the look-out for the turn and, by all accounts, expect any downward movement to be swift and deep".

He suggested it meant companies should remain "cautious about the continued strength of the chemicals recovery". And as the above chart from the excellent ICIS Weekly Margin report shows, Asian prices for major ethylene derivatives such as high density polyethylene (HDPE, red line) are now also falling quite steeply.

As always at turning points, the picture is still mixed:

• Lower feedstock costs, due to the plunge in oil prices, have enabled integrated producers to retain good margins (yellow block) so far.
• But a warning sign can be seen in the standalone margins for Asian HDPE producers (red block), which have remained negative.
• And my fellow blogger Malini Hariharan notes that China's polymer stocks are reportedly "close to record levels".

Its bad enough that many of the world's major banks collectively lost $4 trn, whilst continuing to pay themselves $bns in bonuses. Equally sad was the fact that the heads of these banks seemed unable to understand the simple principle of fiduciary duty, when asked by the US Congress about their responsibilities to clients.

But now, a major investigation by the Wall Street Journal suggests that some major banks may be deliberately making it difficult for regulators and investors to properly monitor their real leverage. As the chart above shows, it seems that Bank of America, Deutsche Bank and Citigoup have consistently reported lower net borrowing (green line) over the past 10 quarters, than their average net borrowing (blue).

The Journal reports that "Over the past 10 quarters they have lowered their net borrowings in the "repurchase," or repo, market by an average of 41% at the ends of the quarters". And it adds that "The practice, known as end-of-quarter "window dressing" on Wall Street, suggests that the banks are carrying more risk most of the time than their investors or customers can easily see."

The blog's White Paper, Budgeting for a New Normal, has proved extraordinarily popular since it was published earlier this year. As a result, ICIS have asked me to produce a mid-year Update, to review developments over the past 6 months. This will appear shortly.

In the meantime, ICIS' Will Beacham interviewed me in London's Trafalgar Square, on the implications of recent falls in chemical prices and other key issues. Please click here for the highlights, and on the screen above for the full interview.

'Sell in May and go away' seemed a good tactic to the blog at the beginning of the month.

It worried that we might now be approaching the 'drawn-out fundamental downtrend' phase of the current cycle. And in spite of several major 'relief' and 'short-covering' rallies, financial markets have continued to suffer.

The US Dow Jones Index has been one of the worst affected. As the chart from the Wall Street Journal shows, it is down 8%. That's the worst May performance since 1940.

And its not alone. China, supposedly the current growth engine for the global economy, has seen the Shanghai market fall 6%. It is now down 18% since the start of the year.

The chemical industry, as I note in my ICIS interview below, is a very good leading indicator for the world economy. Equally, stock markets seem to be taking a more cautious view of the general economic outlook.