Chemicals & The Economy

Force majeures can be very costly in a downturn, as they enable competitors to gain market share, whilst the business suffers a loss of revenue and earnings. Yet maintenance spend on plant and equipment, and training, is always a soft target for cutbacks when cash is tight.

The blog also knows from its own experience of the 1980s and 1990s downturns, that continued deferral of required spending creates future problems. Thus it has become concerned by the increasing number of times that 'force majeure' is being mentioned in ICIS news reports.

The chart above summarises the global position on a monthly basis, from January 2008 to July 2010. It shows that mention of force majeures declined sharply as the Crisis hit in Q4 2008 (even though September/ October 2008 data reflected Hurricane Ike problems in the USA).

But mentions have recovered sharply in 2010. Is this a statistical anomaly? Or is it due to the impact of deferred spending in 2009? It is impossible to be sure. But the blog is very aware from its contacts in the insurance community that underwriters are increasingly concerned.

Equally, when talking last week to George Pilko of Pilko & Associates (global EHS advisers), it discovered that buyers are increasingly focusing on Operational Excellence issues, including maintenance spend, during due diligence processes in M&A.

Hopefully, H1's better earnings will now encourage companies to reinstate any spending deferrals that have been made.

In business, as in war, defence can often be the best form of attack. This seems to be the principle behind Ineos's announcement that they intend to build a 1 million tonne deep-sea ethylene terminal to feed their 340KT ethylene oxide/glycol business near Antwerp, Belgium.

The glycol business is clearly under threat from the massive volume of new low-cost capacity now coming online in the Middle East. Already Dow have closed their 275KT plant in Wilton, UK.

But Ineos' move is a potential game-changer for plants situated along the ARG ethylene pipeline. It will be the first terminal owned by a company structurally short of ethylene, and will also provide Ineos with a valuable link between the ARG and its US, UK, Norwegian and N German plants.

Until now, it has been relatively difficult for ethylene to be imported into Europe. Not only is it expensive to transport. But there has also been a shortage of terminal space linked to the ARG pipeline. This latter constraint will now change. Rightly, Ineos describe it as being likely to "significantly change the shape of the ethylene market in Europe".

Of course, the cost of the terminal will be high - probably around $80M. And Ineos will have to absorb a $200/t or more freight penalty when importing product. But once it opens in 2012, older, inefficient, crackers along the ARG will effectively find themselves in competition with ethane-based Middle Eastern ethylene having a $200/t cash cost of production.

Ineos' move is therefore likely to open up a major debate about the likely future of Europe's petrochemical assets.

Undertaking fundamental analysis of a market can be a tedious business. You have to try and understand what uses the product might have, and the alternatives for the feedstocks. You might even have to look at inventory, and forecast future supply/demand levels.

Luckily, however, for the modern financial investor, these sad disciplines have been resigned to history. Instead, one merely has to look at the 'correlations' with designated key markets. And, of course, a helpful figure from one of the major investment banks is always on hand to provide guidance and support.

Nowhere are the benefits of modern trading more evident than in China's Dalian future exchange, on the linear low density polyethylene (LLDPE) contract. Players there have no need to read boring stories in ICIS news about inventories being 30% - 50% above normal. Or to study purchasing manager reports that suggest demand is slowing.

No, they simply need to understand that the crude oil price is going up, along with the US S&P 500. Then, as shown in the above chart, they can pile in with their orders and take monthly volume (blue line) to an all-time record of 92 million tonnes - a mere 4 times annual global production. 'Sentiment Rules OK', as the graffiti used to say.

Trust the boring old blog to have to point out a potential flaw in the argument. As its friend, and Asian expert, John Richardson notes, "there is now a significant gap between (prices of) more expensive domestic material and cheaper imports".

He also quotes a leading industry figure as warning that "It used to be that we had two markets in Asia - China and the rest of Asia, but now we have three - Dalian, China and the rest of Asia, which is causing a lot of confusion." And this party-pooper adds that he is "really worried about the 100 KT of LLDPE that is in Dalian warehouses right now."

This producer is clearly of the old school, who worries about such minor details as who is going to buy high-priced product when demand is slowing?'. Luckily for the new style of investor, and the profits of the investment banks, nobody listens to such boring stuff on Dalian any more.

Following on from the blog's note yesterday, an investment banker reader passed on a similar insight from the high yield sector of the bond market.

Currently, retail investors are desperate for income-producing assets, with global interest rates very low by recent historical standards. So to help supply meet demand, her bank's high yield bond team are working night and day to package high yield bonds for sale to the retail sector.

As with Dalian, these investors never look beyond the promised level of yield. Why bother with the boring stuff that might help you decide whether the company could actually afford to pay the interest being offered?

However, she did offer one clue about the underlying quality of these bonds. Apparently the bank is not proposing to keep a share of these 'red hot' deals on its own trading book. Blog readers might also like to take a careful look before investing their hard-earned cash.

The blog is delighted by the interest being shown in its White Paper 'Budgeting for a New Normal' and the recent Mid-Year Update. Almost 7000 copies have now been downloaded.

Discussions are also underway with ICIS about producing a new White Paper in Q4, to accompany the blog's annual Budget Outlook post in October.

If you would have not yet seen a copy of the Mid-Year Update, please click here to download a free copy.

The blog is a great fan of Pimco, the world's largest bond fund managers.

They were the first people to spot the housing bust developing in the USA, and to suggest the scale of the damage it might cause. More recently, they have pioneered the concept of the 'new normal'.

Thus a new analysis by their CEO, Mohamed El-Erian, is worth taking very seriously. His key point is that increasing volatility in financial markets makes forecasting the future much more uncertain:

• Traditionally, likely outcomes have clustered together, in a bell-curve.
• But increasing volatility means that we are seeing "a much flatter distribution of outcomes"

This has enormous implications for chemical companies. We have become used to a world where most reasonable people could agree on a consensus viewpoint, and they would normally be proved right. Now, however, El-Erian argues that 'rules of thumb' regarding the evaluation of risk are becoming "less useful, if not dangerous".

By coincidence, an example of El-Erian's argument has just appeared in the USA.

James Bullard, a Federal Reserve Governor, is warning that he may have been completely wrong to worry about future inflation. Instead, he has converted to the blog's view that Japanese-style deflation is a real risk.

If this happened, it would turn upside-down a whole range of current assumptions. Demand, for example, might well reduce, as it would become sensible for companies and consumers to delay purchases for as long as possible, whilst prices fell.

El-Erian has been right before, when the consensus was over-optimistic. As we come into Budget season, CFOs might find it useful to circulate his article around their colleagues. Forewarned, as they say, is forearmed.

There was good and bad news from the latest IeC Boom/Gloom Index.

The good news was that the Austerity reading fell quite sharply. Markets have moved on from the Greek crisis. And confidence seems to have been restored, at least temporarily, by the results of the 'stress tests' on the major European banks.

But the bad news was that the Index itself fell back to the 4.0 level that described the downturn period in financial markets from November 2008 - April 2009. This is worrying, as most markets staged an impressive rally during July, with the US S&P 500 rising 7%.

However, these rallies took place on low volume. Whereas a strong market should see rising volumes, as new investors join the rally. August's Index will therefore be critical. If it stays low, then the next stage of the downturn may well be close at hand.

The American Chemistry Council has recently updated its invaluable work on US polymer chain inventories. Last December this led the blog to conclude that we would see "a strong H1", as inventories were low, whilst demand was likely to rise supported by seasonal and stimulus factors.

But the ACC's latest analysis (above) leads to a less optimistic conclusion. The trend is now pointing to a period of destocking, with the black line slipping below zero. March (red column) was a strong month for demand, but was then followed by a slower April and May.

The ACC note that whilst some restocking took place in June, "the recent data suggests that customers may actually be drawing down their inventory". Although only 23mlbs (11 KT) overall, this is very unusual for a period which is supposed to be seeing a major economic recovery.

Normally, manufacturers should be increasing inventory in anticipation of better times ahead for demand. So the data adds to the general sense that the US recovery may, in fact, be stalling now the stimulus programme has peaked:

• US unemployment remains at 9.5%, and 1.2 million people have dropped out of the labour force in the last 3 months
• US Q2 GDP came in below expectations at 2.4%, a very weak reading for this stage of a normal recovery
• US housing starts have fallen to their lowest-ever levels following the end of the $8k tax credit.
• And as the ACC note, although US auto sales in July were at an encouraging 11.6 million rate, this was due to "higher incentive spending, higher used vehicle prices (used as a trade‐in), and by fleet purchases".

Q3 is clearly going to be seasonally weaker for chemical demand. And the blog is beginning to fear that Q4 may also be weak, unless end-user demand stages a sudden recovery. March may, in fact, turn out to have been the peak demand month for the current cycle.

The blog has been revisiting the Bank of England's 2008 analysis of the likely impact of the financial Crisis.

This reviewed 33 banking crises between 1977-2002 and found that:

• The average length of each crisis was 4.3 years
• The median loss of GDP was 7.1%
• Major crises (such as today's) caused GDP losses of at least 10%.
• GDP losses can double if the banking crisis leads to a currency crisis

The study also found that it was initially easy for Governments to borrow, but that (like Greece this year) they faced the risk of a currency crisis if foreign lenders began to suspect they would never be able to repay the money borrowed. Companies would also find it more difficult to borrow, as banks "de-risked" their balance sheets.

Meanwhile Consumers faced an increased risk of unemployment, and so tended to save more, rather than spend money. In turn, this reduced demand - further pressuring companies, and government's ability to provide fiscal stimulus.

As a result, whilst government intervention could mitigate a crisis, the study found that credit crunches are deflationary.

18 months later, it appears (to the blog, at least) that we are following the text-book pattern. Clearly this is still not the consensus view. But helpfully, the Wall Street Journal has provided 5 useful investment tips for dealing with deflation:

Stocks. It notes that "deflation is generally bad news for stocks, since a period of falling prices and weak demand tends to weigh down corporate earnings and, therefore, share prices". However, it says that companies that dominate an industry can do well, as might those "with plenty of cash, low debt, steady dividends and products that people will buy even in tough economic times".
Bonds. The WSJ suggests that "in a deflationary environment, longer-term government bonds tend to do well. As investors rush to the safety of Treasuries, yields drop and prices jump, resulting in higher total returns". However, "inflation-linked securities could lose value in a period of sustained deflation".
Cash. It notes that "cash is king in a deflationary world. While investors may not earn much interest, cash gains in value as prices fall".
Hard Assets. It suggests that "deflation generally means falling prices for commodities, real estate and other hard assets. But as with stocks, investors shouldn't write off the category altogether. Gold, which many investors consider an inflation hedge, also can be a useful deflation-fighting tool. The government tends to respond to deflationary concerns by printing money, which in turn can spark fears of inflation and drive up the price of the metal. Gold is a hedge against financial stress."
Debt. It notes that "deflation generally isn't kind to debtors" as the value of the debt remains steady, whilst prices generally are falling.

Anyone who followed supply/demand balances might look at the above chart from oil analysts Petromatrix, and conclude that crude oil markets should be relatively weak today. It shows that US oil stocks are only 2.2mb below the record level seen in September 1990, and have grown by 83mb since March.

But this is not the view taken by those operating in financial markets. They see a bullish story, and oil prices actually rose on the news. Amrita Sen, of Barclays Capital, was typical in telling clients that "the long wait for oil prices to break past $80 has finally come to fruition, as sentiment aligns with fundamentals".

Sen also claimed that "actual demand data had finally started to perform strongly and consistently". But the blog is slightly puzzled as to how an 83mbd rise in inventory in the world's largest market could be viewed as bullish, especially when other markets also seem to be slowing. China's oil imports, for example, fell by 150kbpd in July versus 2009.

Petromatrix also report that tanker "rates in crude oil are at the lowest level of the year". Rates on the major Arabian Gulf - Japan route have fallen 50% since June, and are now at, or below, operating costs. And whilst tanker rates can fall for many reasons, they don't usually crash 50% when demand is strong.

The only rational explanation is that oil markets are in a speculative mania. This, as we saw during the US housing mania in 2006/7, means that players become blind to the underlying state of demand. Instead, they focus on what other traders are doing. And in oil markets, as Mike Fitzpatrick of MF Global notes, "upward momentum is still vibrant".

One day, maybe soon, fundamentals will burst the bubble. And the blog's worry is that when this happens, and the momentum players finally panic and try to sell in a falling market, it will be the users in the chemical industry who have to pick up the pieces.

Yesterday, the blog worried that oil prices were well out of line with fundamentals. It argued that momentum trading, highlighted by MF Global's energy VP, Mike Fitzpatrick, had created a speculative mania.

Today, it looks as though Fitzpatrick might agree. Quoted in the Financial Times, he notes "As fundamentals come more into focus, it would suggest that there is less real support for oil prices than recent valuations would imply".

The blog couldn't have put it better.

An interesting opinion piece in today's China Daily suggests the concept that "the next few years will see a dramatic acceleration in the shift of global economic powers eastward" is "at best, a half-truth".

Yu Zhongwen notes that this theory has gained ground in recent years, as the media have speculated that "with a combined population of some 2.4 billion at present, China and India, the two vast countries of the East, will reclaim their positions as economic giants in this century".

However, he goes on to argue that the theory ignores the "obvious fact that the two Asian countries are only developing nations, with their per capita GDP lagging developed countries". He notes that China's $3687/ capita and India's $1122/capita ranks them "103 and 140 in the world", versus the USA at $46436/capita.

Yu suggests that "the significance of China's and India's soaring GDP should not be exaggerated, considering the real scenario where a large proportion of the populace in both nations is leading a relatively poor life."

This argument, of course, has major implications for chemical industry sales. Until now, Asia's economic boom has been based on supplying manufactured products to wealthy Western consumers. But this export boom is now ending, as N America/Europe move into an age of austerity.

Chemical and polymer demand are very closely linked to high levels of GDP/capita. Villages without electricity, for example, don't need to buy many 52 inch HD televisions. Asian chemical industry growth rates could therefore slow quite sharply over the next few years, as countries make the transition from export to domestic demand.

Current financial and chemical market volatility is a bonanza for good traders, as it gives them more opportunity to take positions, up or down.

However, having traded on behalf of a chemical major in Houston, Texas, the blog knows from personal experience that not all traders get all their positions right, all of the time.

It therefore thought it might be helpful to provide some definitions of trader-speak, heard recently, to help clients interpret their comments:

"The outlook seems pretty clear to me" = I've taken a long position, but I'm having second thoughts about it. What do you think?

"It's true that the market is not in good shape. But it's not all bad either" = I've got a long position, and I can't find any way of offloading it.

"Its slightly worse than we anticipated, but its consistent with leading indicators" = I've got a short position which is in the money, but this might be the time to sell.

"Not every product is heading south" = I've got a short position, and I'm hanging on to it till things really fall apart.

"Nobody could have forecast these developments" = My boss is thinking of firing me, and hiring someone who knows what they're doing.

More examples will, of course, be very welcome.

Who now remembers the stock market rally that followed 1929's initial collapse? By November 1929, the US Dow Jones Index had fallen to 195 from its September high of 386. But by April it had rallied 52% to 297.

At the time, this seemed as sensational as the Dow's recent rally, which took it up 74% from March 2009's low of 6469, to peak a year later at 11258. And it occurred without any co-ordinated G-20 stimulus packages around the world. It just happened.

But when the famous English poet (and former bank clerk) TS Eliot published in 1936 the first part of his major work 'The Four Quartets', quoted above, his tone reflects the weariness of the subsequent Downtrend, not the euphoria felt during the Rebound.

The chart above captures the textbook path of a major financial crisis, as first described by Merrill Lynch's guru, Bob Farrell. There is an initial Sharp Decline, as seen this time from September 2008. Then there is a Rebound. And finally, the Drawn-out Downtrend.

The chart also adds the 'Paradigm of Loss' model developed by famous psychologist Elizabeth Kübler-Ross. As first noted by the Financial Times last year, her model is potentially an excellent guide to the stages through which the current Crisis will likely pass.

The FT suggested that the world was slowly moving from Denial into Anger. Clearly some policy makers, and many bankers, still remain in the Denial phase. But the rise of the Tea Party protest movement in the USA, as well as the riots in Greece and elsewhere, supports the FT's argument.

This emphasises that after 2 years, we are still towards the beginning of the Crisis. Only a relatively few consumers or companies have moved towards the Bargaining phase, to focus on saving rather than borrowing. Most are convinced any cutbacks will impact others, and not themselves.

Equally, we are nowhere near the Depression and Acceptance stages, which would indicate that the world was getting ready to move on to accept the world in its post-Crisis form.

The blog hopes that its analysis is wrong, and that in a year's time it will be able to eat humble pie and admit it was too pessimistic. But if it was still running a major chemical business, it would by now have ensured that a detailed contingency plan was ready, in case its fears come true.

As noted by a blog reader last week, retail investors are throwing caution to the winds.

Unwilling, or unable, to adjust their lifestyles to cope with lower interest rates on government bonds, they have rushed to instead buy higher-yielding 'junk bonds'.

These are less than normal 'investment' grade, and offer increased yield in exchange for higher risk of default.

Clearly, however, investors are focused on the yield, not the risk. The Wall Street Journal notes:

• Junk bond sales to date are up 80% versus 2009, at $155bn
• This week saw $15.4bn sold, an all-time record

Meanwhile, overall US economic conditions continue to disappoint. The latest trade figures prompted many economists to reduce Q2 GDP estimates still further. First estimated at only 2.4%, very low for the middle of a supposed recovery period, some are now suggesting it could have fallen below 2%.

GDP in export-led countries such as China and Germany has soared in H1. But this growth will be cut short in H2, if the US economy is indeed sliding back towards recession. After 2009's downturn, the US's share of global GDP has risen to 25%, according to latest World Bank figures.

Junk bond investors may be partying for the moment. But when even the Chairman of the US Federal Reserve describes the outlook as being "unusually uncertain", the blog maintains its preference for strategies that prioritise return of capital versus return on capital.

High quality 3 year government bond yields are now less than 1%, as shown in the above chart from thechartstore.com of the US Treasury market. US rates have not been this low since the 1940's and 1950's.

This has also led to a major rally in corporate bonds, based on increasing fears of a double-dip recession. Investors prefer the added security of corporate bonds, which appear 'safer' than ordinary shares. Pension funds are also attracted by the higher yields, relative to high quality government bonds.

However, potential investors should be careful. The blog understands that fees are relatively low for this type of work, so the banks need to generate high volume to compensate. They are achieving this by segmenting the market:

• Higher quality bonds (those with a strong position in the event of bankruptcy) are being sold to 'sophisticated investors' who undertake their own research.
• Lower quality product is being sold to other investors, who don't ask awkward questions about repayment, and just focus on the yield.

No doubt some bonds will end-up being under-priced in the stampede. But high quality companies are generally taking full advantage of the opportunity to reduce their financing costs. This month, for example, IBM sold $1.5bn of 3 year bonds at a yield of just 1%.

Caveat emptor ("buyer beware") is probably a good motto when considering an investment in this area.

The blog has come across a useful new tool for global brainstorming, run out of San Francisco by DiscoveryCast.

They have recently organised a major event with Paris-based SpecialChem to review the current state of play in bio-based initiatives.

This involved a group of 550 experts from 400 companies (including 3M, Dow, Michelin, DuPont, Arkema, Dow Corning, Bayer, DSM, BASF, P&G and Unilever), pooling ideas online.

The conclusions provide a fascinating snapshot of developments in this key area:

• Bio-based initiatives are more technology-driven than market-driven
• There is no clear vision about where the first breakthroughs will occur
• Areas of current study include lignin for PF resins, and a possible role for fermentation to develop oxygenated and di-acid intermediates
• Key technology trends in the use of genetically engineered organisms (eg bacteria, algae, or plants) are still in their infancy.
• The development of enzymes and catalysts to efficiently transform sugar-based feedstocks is attracting widespread interest.

Significant resources are being invested in bio-based materials, and current thinking is focused on developing business models that aim to replace oil-based chemicals by copying or mimicking petrochemicals.

Bio-based aliphatic systems are likely to be an earlier market than aromatics, as the latter don't currently exist on a commercial scale. Equally, participants appeared realistic about the multiple hurdles that still have to be overcome (e.g. the food vs. chemicals debate, lack of consistent "green labelling" for consumer products).

Overall, brainstorm participants expected a number of niche opportunities, and some medium-sized opportunities, to develop over the next few years. But understanding the market drivers for these new products will be key to success.

Consumer spending is 70% of US GDP. And because US GDP is so large, this means the US consumer is 17% of global GDP. This is the same as the combined GDP of China and Japan, who rank 2 and 3 after the USA.

So a change in US consumer spending matters. And it particularly matters to the chemical industry, as our products are focused on consumer needs. Thus the blog is taking very seriously indeed comments from major US consumer companies, who suggest we can no longer rely on the "shop-till-you-drop American consumer" to support global demand. For example:

• Wal-Mart, the world's leading retailer, has seen its US same store sales drop for the last 5 quarters. This has not happened before. Wal-Mart also warned they expect consumers to "remain cautious about spending".
• Target, the leading discount store, confirmed the blog's view that March was the peak of the cycle, with CEO Gregg Steinhafel saying "its clear Q2 marked a change in trend. GDP growth softened considerably, and our sales trends levelled off as well".
• Procter & Gamble, the world's largest consumer products company, gave the same message. "Consumers day-to-day spending reflects an entrenched frugality that often means leaving P&G's relatively inexpensive products on the shelf."

This is serious stuff. And it links with major demographic changes taking place in the USA. The boom in chemical demand over the past 40 years is closely tied to demand from the 'baby boomer" generation (born between 1946 - 1964). They now own 80% of all US personal financial assets and are responsible for over 50% of discretionary spending power.

But they are getting closer to retirement, with a median age of 54 years. And so their need for 'new things' is reducing, as is their ability to afford them. Equally, as the above chart from thechartstore.com shows, their savings rate is starting to shoot up. They were let down by the stock market after the dot-com boom; then the housing market disappointed.

So now we seem to be seeing the start of a generational switch from spending to saving in the world's most important market. From close to zero, the savings rate has already jumped to 6%, as baby-boomers worry about how to afford their retirement, especially as they can expect to live longer than any generation in history.

Of course, if stock market and housing prices began to recover, then this trend might reverse again. But there is clearly a danger of a vicious circle developing, where fear replaces greed as the prime driver in financial markets, and drives a growing demand for yield.

The back-to-school season, now underway in the USA, is the second most important shopping period of the year. It will therefore be even more critical than usual for those wishing to forecast chemical demand.

If Wal-Mart, Target and P&G are right, then the US economy could easily see US GDP growth of below 2% in Q4.

This would not be good news for everyone in the chemical industry, dependent on the US consumer to drive future demand.

Oil markets are an accident waiting to happen for the chemical industry. Oil inventories around the world are close to record levels, with the IEA (International Energy Agency) reporting they are over 61 days of demand. Equally, as the Petromatrix chart above shows, they are at record levels in the USA (the world's largest market), and still climbing.

The major investment banks, of course, are still able to make easy money by selling the story of "demand from emerging markets and limited growth in supplies" to gullible pension funds. So it is no surprise that sentiment in the futures market continues to ignore the fundamentals.

But the risk/reward ratio for a bet on oil at $90/bbl in Q4 is starting to look pretty thin. Prices peaked at $83/bbl in early August and in spite of another bullish report last Monday, were down $9/bbl (11%) by the end of last week. So the risk of a price collapse to $60bbl or lower is clearly increasing, and is certainly now above 25%.

If it happened, then clearly OPEC would quickly cut production again. But this would be shutting the stable door after the horse has bolted. So destocking, as we saw in Q4 2008 - Q1 2009 and in 1980, could again become a serious problem for the major chemical industry value chains.

Thus, if the investment banks lose their battle to support oil prices, then the chemical industry may well be left to pick up the pieces.

Sometimes every cloud does have a silver lining. And that's currently the case with the fall in demand for oil products.

The European petchem industry is based on feedstock from refineries such as naphtha and LPG. And as the chart above from the IEA shows, German refinery runs, like others elsewhere in Europe, are down 15% due to lower demand for most oil products.

This has proved very supportive for petchem margins. As the second chart shows, based on APPE data , European operating rates for ethylene were only 82% in H1. Back in the Boom period between 2004-7, H1 rates averaged 89%.

Producers have done a lot in terms of self-help to reduce fixed and variable costs. And the monthly contract price certainly gives more flexibility versus the old quarterly system.

Even so, an 82% rate would have normally hit petchem margins, as producers fought to maintain market share. But instead, the 15% cut in refining rates meant cracker feedstocks were also reduced. So effective operating rates were much higher than 82%.

Thus producers were able to pass through H1's higher oil prices, and spreads for ethylene versus naphtha actually increased to €422/t. Whilst lower overall production rates sent co-product prices for both propylene and butadiene above those for ethylene, for the first time in history.

How long will this silver lining last? The blog's friends in the refining industry suggest that poor competitiveness will remain a problem for the European refiners, and they do not observe great optimism amongst leading players that might suggest a quick recovery.

However, it is also clear that petchem consumers are finding it increasingly hard to pass on the higher prices to their customers.

But in the meantime, EU petchem producers have their silver lining.

Registrations are already building for our 9th European Aromatics and Derivatives Conference, to be held in Berlin on 23-24 November. Co-organised as always with ICIS, it features a strong line-up of industry speakers including:

• Shell Chemicals, Sven Royall, VP Intermediates on 'What next for Aromatics'?
• Ralf Kuhlmann (former Business Director, ExxonMobil Chemicals and APPE President) on 'European petrochemicals: on the right track for the future?'
• Dow Chemical, Andrew Jones, Global Business Director Aromatics and Derivatives, on 'The changing landscape in aromatics'.
• China, Yu Jing from China's National Petroleum and Chemical Planning Institute, on 'Developments in China's aromatics and derivatives markets'.

In addition, there will be important presentations from companies including TOTAL, Polimeri Europa, Equipolymers, Wood Mackenzie and Nexant. The blog will also be presenting its thoughts.

The 'early bird' discount expires next week, so its worth registering today if you can. Please click here for further details of the agenda and registration.

Recycling may not be reducing carbon emissions as much as had been hoped. This seems to be the finding of an interesting new report from consultants SRI on recycling of PET bottles.

It looks at the benefits of recycling 1.5 litre carbonated beverage bottles made from PET (polyethylene terephthalate). Stricter legislation has led to many European countries collecting 80% of these bottles. The blog, along with its neighbours, dutifully puts its bottles into a green bin every week.

Yet the study finds that such 'kerbside' collection leads to only 45% of PET actually being reused. The other 35% somehow gets 'lost' in the cleaning and sorting process. This is perhaps not surprising given the difficulties of separating PET from other polymers, especially when the initial sort is done in cold and wet conditions on the road.

It concludes that this inefficiency means that recycling PET at the kerbside 'is no better than land-fill' in reducing carbon emissions. And it suggests that if politicians are really serious about reducing emissions, they should focus on improving the yield when sorting and reprocessing PET.

This would likely involve more effort by consumers. The best model is apparently Switzerland's, where bottles are returned to supermarkets. This leads to a 70% yield, and a clear benefit in terms of reducing carbon emissions.

The blog has had a letter published in the FT this morning, which readers might like to see.

It focuses on the problem of using EBITDA measures when analysing a company's performance. It suggests that analysts should move away from their current reliance on this measure, which ignores the impact of important areas such as interest and tax payments. Hopefully, the letter may help to spark some debate in this critical area.

Sir, I was delighted to see Lex reminding readers that they should assess company profits after payment of all significant costs such as "staff or technology" ("Price/earnings multiples", August 24).

It would be excellent if Lex would return to basing its valuable analysis on a company's real bottom line. This would then help your readers to assess who is swimming naked, before the tide goes out.

Paul Hodges,
Chairman,
International eChem,
London N7, UK

With the Chairman of the US Federal Reserve saying the outlook is "unusually uncertain", its time to summon the chemical market genie.

Of course, rubbing the lamp is not always successful. And if the genie does arrive, one can only ask 3 questions.

So rather than risk wasting them, the blog has learnt to spend the first question in asking him to decide the other two questions.

And this is what the genie said:

"They should be obvious, even to you, blog. Ask me what is happening to the US economy? It dominates the global economy, as you have written many times".

So I asked, and the genie answered, laughing:

" You have wasted a question. You already know what is happening to the US economy. It is heading back into the downturn, now the stimulus programmes are ending.

"In Q3 last year, GDP grew by 1.6%, and by 5% in Q4. But then it slowed in Q1 to 3.7% and now Q2 is estimated at just 1.6% again. But I can understand that you have been hoping a proper recovery might be underway, particularly after the industry has had such a strong H1."

Thank you, O genie, I replied, and so what should be my second question? The genie sighed, and I thought for a moment he was going to disappear back into his lamp.

"Ask me about the US housing market? You surely know that this used to be a $35bn chemical market in 2006, when there were 2.2m housing starts? But you can start by answering my two-part question:

"So, said the genie, the rich aren't buying. And as 23% of all homeowners owe more on their mortgage than the home is worth, and sales in July were an all-time low of just 276k annualised (worth just $5bn), then this major market will provide little support for future chemical sales"Chastened, I waited for him to reveal my 3rd question.

"Again, it is obvious", he replied. "Even you have been writing about it since February 2009. Ask me about the potential impact of deflation."

"But if I can interject, O genie, all the commentators suggest that we are in a 'bond market bubble' and that we should really worry about inflation?"

At this, the genie laughed for a very long time.

"You amuse me, blog", he finally replied. "So I will allow you this extra question. Ask all of your friends if they have read an article about this so-called 'bond market bubble'? And then ask them if their own pension fund is now even 50% in long-term G7 government bonds? You will find there is indeed a bubble in articles about a 'bond market bubble', but very few people actually own them".

So the genie then answered his 3rd question, reminding the blog of an analysis in Barrons, the US investment magazine.

"Today, if you're a Western baby-boomer (born between 1946-64), you now need to save $1.42 if you want to have $2 in 10 years time, with interest rates at 3.5%.

But when rates were at 7%, you only needed to save $1 to achieve the same result.

"Now, blog", he then added. "You wrote about the baby-boom generation only last week. You can surely see why they are beginning to panic about their future income level in retirement?

"If their baby-boomers stop spending and start saving, which they must do to protect their retirement income, then clearly global chemical market growth rates cannot go back to the levels seen before 2008."

And with that, the genie disappeared back into his lamp, leaving the blog to ponder on the implications of his answers for chemical sales in the rest of 2010, and in future years.

The Petromatrix report is currently a must-read for anyone seeking to understand what is really happening in crude oil markets.

Its latest issue analyses China's demand. It suggests this is not as strong as the bullish investment banks on Wall Street might wish.

China's refinery runs are certainly rising, as its new major capacity comes online. And its own oil production in July was up 250kpd versus 2009. But its oil imports appear to have peaked, with July's 1mbd lower than in June, and slightly below 2009 levels. In addition, oil product imports are now falling, as domestic production increases.

Thus, as the chart shows, China's total imports of crude oil and products were actually 441kpd less in July (blue line) than in July 2009 (red). They were only 640kpd higher than in July 2008 (yellow) and just 478kpd above July 2007 (green). Pretty clearly, this slow growth in total domestic demand does not justify today's very high crude oil prices.

The figures also suggest that China is keeping its own refinery operating rates at a high level by replacing imports with domestic production. As such, it poses a real threat to other integrated refiners/petchem producers across Asia. If they have to cut refinery runs to compensate for China's higher production, then petchem feedstock supply will suffer.

Many readers have been taking a well-deserved break over the past few weeks. As usual, therefore, the blog is highlighting key posts during August, to help you catch up as you return to the office.

August has been surprisingly busy:

Force Majeure reports show worrying increase highlighted the worrying rise in force majeures, which may be linked to cutbacks in training, and maintenance spend.

US consumer demand growth stalls. The US economy seems to be heading back into the downturn, as the stimulus programmes end, with unemployment still high, housing starts at all-time lows and GDP slipping.

5 tips for surviving a period of deflation covered advice from the Wall Street Journal on managing a personal investment portfolio.

Speculative mania continues to drive oil markets. The impact of futures market trading disguises the weak fundamentals of the oil market, and has also been driving speculative activity on polymers in China.

US junk bond issue hits record as GDP slows worried that investors were piling into high-yield corporate bonds, just as the slowing economy was increasing their risk.

Lower refining rates support EU petchem margins described how lower oil product demand, and hence refining rates, was reducing naphtha availability, and so helping to keep petchem markets tight.

The" real bottom line" in the Financial Times featured the blog's letter to the FT.