Chemicals & The Economy

The blog is pleased to have been invited by the American Chemical Society (ACS) to join its online panel discussion on "Chemical Industry & Employment Outlook: Trends 2010 and Beyond", taking place via webinar on Tuesday 2 November.

Its co-panellists will be Pat Confalone, Vice-President, Global R&D, Du Pont; and Susan Butts, Senior Director of External Science and Technology Programs, The Dow Chemical Company.

The webinar is free, and open to all. Please click here for further details.

Global chemical production seems to be "slowing", according to latest data from the American Chemistry Council (ACC). They note that total chemical output, including pharmaceuticals, rose just 0.7% between July and August, against a 9.4% rise versus August 2009.

The good news is that the ACC believe "at the headline level, the previous peak has been reached, turning global recovery into expansion." But they warn that output performance is uneven - "some nations and regions lag, and have yet to reach the prior peak." The blog will look at this in more detail next weekend.

The ACC has also introduced the above new chart, showing capacity utilisation in the global industry (again including pharma), since 1989. This shows the clear improvement since the bottom of the crisis, with utilisation rates at 86.9% in August versus 80.9% in August 2009.

Utilisation is well down, however, versus the 2007 peak of 93.5%. It is also down versus the 1995-2007 average of 90.1%. Demand grew by 80% over this period, from 56.7 on the ACC's Index to 101.8. But since 2007, demand has only risen 8%, whilst capacity is up 26%.

The risk for pricing and margins is that demand growth now disappears, as the stimulus programmes end, whilst more Asian and Middle Eastern capacity continues to come online. This would inevitably lead to a new decline in the utilisation rate.

As promised last week, the blog has undertaken its usual 6 monthly analysis of global chemical production, excluding pharma, by major region.

The data comes from the comprehensive American Chemistry Council (ACC) report. It shows global production (blue diamonds) was 4% above the previous peak in H1 2008. But there is a considerable variation in Regional performance:

Asia-Pacific. Output (blue line) was up 17% versus Q1 2008, due to China's lending and stimulus programmes.
Middle East/Africa. Output (orange) up 16%, due to advantaged feedstock.
Latin America. Output (green) was at Q1 2008 level, due to Asian demand.
W Europe. Output (purple) was down 4%, with stimulus programmes ending.
CEE. Output (green) was down 5%, after a strong rise in Q2 2010.
N America. Output (red) was down 8%, with Q2 2010 static vs Q1.

This highlights the industry's clear dependence on Asian demand.

Western stimulus programmes were supposed, by now, to have provided 'escape velocity' from the Crisis, and encouraged consumer confidence to return. Instead, after the initial excitement, they seem to have led to a period of doubt, where people worry about how the cost of them will be repaid.

Business models have been changing over the past decade in the chemical industry, as illustrated in the above chart.

Initially, the dotcom era began to put pressure on former 'specialty businesses', as customers discovered they were paying over the odds for technical support that was no longer required. The internet made it much easier to obtain low-cost supplies (often from Asia) of the molecules they required.

Then high oil prices pressured the former 'commodity' businesses, as it became more difficult to pass on these higher costs down the various value chains. And in turn, this has led the majors to implement strategies that prioritise site and business integration as a way of mitigating the problem.

Thus Steve Pryor, ExxonMobil Chemicals president, told EPCA last year that businesses need to be "tightly integrated to maximise the value of every molecule and minimise costs". And now Shell's Ben van Beurden, Shell's chemicals EVP, has told ICIS's Nigel Davis that even the phrase "refinery/chemicals interface" represents an out-of-date concept.

Van Beurden went on to explain that in Shell's view, "as long as you have an interface, you have a problem". And thus the chemicals business needs to focus instead on becoming the "highest profitable hydrocarbon upgrader". By this, Beurden said its role was to enable the company to "capitalise on low-value and other refinery streams and add value to the whole".

These are major changes in business models, which take time to implement. But as they become more apparent, so it will become clear that the chemicals landscape is undergoing a profound change from that which has applied over the past 30 years.

The World Bank have kindly sent the blog a copy of their new handbook "The Day After Tomorrow: A Handbook on the Future of Economic Policy in the Developing World".

It describes the impact of the Crisis on the emerging economies and summarises the challenges ahead, by individual region.

You can download a free copy by clicking on the copy of the book cover.

Warren Buffett, the legendary US investor once cautioned that "over time, markets will do extraordinary, even bizarre, things."

We are certainly living through such times today.

In August, the US S&P 500 Index fell 5%, as investors worried about the end of stimulus packages, and the return of banking problems in Europe. The IeC Boom/Gloom Index mirrored this fall, sinking back to its post October 2008 lows.

These fears came true came true last month, as the weaker European economies faced record levels of interest rate spreads; Ireland warned the rescue of Allied Irish Bank might cost a third of GDP; and the US Federal Reserve said it might resume Quantitative Easing (QE2), due to its worries about the US economy.

In response, the US S&P 500 rallied 9%, with the Boom/Gloom Index (above) tracking it once again as sentiment turned bullish.

"Extraordinary, even bizarre", might seem a good description of events.

The issue is our old friend, liquidity. As the SEC report into May's 'Flash Crash' shows, the high-speed traders who now dominate financial markets couldn't care less about underlying economic reality. To them, as BofA Merrill Lynch commented, "QE2 = the Bernanke Lifeboat for the equity market". All the boys with the big computers care about is that the US Federal Reserve might soon sponsor another tidal wave of liquidity.

They expect this to trigger renewed fears about the potential for rising inflation. In turn, they hope this will drive the value of the US$ lower, and cause renewed buying of commodities such as crude oil. Its the perfect opportunity for them to max out on bonuses in time for Xmas.

But once the party has ended, and the computers have been shut down for the night, it will be the real world of the chemical industry that will have to pick up the pieces.

The blog's former ICI colleague, Tom Crotty, aptly summarised the mood of most petchem players at this week's meeting in Budapest, Hungary, when telling ICIS' Nigel Davis that "2011 is a very tough call to forecast".

Crotty is this year's president of EPCA (European Petrochemical Association), and it was clear from the blog's discussions that uncertainty is the key factor in current petchem markets. In particular, people have different viewpoints based on their geographic location:

• Asian, Middle Eastern and Latin American players have had a good year, supported by China's demand. They hardly recognise that a recession has been underway, but worry China may slow next year.
• European players have seen tight markets, with feedstock supply limited by refinery cutbacks, as I describe in the above interview with ICB's Will Beacham. But they worry that government cutbacks and austerity programmes will hit demand next year.
• US players have also been supported by Asian demand, and domestic stimulus spending. But the upcoming mid-term elections, and lack of clarity over future economic policy, create their own uncertainty.

In addition, there is the strange case of crude oil prices.

Petchems always do well when these rise, as players build inventory down the value chain (as in 2007-H1 2008). And as in 2008, the blog fears that today's high prices will also choke off demand, as they reduce discretionary spending.

Equally, oil prices have not been supported by tight supply conditions. Inventories of crude and oil products are at near-record levels. It is only the efforts of financial players, selling the US$ and buying commodities such as oil, that has led to today's $80+ levels.

Scenario planning seems essential when looking forward to the 2011-12 Budget period, with companies faced by extreme levels of uncertainty over future demand levels, government actions, currency movements and feedstock prices.

The blog will take up this issue in more detail, when presenting its annual Budget outlook later this month.

Regular readers may remember that the blog is also non-exec chairman of NiTech Solutions, a technology spin-out from the chemical engineering department at Heriot Watt University in Scotland.

They will therefore understand its delight that NiTech have won this year's ICIS Innovation award in the SME (Small/Medium size Enterprise) category.

The picture above shows the plant that won the award - installed with Genzyme, the leading biotech company. The technology offers a major cost reduction (both capex and opex) for those currently using stirred tank reactors, as well as better product quality, lower carbon footprint and waste reduction.

NiTech's technology is particularly strong for mixing and crystallisation applications, where a number of chemical/pharma majors have already begun feasibility studies. Hopefully the Award will encourage other companies to investigate its potential for their businesses.

It is not easy being an SME in the current economic climate. The blog therefore congratulates its NiTech colleagues on this major success. The full ICIS report is available by clicking here. A short video demonstrating the technology can be seen by clicking below.

More evidence is emerging of the major changes taking place in Western retailing as we transition to the New Normal. Last week, my fellow blogger Doris de Guzman reported from the World Detergents conference that:

• P&G's CEO Robert McDonald noted that in "the last 18 months, 60% of all new laundry and detergent products came from lower-tier segments".
• Henkels's SVP Thomas Muller-Kirschbaum, emphasised "there is current hyper-competition when it comes to product pricing".

This trend was also evident when the blog returned recently to the IMD business school in Switzerland for an alumni event. One featured case study on 'marketing in the new normal' came from Peter Yorke, P&G's global marketing director for Pampers, the leading diaper brand.

Yorke explained that P&G had traditionally resisted competing in the lower price, own-label market, for fear of cannibalising its sales in the upper and mid-tier. But the advent of the Crisis had caused this philosophy to be revisited, and the new lower-cost brand was now making an major difference to the bottom line.

"Most importantly", he said, it has created a belief that "P&G could win" against the own-labels. This, of course, is why P&G, like other major consumer products companies, is now focusing on the area as a source of growth for the future.

This new focus on the value sector has important implications for all the chemical companies who supply raw materials into the consumer products market. Lower price, rather than technical innovation, is increasingly going to be the key to success.

Natural gas markets, so important in relation to chemical feedstock availability and pricing, are undergoing major change as we transition to the New Normal.

The Middle East, which had been in surplus, is now moving to a more balanced position in some countries, such as Saudi Arabia. But the USA, which had expected to need increased imports, may instead become a major exporter.

Middle East. The blog was speaking at the World Refining Association's annual conference in Bahrain earlier this week. And it was clear from its discussions with leading players that Saudi Arabia is having to re-evaluate gas usage strategies, to take account of competing end-user demands, as well as overall energy supply balances.

The supply position has thus changed significantly since the blog first visited the region in 1996. Then, everything was in surplus, and multiple investment objectives could be achieved, such as providing good financial returns whilst also adding value to a natural resource and providing local employment.

Today, as noted by McKinsey's Christian Gunther in Bahrain, choices will have to be made between competing priorities. Should gas replace diesel as a power station fuel, for example? Equally, should gas users pay the exploration costs for finding non-associated gas?

USA/Global. Meanwhile, over in the USA, "a supply revolution" has taken place, according to Shell CEO, Peter Voser. Voser told a London conference yesterday that a much more favourable global picture is emerging for gas reserves, due to shale gas and liquefied natural gas (LNG).

He noted that the US now has "over a century's supply" of natural gas at current consumption levels. Yet, just a few years ago, it was thought that "domestic gas production would decline". And including LNG supplies, the International Energy Association estimates the world has enough "gas in the ground for 250 years at current production rates".

In turn, of course, changes of this magnitude create both problems and opportunities for the chemical industry. Shell VP, Jeremy Bentham, spelled out some of the opportunities at last week's EPCA meeting in Budapest:

• He noted it was now economic to produce US shale gas at between $3 - $5 MMBtu, compared to the previously assumed minimum cost of $6 MMBtu.
• He also revealed that US producers were "queuing up" for export licences, based on using the terminals recently constructed for LNG imports.

Working through these issues will be a complex process. And it is made no easier by the current divorce between oil and gas prices. Oil has 6 times the energy content of natural gas and, as the chart above shows, the two normally track each other quite closely, with oil 6x gas prices.

But with financial markets currently powered by liquidity rather than fundamentals, oil prices (blue line) are now 20 times US gas prices. Does this mean gas prices (red line) might treble to $12/MMBtu? Or might oil fall back to $24/bbl? Or will current relationships continue?

The honest answer, is that nobody knows. We have simply never seen conditions like this before.

Greater use of electric autos is a win-win for the chemical industry. They will not only reduce competition with gasoline for feedstock, but also increase polymer demand - to replace steel and glass. So China's entry into the market could be very important.

As always, the blog has been brought up to date by its friend Pedro Spohr of GALP, who keeps a close eye on developments. He notes that China has recently sold its first all-electric auto (see picture), 4 months ahead of Nissan's planned Leaf debut in the USA.

China is also following the USA in offering enormous subsidies to buyers, in a pilot programme covering 5 major cities:

• Central government subsidies are up to 60k yuan ($9k)
• Many of the local governments offer similar amounts in addition.

China's subsidies work via direct government allocation to manufacturers, in order to reduce list prices. Government is also funding the construction of charging stations and battery recovery networks.

Meanwhile in the USA, 20,000 people have already reserved the all-electric Nissan Leaf, which goes on sale in 5 states in December. And the New York Times reports they are also being given lots of incentives:

• $7.5k federal tax credit
• Cash rebates from state governments eg $5k in California, $2.5k in Tennessee
• Free or subsidised $3k home-charging units from the Energy Department
• Charging stations are being built by the $230m nationally funded EV project

The blog will continue to follow developments with interest.

The blog's argument that oil prices are now being entirely driven by financial market speculation has won support from one of the main state oil trading companies.

ICIS news reports that the CEO of SOCAR Trading (State Oil Company of Azerbaijan Republic) claimed that the "rise in crude and other commodity prices, resulted principally from the speculation of banks". And he went on to argue that "fundamentals would indicate that the price of crude should be around $30/bbl."

Speaking at the Asia-Pacific Petroleum Conference, he justified this claim by pointing out that "paper trading on the NYMEX and ICE exchanges in 2010 was worth $25,000bn, compared with just $2,000bn for physical oil". And he noted that "although crude prices had risen, OPEC spare capacity still stood at around 6m bbl/day".

Azerbaijan produces 1mbd of oil, and SOCAR believes that today's high oil prices are positive for the world economy, as they "cushioned resource-rich developing countries, including Azerbaijan, from the worst effects of the crisis". The blog strongly disagrees with this view, which ignores the impact of high oil prices in reducing discretionary spending (and therefore chemical demand) in the rest of the world.

But SOCAR's clear statement does give a clear indication of the downside risk to oil prices, should the QE2 lifeboat party ever end.

The blog will publish its annual Budget Outlook for 2011 next weekend. And so as usual, its now time to review last year's Outlook. Past performance may not be a perfect guide to future outcomes. But it is one of the best that we have.

The 2010 Outlook was titled 'Budgeting for a New Normal', and it argued that over the next few years:

"We will start to see a rebalancing of the global economy. The West will see lower consumption, as people rebuild their savings, and borrow less. In turn, this will mean lower export demand for the emerging economies. The outcome will be a more sustainable world economy, but it will be a difficult journey."

Today, this still seems to be an accurate view, particularly the sense that it will be a "difficult journey".

The blog's 2008 Outlook 'Budgeting for a Downturn', and its 2009 'Budgeting for Survival', meant it was one of the few to forecast the Crisis. Last year, however, the blog was more positive about the outlook than most forecasters, expecting that "2010 should be a better year for the chemical industry, as demand grows in line with a recovery in global GDP".

It also correctly balanced this optimism by warning that there would be no "quick V-shaped return to the 2003-7 Boom years", and suggesting that:

"Governments will worry about budget deficits, and may well scale down support for critical end-uses such as autos and housing. Equally, major amounts of new capacity, planned during the Boom years, will start to come onstream in the Middle East and Asia."

This led it to fear that "unemployment is set to become a key political issue in the West". Unfortunately, this has also been proved correct. So have its concerns that the expected recovery in demand would put "great strains on cash-flow", and that speculative bets on "oil prices linked to traders' bets on the US$'s value will continue".

However, although it identified this latter factor, it clearly underestimated its likely longevity, with oil so far averaging around $75/bbl versus its suggestion that "$50/bbl might be an average price". The blog will keep this lesson in mind when posting its Outlook next weekend.

The blog's aim is to 'share ideas about the influences that may shape the chemical industry over the next 12 - 18 months'. It hopes that its 2010 Outlook again helped readers to better prepare for today's more difficult economy.

If you only read one newspaper article this year on the economic outlook, then the blog would recommend Martin Wolf's recent analysis 'Why America is going to win the global currency battle'.

Wolf is a former EPCA speaker, and he sets out very convincingly the rationale for the US Federal Reserve's planned move to restart printing money again (the QE2 Lifeboat policy). As he says:

"To put it crudely, the US wants to inflate the rest of the world".

Wolf argues that the Fed's QE2 policy will encourage asset price inflation in financial markets (stocks, commodities etc). The belief is this will spur US consumer spending and promote growth in the real economy. Higher US inflation will also devalue the US$, thus reducing the 'real' value of the US's enormous debt.

Equally, of course, the article highlights Fed's real fear that the USA may be following Japan's deflationary path since its financial and real estate bubbles burst 20 years ago. The chart above shows this danger very clearly:

• The bottom axis is the percent change in the Nikkei 225 Index (purple line) from September 1985
• The top axis is the percent change in the S&P 500 Index (red line) from September 1995
• The S&P line is lagged by 8 months, so that it peaks in 2000 in line with the Nikkei's all-time peak in 1990.

It shows how the Fed began inflating like mad in 2003 - focusing on the housing market - as the S&P followed the Nikkei's downward path after the dot-com bust. The resulting Crisis, however, then brought the two lines perilously close again in 2009. Thus the Fed is clearly very worried that this summer's 'soft-patch' may signal that the USA is reconnecting with Japan's fate.

The blog, does, however, disagree with Wolf's overall conclusion, that the Fed will inevitably win this battle. Wolf believes that its policy will force China and other emerging economies to allow their currencies to rise sharply, or risk higher inflation and over-heating in their domestic economies. This will then allow the US to increase its exports, and also help to rebalance the US economy.

But he overlooks the impact that the lower US$ and higher commodity prices will have on US domestic demand. Higher oil and food prices, brought on by the 'QE2 Lifeboat party', are just as likely to cause further declines in US consumer confidence, and cut into the discretionary expenditure that drives growth in the real economy.

The problem, of course, is that the Fed is certainly powerful enough to engineer a short-term boom in asset values. This is what we have been seeing with the 15% rise in the S&P since August, when the Fed began briefing on its proposed policy. But can it really 'win', as Wolf believes?

In the blog's view, this just adds to the general uncertainty over likely future demand levels, that was so evident earlier this month at EPCA. And it is therefore yet another reason why the blog plans to title its Budget Outlook this weekend, 'Budgeting for Uncertainty'.

EU auto sales were better in September than in either July or August. But 'better', of course, is a relative word these days.

As the chart shows, they were only down 10% versus 2009 levels, whereas July and August were down 19% and 13% respectively. But in terms of absolute volume, sales at 1.2m were well short of the average September figure of 1.4m between 2003-7.

The figures also confirm that the earlier 'cash for clunkers' programmes were a complete waste of money. As in the USA, these only brought forward sales, and didn't create sustainable new demand. Thus ACEA (European Automobile Association) report that in September, "all major markets contracted, by 8% in France, 9% in the UK, 18% in Germany, 19% in Italy and 27% in Spain".

Now, austerity programmes are replacing stimulus. And with major markets such as France in the middle of major strike actions, it seems likely that Q4 demand trends will continue to weaken.

The Bank of England has become the first major central bank to endorse the argument that we are moving towards a 'New Normal'.

In an important speech this week, its Governor Mervyn King, set out the argument that we can look forward to:

"a SOBER decade - a decade of Savings, Orderly Budgets, and Equitable Rebalancing".

And he contrasted this with the recent past:

"the Non-Inflationary Consistently Expansionary - or 'NICE' - decade from the early 1990s to the early 2000s".

This is very much in line with the arguments put forward in the blog's White Papers on 'Budgeting for a New Normal' this year.

A similar message has come today from the USA, where Treasury Secretary Tim Geithner, told the Wall Street Journal that "The rest of the world wants us to save more--and that means less U.S. demand for the rest of the world. Demand is going have to come from other sources."

This transition to the New Normal is not going to be easy. Chemical companies now preparing their Budgets for 2011, should expect plenty of bumps in the road.

When elephants fight, those around them need to be cautious. And this is the prospect for 2011-13, as the Western countries try to force the BRICs (Brazil, Russia, India and China) to export less and import more, the so-called 'rebalancing' strategy.

Thus Budgeting for Uncertainty seems the right title for the blog's annual Outlook for the chemical industry.

Key factors that will contribute to this uncertainty include:

• The USA is aiming to rebalance the world economy by forcing the BRICs to reduce exports and instead focus on expanding domestic demand. This proposed rebalancing represents a major change from the past 20 years of export-driven development by the emerging economies, and will not be achieved overnight.

• Europe is making a 180 degree shift in policy, by abandoning previous efforts to stimulate its economy. It is instead planning to achieve budget balances by reducing spending and increasing taxes. It is also lining up alongside the USA in hoping to increase its exports to the BRICs, whilst reducing imports from them.

• The BRICs themselves are between a rock and a hard place. They were not the cause of the financial Crisis, but they are the ones on whom the major burden of adjustment may fall. The principal instrument of change will be the exchange rate, as the West aims to force China and others to revalue their currencies quite sharply.

These macro factors clearly raise more questions than answers. Even the issue of timescale is unclear, with the US suggesting it might take a full Budget cycle of at least 3 years for real changes to be observed. Plus, of course, there is absolutely no guarantee that the West will get its way, or that the whole exercise may not end in tears.

On the other hand, everything might go extremely well, with a renewed burst of co-operation as seen immediately after the Lehman collapse in Q4 2008. If the G20 Group of the major economies really worked together, then chemical demand could easily be stronger, rather than weaker.

The blog's view is that Scenario planning is the only solution when faced with so many different variables. The idea is to establish a Base Case, and then develop Upside and Downside Cases which are reasonable projections of what might happen if everything went very well, or very badly.

The blog's own effort to help kick-start this process is shown above:

BASE Case. This suggests we will see global GDP growth of 3%, with oil staying in the $60 - $80/bbl range of the past 18 months. We will still see financial market volatility, but no major collapses. It is the classic 'muddle through' type of Scenario.

UPSIDE Case. This assumes that the G20 achieves a 'grand bargain' to rebalance the world economy, allowing GDP to grow at above 3.5%. Inflation would probably become a major issue under this Scenario, causing oil prices to move above $80/bbl.

DOWNSIDE Case. Instead of increased international co-operation, countries put their own interests first and adopt beggar-my-neighbour policies. GDP growth would probably fall to 2.5%, and the oil price below $60/bbl, with the banking system under major strain as Deflation took hold.

The slide also suggests a number of 'Jokers' that companies may want to consider. These include changing demographics, such as the ageing of the Western baby-boomers. And, of course, one can never ignore the potential impact of geo-political events, such as a bombing of Iran's nuclear plants, or new tensions with N Korea.

Of course, it would be possible to simply adopt a Base Case Scenario, and assume that this will work out. But the chances of this occurring are probably less than 50%, so it would be highly risky. Instead, the blog would strongly recommend businesses to adopt a version of the above framework, using their own ideas for Base, Upside and Downside Scenarios.

By adopting this process, businesses can then test out key assumptions in advance. They can also develop mitigation strategies, in case events begin to diverge from the Base Case view. As always, the blog will be very happy to advise on the process, if this would be helpful.

2010 has been a suprisingly good year for many companies. We can certainly hope that current performance will continue, but hope is not a strategy.

Scenario planning will give businesses the chance to adopt the wisdom of the Scouting movement. Its motto, 'Be Prepared', seems the best possible approach in today's increasingly uncertain New Normal environment.

The above chart, from the excellent American Chemistry Council (ACC) weekly report, shows how Operating Rates (OR%) have changed in the global chemical industry since 1989.

From 1994 - 2003, they were broadly in an 87% - 93% range. They then moved up to a seemingly stable 92% - 94% range until 2008, before crashing down to an all-time low of 77% in December 2008.

Since then, they have recovered well. But they are still only back to 2003 levels, at 87.4%. And as the ACC note, production in important markets such as the USA, excluding pharma, has been "essentially flat" over the past year. Whilst in Asia, "the upward gain has moderated".

This highlights the uncertainty over the Outlook for 2011-13, as discussed in the blog's newly published 'Budgeting for Uncertainty'. And so the blog has therefore added 3 arrows, to illustrate the different Scenarios it has identified:

• A Base Case, where OR% maintain the improvement since 2008.
• An Upside Case, where they continue to improve and deliver a full recovery.
• A Downside Case, where they fall back again as demand growth stalls.

The blog has been recognised in the Financial Times and elsewhere as being one of the very few forecasters to correctly warn of the global downturn, and then highlight the recovery seen this year.

But it feels no such certainty about the Outlook for next year. It therefore hopes its Scenario analysis is helpful to companies, as they grapple with this key issue.

This is Budget Outlook week in the blog. And for the rest of the week, it is looking at a key issue in a major Region. Today, it highlights the US housing market. This used to be a $35bn market for chemicals, with up to 2.2m housing starts a year, each worth $16k in sales. Now it is worth just $10bn, with recent starts only ~600k.

The above chart, from thechartstore.com, highlights the key issue. A year ago, it was widely assumed that starts would soon recover from these 50-year lows (green and orange lines), as low interest rates and tax credits stimulated demand. But clearly this didn't happen. Instead, many now worry that rising numbers of foreclosures may lead to further falls in house prices.

Equally, there is increasing evidence that consumer trends have changed from those seen over the past 20 years. Large McMansions are no longer fashionable. And underlying demand growth for new housing has slowed, as lack of cash and fear of unemployment forces families to share homes again.

This suggests that US housing has been one of the first major markets to enter a New Normal environment, as Western societies start to save more and spend less. Tomorrow, the blog will look at similar trends that seem to be developing in Europe.

As promised, the blog is today looking at a key European consumer trend, as part of its Budget Outlook week. 70% of chemical sales are consumer-related, so changes in these trends are very important.

Earlier this month, it shared a platform in Bahrain with Thibaut Eissautier, Chief Procurement Officer of McBride, Europe's leading own-label producer of household and personal care products. 81% of his purchases relate to chemicals, from packaging materials through to the actual ingredients.

He noted that Europe has the highest global penetration of own-label goods (those supplied to supermarkets under their own label). And it has risen 10% since 2007, with one in six products now own-label in the household care sector. He outlined 5 key trends driving this trend:

• Value for money. "Consumers are more price-sensitive than ever".
• Simplicity. They "want less complicated life-styles".
• People, not things. They increasingly "prioritise what is important in life, such as family and friends", and often only "enjoy small moments of indulgence", which they prefer to achieve via "bargain-hunting".
• Values. Sustainability, carbon footprint, trustworthiness and performance are key for many consumers.
• Local. Convenience/express stores and online options are therefore gaining ground versus hypermarkets.

Most of these trends are quite different from those of the past 20 years, when affluent European consumers often defined themselves by the car they drove, or the house they owned. They therefore add a further element of uncertainty, when it comes to forecasting future chemical demand patterns.

In the last of its Budget Outlook analysis, the blog today looks at the major changes underway in China. These are typical of many emerging economies, including India, and could potentially have a big impact on chemical demand.

The key issue is that China's leadership has recognised the current export-driven development model no longer works. As Yi Gang, deputy central bank governor noted in July:

"China's future economic growth will definitely gradually slow down. The issue for China's economy is the quality of growth, which is why we now have to carry out structural adjustment and transform our development model."

China's export-driven development model meant investment in factories and urban infrastructure 'crowded out' personal spending. Over the past decade, it has grown at up to 30% a year, twice that of retail sales. Thus personal consumption is now only 30% of GDP, compared to 70% in the USA.

This has also led chemical companies to focus sales within China on the relatively well-off. But even in 2015, only 6% of China's forecast 280 million households will have incomes of >$12.5k. The real mass-market will be the 73% of households with projected incomes of <$5.2k.

This market will include most of the rural population, who have been left behind over the past decade. As the chart shows, their disposable incomes today at $672/capita (red column) are only 1/3rd of those in urban areas (blue). The needs, and aspirations, of these 700m people will provide the major growth area for consumer spending.

The magnitude of this change highlights a further aspect of the uncertainty underlying the Budget Outlook this year. We do not know whether we will see global co-operation on currencies, or a collapse into protectionism. Nor do we know exactly how far, and how quickly, changing consumer trends in the USA, Europe and China will impact chemical demand.

This is why the blog believes that Scenario planning is essential this year. It is also convinced that the rewards over the next few years, for those who do it well, could be very good indeed.

An unnatural calm continues to dominate crude oil trading. Prices may move up or down by $2/bbl or $3/bbl a day, but then they always return to where they started, between the upper red line and the lower green one.

The blog has kept its promised eye on developments, since this trend of 'trading in a triangle' was spotted by Petromatrix last month. It also applies, as the chart above shows, to trading in the Brent oil contract in euros/bbl. And it has continued even with the US Fed's QE2 Lifeboat policy about to start.

Thus there is still the potential for the sharp move, up or down, that technical theory would suggest, if either bulls or bears finally come out on top.

One of QE2's major aims is to drive down the value of the US$, and increase inflation. And in turn, of course, this is supposed to force investors into chasing so-called 'riskier' assets. Thus they should buy commodities such as crude oil, as a supposed 'store of value'.

The interesting thing, however, is that this promised vast flow of liquidity has indeed pushed up equity markets, and some commodities. But as the triangle shows, its positive impact on oil has been balanced by others' sales.

Crude oil prices were already far too high, of course, relative to either today's supply/demand balance, or natural gas prices. But they could still have gone higher. After all, as the eminent economist Keynes warned, 'markets can remain irrational, longer than you can remain solvent'.

So today's unusual calm in global oil markets, is perhaps trying to send us a message about future developments. The blog will continue to watch, with interest.