Chemicals & The Economy

In the Boom period, it was the investment bankers who used to walk away with telephone number fees, after convincing a CEO to go after an acquisition 'opportunity'.

Now, in another sign of the New Normal, it is a former quality control manager who has become $96m richer, after making a 'whistleblower' call to GlaxoSmithKline's (GSK) then CEO, JP Garnier.

Her call, in July 2003, was not returned. And this proved a costly mistake. She was trying to warn him, after failing at lower management levels, that quality in the Puerto Rico factory which she had been auditing, was not up to standard.

The result, 7 years later, is that she will now get a $96m share of the $750m settlement made between US regulators and GSK. As The Guardian newspaper notes, this is "an extraordinary sum, but the failings in GSK's factory were also extraordinary".

DuPont taught us all, back in the 1980's, that safety was the top priority for management. The arrival of the New Normal, with fines like this, will no doubt help to remind us.

China's Dalian futures market has been attracting world headlines recently, with its status as China's leading market for chemical futures being confirmed. As such, one would expect its pricing for the two major polymers traded, LLDPE (linear low density polyethylene) and PVC, to follow similar patterns.

But this seems not to be the case. The LLDPE contract has boomed recently, offering punters a chance to bet on the direction of oil prices in high volume. It traded 46 million tonnes last month, around twice total annual global output.

Yet PVC, a higher volume product globally, and in China, traded just 1/10th of this volume. And as the chart shows, its price (red line) actually fell last month, as the physical market failed to pass through higher oil prices (blue).

This highlights, of course, the more speculative nature of the LLDPE contract. Anyone using it as the basis for pricing physical product, therefore needs to keep a close eye on what happens next to crude oil prices.

The US is 25% of the global economy, and its performance matters enormously to the chemical industry. So it was good news that US GDP growth stabilised at 2% in Q3, versus the 1.7% level of Q2. But the underlying trends during 2010 are worrying, as the above chart shows:

• Sales growth (blue line) has been slipping, and was only 0.6% in Q3.
• Inventories (red column) have been growing, and rose $110bn in Q3.

This is clearly the wrong way round.

Personal consumption is 70% of GDP, and should be rising by 5% at this stage in a normal recovery. Retailers and manufacturers clearly anticipated this outcome, and increased their orders in advance. But instead, this volume went into inventory, accounting for 72% of Q3's total GDP gain.

What happens next, is therefore the key question?

Will US consumers remain nervous about the economic outlook? Or will they re-open their wallets over Thanksgiving and Christmas, and return to Boom-year spending habits?

If they spend, then the inventories will soon reduce. But if they don't, then domestic producers, and foreign exporters, will need to prepare for major destocking in H1 2010.

Later this month, Berlin hosts our annual European Aromatics & Derivatives conference, held as usual with ICIS. It has one of our strongest-ever speaker line-ups, and covers a number of important areas:

What next for aromatics? Sven Royall, Shell's VP Intermediates, will present his view of the outlook for the value chain. Ralf Kuhlmann, formerly ExxonMobil's Business Director Hydrocarbons, will question whether Europe is on the right track for the future.

The future for styrene: Andrew Jones, Dow's Global Business Director for aromatics, will be outlining his ideas on the major challenges ahead, along with Jeff Denton, Feedstocks VP for Styron, who is kindly flying in from the US to present an overview of this major new player, and Piet Vermeersch, TOTAL's Business Manager for styrene.

Paraxylene and PET: Gianluca Girardi, Polimeri Europa's Sales Manager, will look at the outlook for PX and the C8 chain. Whilst Antonello Ciotto, Equipolymers' Commercial Director, will highlight the developments underway in recycled PET.

Refining and the gasoline interface: Matt Chadwick, from our partners Wood Mackenzie, will focus on changes taking place in the European refinery system, and the opportunities for advantaged cost feedstock into aromatics.

LyondellBasell: Hans van der Kaaij, Business Director, will talk about the Chapter 11 experience, and outline the 'new beginning' now underway.

China. Yu Jing from China's Chemical Planning Institute will present an informed view of plans for new production, and give her views on the 2011 outlook.

In addition, the blog has been preparing a special paper to mark '50 years of benzene production from oil'. It will challenge benzene's current by-product status, and suggest ways in which companies can build competitive advantage for the future.

As always, of course, the Conference will also provide an excellent opportunity to network with industry colleagues. It is being held in Berlin on 23 - 24 November, and registrations are already going well. Further details on the agenda, and how to register, can be found by clicking here.

So now its official. This week, the US Federal Reserve confirmed it was launching its 'QE2 Lifeboat'. It will inject $600bn into the US economy, in yet another bid to kick-start full economic recovery.

Clearly, this is a major initiative by the world's most important central bank. Will it work? And what might it mean for the chemical industry?

The answer to the first question is uncertain. Martin Feldstein, the blog's favourite economist and one of the very few to correctly forecast the start of the downturn, says it is a:

"Dangerous gamble with only a small potential upside benefit and substantial risks of creating asset bubbles that could destabilise the global economy".

Feldstein is Harvard's Professor of Economics, and so his views carry weight.

So what about the 2nd question? Here, markets have already given their answer, pushing the price of crude oil above $87/bbl. They expect QE2 to weaken the US$, and so they see commodities as a 'store of value'.

This cannot be good for the chemical industry. Rising oil prices will encourage inventory-build, just as we saw in 2007 - H1 2008, and 1979 - 1980. They will also reduce discretionary purchasing power, vital for chemical consumption, as consumers still have to purchase gasoline and heating fuel, even if prices rise.

All in all, therefore, the Fed's move simply creates more uncertainty, confirming the blog's fears when it published its recent Budget Outlook.

The US Fed's move to launch its QE2 Lifeboat continues its policy of focusing on measures to boost liquidity. Yet as the blog has long argued, today's problems are based on a lack of solvency not liquidity. Therefore it worries that the Fed's efforts are likely to miss the mark, again.

The above slide, based on US government data, highlights this key issue. It shows that 'real' median US wages* (eg after adjusting for inflation), have hardly increased over the past 10 years. In fact, they are at almost the same level as at the end of 1979, when the data starts.

This confirms that the consumption binge of the Boom years between 2003 - 7 was based on borrowed money, rather than income growth. It also highlights that the continuing aftermath of this binge, the 35% drop in average US house prices, is a solvency problem. And it suggests that the current total of over 2 million homes in foreclosure is more likely to rise than fall.

One would have hoped that the Fed would have learnt from its previous mistakes, particularly after inflating the housing bubble with low interest rates in the early 2000s. This was done to counter the dot-com crash, but provided only temporary support for the economy.

Injecting $600bn of extra liquidity into the US economy will not change real incomes, and so it will not create new demand. Equally, by raising inflation concerns, it has already succeeded in raising long-term mortgage rates, the last thing that was required.

* Median wages give a clearer picture than average wages. These are distorted by the dramatic rise in incomes of the richest 1% of the population, from $800k to $1.8m between 1990 - 2007 in real US$, meaning that their share of total income rose from 12% to nearly 20%. Chemical demand depends on trends amongst the 99%, not the 1%.

Last week, the blog repeated its warning that crude oil was preparing for a big move, either up or down. And prices then jumped 7%, to a two-year high of $87.49/bbl. So the 'triangle formation' proved its predictive power again.

As the above chart shows, from Petromatrix, the driver behind the move was the Large Speculators on the Futures markets (ICE and NYMEX). In anticipation of the US Fed's QE2 Lifeboat programme kicking off, they:

• Bought a further 12.5m bbls, about 15% of total daily consumption
• Took Speculative length to an all-time record high

2010 (blue line) has seen more Speculative buying than any previous year. Net length is now ~150mbbls, versus March 2008's peak of 115mbbls (green line).

At the same time, of course, the world is seeing near record levels of physical stock. And OPEC's own forecast last week suggested global demand in 2011 would only equal 2007's level. Even in 2014, OPEC expects to have over 6mbbls/day of spare capacity.

In the short-term, however, the Speculators rule, not these fundamentals. So the most likely outlook for chemical markets for the rest of Q4 is that:

• Speculators will continue to buy oil futures and sell the US$
• In turn, this will force chemical company purchasing managers to buy forward
• CFOs will probably allow inventories to increase, given good cash-flow

In turn, this should lead to a strong end to the year, as far as chemical volumes are concerned.

Of course, it is possible that the US Fed will be proved correct. It might happen that a lower US$, and higher commodity prices, will restore Western consumer confidence and banish current debt worries. But the blog would not invest its own money on this basis.

It fears it is far more likely that we are in the middle of yet another speculative bubble. Whilst oil prices are rising, underlying demand is almost certainly weakening. Once again, as in the mid-2000's, the Fed's misguided policies are treating symptoms, rather than causes.

US Fed Governor Kevin Warsh is one of the few policymakers to focus on reality rather than wishful thinking.

He pointed out nearly 3 years ago that liquidity should not be mistaken for capital, although others continue to ignore this uncomfortable fact.

Now, in advance of tomorrow's G-20 meeting of the world's richest economies, he delivers a stinging critique of current policies and argues, in the Wall Street Journal, that the key issue is the need to "improve our policies".

"Broad macroeconomic policies have not changed direction in the past several years. But change they must if we are to prosper. We can no longer afford to tolerate economic policies that are preoccupied with the here and now. Chronic short-termism in the conduct of economic policy has done much to bring us to this parlous point.

"The U.S. and world economies urgently need stronger growth, and the adoption of pro-growth economic policies would strengthen incentives to invest in capital and labor over the horizon, paving the way for robust job-creation and higher living standards."A year ago, after the G-20's last meeting in Pittsburgh, USA, the blog took strong issue with the self-congratulatory mood. This time, it fears 'beggar-my-neighbour' policies are inevitable, if participants don't raise their game.

Or, as Warsh warns, "heightened tensions in currency and capital markets could result in a more protracted and difficult global recovery."

The UK housing market has presented a confusing picture over the past 2 years. Unlike Spain, Ireland, or the USA, the lax lending conditions of the Boom years did not seem to lead to major price falls. In fact, along with Australia (benefiting from China's commodity boom), UK prices even appeared to recover.

This was due to a mix of exceptional circumstances:

• Most UK mortgages are on variable interest rates, so the drop in official rates meant many homeowners saw their monthly payments fall to near zero
• The continuation of bankers' bonuses, plus the arrival of wealthy foreign buyers, meant London houses in the GBP1m+ bracket were in great demand
• Outside London, stricter lending conditions meant total sales were down by 50% versus the 2003-7 period, causing average UK prices to be over-influenced by higher London levels

Now, however, there are signs that confidence is leaving the broader market. The chart above shows a correlation first developed by the Bank of England, to forecast likely prices. It shows the Nationwide's historical house price series adjusted for inflation (green line), versus the monthly sales to stock ratio produced by the Royal Institute of Chartered Surveyors (blue).

This shows an extremely good correlation since records began in 1978, confirming the Bank's rationale for its use as a forecasting tool. And now, the indicator is beginning to slip. This week's RICS report pegs it at 0.23, equal to annual price falls of 5%.

Underlying fundamentals for the market also seem to be weakening, with the coalition government proposing over 0.5 million job losses, in its efforts to reduce the deficit. Given the importance of housing to the UK economy, any major fall in prices could also have a major impact on chemical demand.

It would also impact overall EU demand, as the UK's $2.2trn economy is the 6th largest in the world. This therefore adds another element of uncertainty for companies as they complete their Budget process.

The blog's regular review of quarterly company results presents a mixed picture.

Compared to a year ago, some have certainly become more optimistic - Dow, for example, are now "confident in a sustained global recovery", whereas in 2009 they did "not count on material improvements in market conditions". But others, whilst pleased with current results, remain cautious: BASF expects growth "to decelerate, but do not foresee a double-dip recession", much in line with 2009's view of "an uneven recovery".

Equally, companies in different parts of the value chain see recent crude price rises differently: Borealis notes that "better than expected pricing for crude had supported polyolefin prices", whilst both Akzo Nobel and Sherwin Williams are more negative on its impact.

The blog was also interested to see LyondellBasell focus on "operating issues among competitors" as a contributor to margins. This confirms the blog's own fears earlier this year, about the rise in force majeures due to reduced maintenance budgets.

The one constant versus 2009 is that Asian companies remain optimistic. Korea's LG sees "strong growth" ahead, whilst Sinopec focuses on "on-going tight supply". However, Reliance's reference to "margin reduction" in key business segments perhaps indicates this key Region may be at a turning point.

Akzo Nobel. "Reason for caution in mature markets, due to continued softness in construction and housing".
Arkema. "Revenue was boosted by 10.5% increase in sales volumes."
Ashland. "A very challenging quarter. Despite double-digit sales growth, raw-material cost pressures continued to temper margins."
BASF. "Economic growth is likely to decelerate, but do not foresee a 'double-dip' recession".
Bayer. "Significantly higher demand in our main customer industries. Selling prices also rose."
Borealis. "The global economy was still volatile and the positive trend in the polyolefins business would not be a steady upswing. Better-than-expected pricing for crude had supported polyolefin prices."
Braskem. "Brazil remains one of the best-positioned countries in the current economic scenario."
Bunge. "Price volatility was expected to persist in the near term due to the tight supply environment."
Celanese. "Expected continued healthy demand in the fourth quarter".
ConocoPhillips. "Ethylene industry cash margins more than doubled versus 2009".
Croda. "Continued strong progress in Q3".
Dow. "Confident in a sustained global economic recovery. Robust growth in emerging economies will continue, with improved growth in North America and Europe."
Dow Corning. "Strong global demand for our silicon-based products amidst this uncertain economic environment".
Eastman. "Improved end-use demand in the packaging and durable goods markets."
ExxonMobil. "Improved margins increased earnings by approximately $1.7bn while higher volumes increased earnings about $370m."
Henkel. "Strong contributions from adhesive technologies business."
Huntsman. "A continuous recovery in global demand for all of our products and margins are increasing in most product lines."
INEOS. "Demand for polypropylene continues to be strong and domestic demand for polyethylene continues to recover."
Kemira. "Short-term risks and uncertainties were connected to raw material availability and prices."
Kronos. "Demand rose in all market segments, the result of a strengthening economy".
LG Chem. "Expected the strong growth in product prices to continue on favourable supply and demand conditions."
Lanxess. "Higher volumes in key customer industries, positive currency effects and price increases, which fully-offset higher raw material costs".
Lubrizol. "Steady improvement for the markets and applications we serve".
LyondellBasell. "Much of the company's strong olefins margins this year were due to operating issues among competitors."
Marubeni. Increased sales and higher petrochemical prices".
Mitsui Chemicals. "Increased sales from its functional polymeric materials business."
Mitsubishi Gas. "Increased sales volumes and higher market prices".
Nalco. "Particularly strong sales to Brazil, Russia, India and China (BRIC), which were up by more than 40%."
Olin. "Chlor-alkali earnings were likely to decline sequentially in the fourth quarter as weaker seasonal demand was expected to offset improved pricing."
Orlen. "Stable sales growth of olefins and polyolefins and higher demand for fertilizers."
Polimeri Europa. "Recovery in product margins, cost efficiencies and a 1.6% sales volumes increase."
PotashCorp. "Rapidly rising prices for a number of key crop commodities pushed our industry past the inflection point."
Reliance. "Margin reduction in polypropylene-propylene and most of the products in polyester and ethylene chain had offset the positive impact of margin improvement in PVC."
Rhodia. "Markets we serve continue to display favorable dynamics".
SABIC. "Improvement in production and sales, as well as better prices for most products."
Shell. "Improved realised chemicals margins, higher chemicals sales volumes and lower operating costs."
Sherwin Williams. "Cautiously optimistic about the stability of end-market demand and was working hard to mitigate the effect of rising raw material costs."
Showa Denko. "Profit almost halved, due to the impact of high feedstock costs."
Sinopec. "Strong demand for ethylene, benzene and polymers amid an ongoing tight supply would boost earnings in Q4."
SK Energy. "Expect the company's performance to be further driven by favourable market conditions."
Solvay. Chemicals businesses excluding soda ash had shown an improvement".
Syngenta. "Improving conditions in the crop protection market and significant advances in its seeds technology."
TOTAL. "Increase was driven essentially by an improvement in the petrochemicals; the specialties continued to show solid performance."
Wacker. "Even if demand edges down over coming months, which seems likely, market conditions will remain favourable."

The blog has a simple measure for the effectiveness of international meetings. It counts the number of words in the communiqué.

The logic behind this is that when people are really focused, they get down to business. When they waffle, then you know nothing will happen.

The history of the recent G-20 meetings seems to support this analysis:

April 2009 688 words, focused on stimulus measures
September 2009 9292 words, full of self-congratulation
June 2010 10713 words, 27 pages, complete waste of time

Sadly, the Seoul meeting goes overboard on words, to try and disguise its lack of content. We have a Leaders Declaration of 1503 words, plus a Summit Document of 6579 words in 17 pages, 3 Annexes, a Supporting Document, and a Key Outcomes document that, ironically, doesn't download.

The problem goes back to the first G-20 meeting in April 2009, when the blog highlighted the lack of a Plan B, as a "contingency plan in case the global economy does not begin to recover". As a result, the G-20 leaders now have no shared view of what to do, even though Point 7 of the new Declaration highlights this as the key issue:

"Risks remain. Some of us are experiencing strong growth, while others face high levels of unemployment and sluggish recovery. Uneven growth and widening imbalances are fuelling the temptation to diverge from global solutions into uncoordinated actions. However, uncoordinated policy actions will only lead to worse outcomes for all."

As the Wall Street Journal comments, all we then get is "platitudes".

Perhaps the most significant moment came after the meeting finished, when President Obama told a news conference that China's currency was "undervalued. And China spends enormous amounts of money intervening in the market to keep it undervalued." If this isn't a green light to the new Congress to start talking about trade sanctions, then its hard to know what is.

China's export-led economy was badly hit when the financial Crisis began in Q4 2008. In response, the government moved quickly to stimulate domestic consumption, in order to keep people employed. It doubled bank lending overnight, and introduced a $580bn stimulus programme. Worth 13% of GDP, this alone was far larger than any seen elsewhere.

Doubling bank lending to $1.4trn, equal to 1/3rd of GDP, carried its own risks, of course. Inflation is now rising quite sharply, with a jump to 4.4% last month. Whilst premier Wen Jiabao warned in September that stabilising house prices was the "key responsibility of all levels of government".

Now the government has moved to stop all further bank loans to the property sector until the end of the year. According to the Housing Ministry, "China's four biggest State banks have used up their full-year credit quotas for property developers and will stop extending new loans to them".

Originally, the government had set a lending target of Rmb7.5trn ($1.1trn), down 20% from 2009's record level. But as the chart above shows, lending had already reached Rmb 6.9trn by the end of October. So the halt is clear evidence of its mounting concern. It is also apparently discussing a further 20% cut in 2011's lending, to Rmb 6trn ($0.9trn).

Rapid expansion of credit usually seems to work well at first in stimulating demand, as we saw in the USA in 2003-7. But as Warren Buffett warned in 2008, "you only see who's been swimming naked, when the tide goes out".

China's leadership has a difficult balancing act ahead, as it seeks to stabilise inflation and housing markets whilst maintaining economic growth.

The US Fed's new QE2 Lifeboat programme designed to raise asset prices got off to a bad start last week, with most stock markets falling, rather than rising. It has also begun to run into major opposition from advisors to the new Republican-dominated Congress, with an open letter published Monday in the Wall Street Journal and New York Times that suggests:

"We believe the Federal Reserve's large-scale asset purchase plan (so-called "quantitative easing") should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed's objective of promoting employment."

Equally, the above chart from the American Chemistry Council (ACC) weekly report shows diverging patterns of economic growth across the major economies. It notes that the OECD's main Leading Indicator for the world economy (blue line) is now slowing quite fast. And the ACC add that the leading indicators for

"Brazil and China continue to point strongly downwards, edging below the long‐term trend and implying that the level of industrial production will fall below its longer‐term trend in these two economies."

Creating more liquidity, as the Fed plans, does not do anything to tackle these key issues. In the meantime, by having caused oil and other commodity prices to soar, it has created added uncertainty as regards chemical industry prospects for 2011.

All is clearly not well with the Western consumer. The stimulus programmes have not given them renewed confidence about the future. Instead, they are focused on the prospect of higher taxes and rising unemployment.

Two examples make this mood change very clear:

• As the above slide shows, EU auto sales are falling off the charts. They were down 17% (red line) in October, normally a strong month. Equally concerning were the massive declines in the 5 major markets: France down 19%, Germany down 20%, UK down 22%, Italy down 29% and Spain down 38%.

• In the USA, Wal-Mart, the world's largest retailer, saw its same-store sales fall for a 6th consecutive quarter, down 1.3%. This is unprecedented. In response it is launching what promises to be a bitter price war, declaring that it intends to "be the price leader this holiday season". Similarly, US housing starts fell to just 519k, back to April 2009 levels, in spite of record low interest rates.

The blog fears that the consensus Base Case Scenario for 2011 is already starting to look quite optimistic. If it was still running a major business, it would be strongly tempted to revisit the Downside Scenario outlined last month in its Budget Outlook, and re-check how this might impact expected performance.

A decade ago, the blog was one of the pioneers of eBusiness as ChemConnect's VP Europe/Middle East.

And it has retained its interest in the power of the internet to radically change business models.

So it was very pleased to be invited by its old friend Colin Skellett, chairman of YTL Utilities (UK), to the launch of YES, the world's first converged 4G service.

In a sign of the growing importance of emerging economies, this involved Malaysia's YTL, rather than one of the Western companies. But it will hopefully come to prove very disruptive to their established business models. The key factor is that YTL are a new entrant into the Malaysian market, so they have no existing business to defend.

Instead, they offer mobile phone and broadband coverage in one bill on a 'pay as you go' basis that requires no SIM card. International calls can also be made at local rates, with video links via PC included. And its free Yes Life feature enables address books to be accessed via phone or PC.

YTL's Silicon Valley style launch thus claimed to be offering a new type of mobile service, combining the best features of the iPhone, Skype and other innovators. Sadly, for the moment, it is only available via Malaysia.

But hopefully either YTL, or others, will find a way of offering it more globally. As with eBusiness in the chemical industry, once you've seen it, you don't want to go back to the old model.

In one of its first posts, at the time of the ill-fated Access deal for Lyondell in July 2007, the blog highlighted the strange divergence that had developed between the front pages of the newspapers, and their business coverage:

"If you read the financial pages of your newspaper, everything sounds rosy. But if you turn to the news section, its all gloom. Both views can't continue to exist alongside each other for ever. Whichever scenario comes out on top, will have major implications for the chemical industry. My own view is that this week's Access deal for Lyondell will be seen, in hindsight, as marking the top. "

Today, the same disturbing trend has returned.

• The €90bn ($125bn) Irish bailout, for example, is very clearly bad news. As the blog noted back in May, Europe's banks have lent $495bn to Ireland, more than twice the €182bn at risk in Greece. And, of course, next in line are Spain (€792bn) and Italy (€961bn).
• Equally, the US housing markets remains very difficult. Already the government has committed $188bn to keep the two main lenders (Fannie Mae and Freddie Mac) alive. And there are few signs of any real improvements as we head into the seasonally difficult winter months.
• Plus, most importantly of all for chemical demand, China's economy is moving into an enforced slowdown, as the government worries about soaring inflation - up from 3.6% to 4.4% in just one month. Price controls are likely on key foodstuffs, whilst interest rates have already begun to rise to cool the real estate bubble.

Yet the financial pages are full of optimism about the economic outlook. Most remarkably, there seems a consensus that interest rates will need to rise dramatically. Almost all commentators warn that inflation is about to soar, due to the strength of the economic recovery now underway.

As in 2007, the blog begs to differ. The chart above, from the New York Times, shows the parallel between Japan's core inflation rates (green line) after its housing bubble burst in June 1991, and US inflation (blue line) since its housing market peaked in June 2006.

October's US core inflation was a record low of just 0.6%. The previous low was 0.7% in February 1961. And, as always, the blog believes that the major retailers are a far better indicator of what is happening in the real economy, than financial markets. Thus it believes Wal-Mart's announcement that it intends to follow a "price-leadership" strategy virtually guarantees US inflation rates have further to fall.

If Wal-Mart are right, then financial markets must be wrong in their assessment of the underlying state of the US economy. And in turn, this has critically important implications for chemical companies. Lower oil prices, and destocking down the value chain, are serious risks if today's sunny optimism in financial markets starts to be seriously challenged.

Q3 showed no real improvement in European cracker operating rates (OR%). As the chart shows, based on APPE data, these remained at 82% for the Q1 - Q3 period. Of course, this is much better than the 76% OR% seen in 2009, but it would not normally be a matter for celebration.

However, the 'silver lining' identified by the blog back in August has continued to support margins. EU refinery operating rates remained low because of the increasing gasoline surplus. And so there was little pressure to increase cracker operating rates. In addition, there were further force majeures, helping to restrict over-supply.

However, the latest IEA data on refinery OR% indicates these are now rising. This would make sense, as Europe's refineries are primarily diesel-driven, and so rates usually increase as winter approaches. The scale of refinery operation dwarfs that of petchems, so producers will have to remain on alert for relatively small changes to have a major impact on their business.

But for the moment, the silver lining remains very welcome.

China's government tends not to like surprises. Its usual tactic is therefore to talk about policy changes well in advance. And this is what seems to be happening with regard to the real estate bubble.

Back in September, premier Wen Jiabao said it would probably take 2 - 3 years to cool the bubble properly. Now a new report from Beijing's Renmin University of China, prominently reported in the national media, warns property prices will "decline almost 20% next year, due to continuous government cooling measures on the nation's red-hot real estate market".

Talk has also been accompanied by action in terms of rises in bank reserve requirements and an interest rate rise. More measures are undoubtedly on the way. Equally, the central bank clearly warned back in July that "China's future economic growth will definitely gradually slow down", as it moves to "carry out structural adjustment and transform our development model".

Already, as the chart above shows, the impact of existing government measures has caused the OECD's leading indicator for China to forecast growth will go below its long-term trend (100). Those hoping for continued high growth rates next year are therefore effectively arguing the government will fail in its central policy objective. To the blog, at least, this looks an unlikely outcome.

The obvious is rarely a winning strategy in commodity markets. Too many players have inside knowledge to allow anyone to profit from their own position.

But now and again, interesting trends do emerge from following how the major players are positioning themselves. Thus the above chart from Petromatrix provides a valuable insight into the different views being taken on oil markets by the Swap Dealers and the Large Speculators.

As it shows, the net length taken by Swap Dealers (green line) is now at a record low. These are the commercial dealers (eg Goldman Sachs), who have recently been producing daily reports forecasting $100/bbl crude. But they also act for the commercial players - the major oil companies. And so it seems most likely that it is these who have been hedging forward their positions.

Thus almost uniquely, the Large Speculators (red line) now hold all the net length on the US futures markets. These are hedge funds, who have been busy buying crude oil on the famous 'correlation trade', arguing that a lower value for the US$ means higher commodity prices as a store of value.

Initially, their buying caused the recent 7% rise out of the 'triangle shape'. But prices then drifted lower, as producers decided to lock in $80/bbl. And as Petromatrix note, this could cause problems for the Speculators, as producers may not simply close winning positions for a small gain.

The Speculators will clearly continue to try to push prices towards their beloved $90 - $100/bbl range. But if they fail, and prices start to move towards $70/bbl, then there is a clear risk the hedge funds will panic, and in so doing take prices down towards $60/bbl.

Attendees had a fascinating two days at our annual European Aromatics & Derivatives Conference in Berlin this week. As always, it was co-organised with ICIS, and featured a strong list of speakers:

Sven Royall, VP at Shell Chemicals, put forward an optimistic outlook for benzene derivatives. He argued that substitution of PS by PP had plateaued, which should encourage styrene volumes, whilst EPS and polycarbonate should continue to do well.

Ralf Kuhlmann, formerly ExxonMobil Business Director, Hydrocarbons, argued that Europe still had a good future in petrochemicals, but needed to adapt its plants to cope with more volatility in market conditions. The ability to run profitably at lower operating rates would be a critical success factor in future.

Matt Chadwick, managing consultant with Wood Mackenzie, said the 'golden age' of refining had now passed, with Europe now likely to have an advantage over refineries in the USA due to its greater focus on diesel.

A number of speakers focused on the problems facing the styrene business:

• Andrew Jones, Dow's global business director for aromatics, explained how they had come to the decision to sell their styrene business, whilst Jeff Denton, VP feedstocks for Styron, highlighted the key strategies being implemented by the new company.
• Piet Vermeersch, styrene business manager for TOTAL, explained that integration would be key for future styrene profitability, as current production economics were not sustainable.
• Hans van der Kaaij, co-products director with LyondellBasell, argued that producers needed to take on more of an advocacy role with regulators.

In the C8 area, Gianluca Girardi, sales manager with Polimeri Europa, discussed the constraints involved in running the business in Italy. Alastair Hensman of Nexant put forward an optimistic overview of the global outlook for the polyester chain. Antonello Ciotti, commercial director of Equipolymers, outlined the issues with recycled PET and the need to work closely with the brand managers in consumer products companies.

Finally, Yu Jing of China's National Planning Institute, discussed the major new aromatics capacities planned for the 2011-16 period, and said the government's aim was to balance supply and demand, and to expand further into downstream derivatives. This clearly has major implications for current exporters to China.

Benzene markets have become increasingly volatile over the past few years. This is because there are now no major sources available of on-purpose supply, to balance demand.

My speech at our Aromatics Conference in Berlin last week highlighted the changes that had taken place. Over the past 2 years, benzene spreads versus naphtha had fluctuated between minus $100/t and plus $400/t. Whereas historically, spreads had remained in an $80 - $200/t range, as on-purpose hydrodealkylation units (HDA) had supplied up to 20% of demand, and been able to balance the market.

The YouTube interview with ICIS's Elaine Burridge highlights the key points, and the problems being caused for styrene markets by current tight supply conditions. It argues that the changes underway in gasoline markets offer consumers the chance to achieve a new balance, based on potentially distressed feedstock availability.

The chemical industry has been one of the great beneficiaries from globalisation over the past 25 years.

Today, it is hard to remember just how restricted markets used to be. Tariffs often applied within Regions, as well as between them. In his early years as a product manager, the blog would often spend days trying to find the optimal cost and routing for a shipment.

Sadly, the continuing economic downturn is starting to take us back to those times. Many major countries are now trying to depreciate their currencies against each other, to gain export business. This is disruptive on its own, as it makes planning very difficult. Equally, duty barriers have begun to reappear.

Last year, China imposed duties on US nylon suppliers. Then, in the summer, it imposed them on long-standing suppliers of PTA in S Korea and Thailand. And just to prove this is part of a trend, India has now confirmed its decision to impose 6.5% duties on Saudi polypropylene.

Most governments have now moved away from the stimulus programmes agreed at the G-20 Summit in April 2009. Instead, Western economies are more worried about rising debt levels, whilst emerging economies are concerned about rising inflation and asset price bubbles.

The leadership of the chemical industry, with the exception of the Gulf Petrochemical Association, has been strangely quiet on this key issue. The blog hopes they will begin to raise their voices, before the trend becomes irreversible.