Boom/Gloom index signals rising austerity

Index Apr11.pngQ1 was a very strong quarter for Western companies operating at the upstream end of the chemicals value chain:

• Plants were generally operating well, with few force majeures
• Most importantly, the crude oil price jumped 20%.

Many buyers had reduced inventory in December for working capital reasons. Then they found they had to restock in a rising market.

The boom is captured in the record reading on the IeC Boom/Gloom Index in February (blue column). But significantly, it fell back to earlier levels in March.

At the same time, the Austerity reading (red line) started to rise again. This highlights the growing number of problems in the global economy:

• December’s US payroll tax reduction has helped to spur some job creation. But rising oil prices have caused consumer confidence to fall at near-record levels.
Japan has not yet solved the nuclear crisis at the Fukushima Daiichi plant. French scientists believe it suffered temperatures of 2750°C (5000°F) around the reactor cores.
China’s economy seems to be slowing, as interest rates and reserve ratios are increased. This is described in detail in John Richardson’s latest post on the Asian Chemical Connections blog.
• The Middle East is seeing continued unrest. Libya is still the current flashpoint, but pressures continue to build in Yemen and Syria.
• And, of course, in the shadows, the financial crisis in Europe is building towards a climax. Greece, Ireland and Portugal are in serious trouble, with Spain next in line.

Companies closer to the consumer are thus seeing increasingly difficult conditions. Wal-Mart, the world’s largest retail group, does not exaggerate. And its CEO is now warning of “serious inflation” as “cost increases are starting to come through at a pretty rapid rate“.

Overall, it is clear we are now facing the same situation as 1973/4, 1979/80 and 2007/8. So we know how this story will end. After the party, comes the hangover. It is a simple fact that the world economy has never yet been able to operate successfully with oil prices at today’s levels.

And as all investors and business people know, the most expensive phrase in the English language is “this time its different”.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

, , , ,

Leave a Reply