Chemicals & The Economy

A month ago, the blog suggested that chemical companies would "report excellent results for Q1". Its regular quarterly round-up, below, shows this expectation has been confirmed.

The blog was also pleased to see Huntsman CEO, Peter Huntsman, warn about the growing risks from high oil prices, unemployment, and economic fragility. As it noted last month, the history of the past 40 years shows high oil prices have always led to:

• An initial boom in volumes/margin as buyers rush to secure supplies
• Then a period of severe destocking, once oil prices stabilise

Sadly, many analysts only focused on the immediate short-term benefits. Some even upgraded their forecasts, on the assumption that good times are here to stay. The blog hopes they may prove correct, and that 'this time is different', but would not invest its own money on this basis.

Akzo Nobel. "Pricing and cost reduction actions are ongoing to mitigate the impact of higher prices".
Arkema. "Acceleration in the group's growth and its ability to pass on raw material cost increases through sales prices".
Ashland. "Our pricing actions enabled us to maintain overall margins sequentially despite a significant increase in raw material costs".
BASF. "What we have now on our books gives us some visibility for the next two months".
Bayer. "Expects to be able to pass on the raw material cost increases to its customers by raising selling prices."
Celanese. "Strong demand, combined with excellent execution of our strategies, more than offset rising material costs".
ConocoPhillips. "High olefins and polyolefins margins".
Dow Chemical. "Significant sales increases across all geographies and all operating segments through rigorous price and volume discipline".
Dow Corning. "Q1 profits were softened by sharply rising materials and energy costs".
DSM. "Improvement down to the company's focus on innovation and its global customer base".
DuPont. "Our science-powered innovation, keen focus on customers and disciplined execution contributed to delivering outstanding results".
ENI. "Improvement in product margins, mainly in the olefins business".
ExxonMobil. "Record chemical performance though volumes fell 3%".
Huntsman. "Express caution regarding the macro-economic conditions of high oil prices, stubbornly high unemployment rates, and the fragility of the US and European economic recovery,"
INEOS. "Monthly olefin pricing ensured the recent increases in raw material costs were passed on fully in the quarter".
LyondellBasell. "Margins increased in nearly all businesses despite significant raw material pricing pressures".
Methanex. "Demand continues to be strong and industry conditions remain relatively balanced".
Occidental. "Profits surged due to strong export sales, high margins and lower energy costs".
Olin. "Expected Q2 to be better than Q1, reflecting continual uptrend in pricing and sales volumes".
Orlen. "Macroeconomic factors connected with the increase in petrochemical margins".
PetroChina. "Offset any losses from the impact of high and volatile crude oil prices by leveraging fully into its refining and chemicals operations".
PPG. "Construction activity in developed regions remains low with no signs of imminent improvement".
Reliance. "Earnings and sales increased by 18%".
Rhodia. "Global economic growth should remain strong throughout the year, driven by sustained demand especially in fast growing countries".
SABIC. "Q1 profit jumped 42%, due to increased production and sales volumes, and an improvement in sales prices".
Shell. "Realised higher margins and sold more volume".
Sherwin Williams. "US domestic demand remains soft".
Sinopec. "Oil rose continuously, and domestic demand for natural gas, refined oil and chemical products grew steadily."
TOTAL. "Improvement was driven mainly by the improvement in the petrochemicals environment".
Westlake. "Abundant supply of shale gas production makes US ethylene derivatives globally competitive".
Yara. "Improved fertilizer prices linked to tight agricultural markets have more than compensated for increased energy costs from last year".

They don't ring bells at market turning points. Otherwise, we could all retire to the Bahamas.

But there is growing anecdotal evidence, from chemical buyers and the main retailers, that we may have reached at least a temporary market peak. And Brent crude oil has been stable for 4 weeks at $125/bbl.

Equally, since 1970, sustained periods of oil prices above $50/bbl in real terms ($2011) have always led to economic downturns. Some may hope that 'this time it may be different', but the blog prefers Einstein's famous phrase that "the definition of insanity is doing the same thing over and over again and expecting different results".

Therefore the blog is launching its Downturn Alert. This shows the percentage change in prices recorded by ICIS pricing since the start of the year in 4 main markets: Brent crude oil; benzene in North West Europe (NWE); high density polyethylene blow moulding grade exports in the US Gulf (HDPE USG); terephthalic acid imports to China (PTA).

As one would expect, the first report shows a mixed picture:

• Brent prices (red dotted line) are up 32% from $95/bbl
• HDPE USG (purple) is up 31% at 74.5c/bl ($1642/t)
• Benzene NWE (orange) has rallied, but is only up 13% at $1310/t
• PTA China (blue) has fallen since March, and is up just 4% at $1330/t

HDPE seems the most optimistic market, as its jump last week means it has matched the rise in Brent. But ICIS pricing report that "spot exports are becoming decreasingly viable" versus supplies from the Middle East, China and South East Asia. The price move therefore seems more supply-related than consumer-driven.

Equally, the failure of both benzene and PTA to pass through the latest rise may turn out to be particularly significant:

• Benzene prices have jumped 375% since January 2009, versus Brent's 175% rise. But benzene is now down $85/t versus its February peak.
• PTA China prices have been falling steadily since March, and are now $200/t lower at $1330/t.

Markets, of course, have a habit of surprising. But as we saw most recently in 2008/9, the combination of destocking with a downturn in final demand, can have a devastating impact on the chemicals industry. Thus the blog will keep a close eye on developments in coming weeks.

Most economists still expect a major recovery in US housing markets. This would be very welcome for chemical companies, as housing represented a $35bn market as recently as 2006, when 2.2m new homes were built.

But the above chart suggests they may be over-optimistic. It comes from Yale's Prof Robert Shiller, who co-founded the authoritative S&P Case-Shiller US house price indices. Originally published in 2005, at the height of the boom, in his famous book 'Irrational Exuberance', it shows US home prices in real terms ($2010) since 1890.

The parabolic rise from $116k in 1999 to the $198k peak in 2006 is clearly most dramatic. Since then, it has fallen back to $124k at the end of 2010. This is in spite of major Federal government support in the form of tax incentives etc. And as Barrons, the US investment magazine, notes:

• 23% of home owners (11.1 million) are now in negative equity, where their home is worth less than they paid for it
• There are 3.5 million homes on the market, and 2 million homes either in foreclosure or behind on payments
• Banks are increasing the foreclosure rate, and Barrons suggest as many as 8 million homes may be threatened in total.

A new analysis by ICIS' Joe Kamalick suggests that "the glory days of the 2003-2006 boom are likely gone for ever". He suggests a long-term trend towards renting, rather than owning, may now be underway. From the evidence of the Shiller chart, he may well be right.

Financial markets have been fired up over the past 2 years via the arrival of high volume computerised trading. This now dominates market action. And until recently, the US Federal Reserve was happy to finance this activity, via its $600bn QE2 programme.

The Fed's aim was to generate inflation, and so avoid the risk of following Japan's deflationary path since 1990. 'Making sure it doesn't happen here' was, after all, the title of the speech that catapulted current Fed Chairman, Ben Bernanke, into the limelight in 2002.

But, of course, the Fed also has a specific mandate to control inflation. And politicians know that voters become upset when energy and food prices get out of control. Thus it seems unlikely that the Fed will be allowed to proceed with QE3, when QE2 ends next month.

Significantly, therefore, we are now seeing the first divergence in 2 years between stock market performance and that of crude oil. As the chart shows, the main US stock index, the S&P 500 (red line), has failed to follow Brent crude oil (black line) higher since March.

The divergence is now quite striking. Brent is up 50% since January 2010, whilst the S&P 500 is 'only' up 23%. This suggests that equity investors have already begun to recognise that something very important may have changed in financial markets.

If it has, and liquidity is really going to be withdrawn, then crude oil prices could end up very much lower, as traders exit the market. As the blog warned back in October - once the QE2 Lifeboat 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.

US auto sales remained stable last month. As the chart shows (red line), they were just above the 1.1 million level. Until the Crisis began in 2008, this was the minimum level for monthly sales, but now it seems to have become more of a maximum.

Beneath the surface, some other significant changes are underway:

• As GM noted, "consumers are continuing to rethink their vehicle choice". Sales of cars with greater fuel economy, coupled with some style, continued to lead the market.
• Buyers of pick-up trucks are also trading down as gasoline prices rise, with V6 engines being preferred to the traditional V8
• The average age of the auto fleet is now over 10 years, a record
• Japanese manufacturers faced production issues due to the earthquake/tsunami damage, and Toyota's sales were actually lower than a year ago

The combination of a push towards compact autos, and fewer Japanese vehicles, meant companies could reduce incentives. These fell $250 from March to $2118. Even GM, still focused on volume after its Q4 IPO, reduced them by $300 to $3016.

Cracks have begun to appear in commodity markets as QE2 ends.

Crude oil has now fallen $12/bbl on demand worries since the blog suggested a top might be close. And the Wall Street Journal has confirmed that the super-computers who have driven prices skyward, are now beginning to retire from the party.

This builds on recent evidence that chemical buyers feel less need to panic-buy in front of expected higher prices. Equally, the recent divergence between US WTI crude oil prices and natural gas is also starting to come under pressure.

On an energy content basis, WTI should trade at ~6 times gas. As the chart shows:

• Between 1986 - 2008, the ratio averaged 9.9
• This can be explained by the fact that oil is more flexible to use
• But since 2009, the ratio has averaged 18.5

Nobody has been able to explain to the blog why this ratio has doubled. Of course, shale gas has vastly increased potential US gas reserves. But US gas supplies have been in surplus over most of the past 30 years.

Equally, there is no shortage of crude oil. US inventories are near record levels, whilst global stocks are also comfortable. And demand destruction is clearly underway around the world, as a result of today's artificially high prices.

Of course, the high ratio has been wonderful news for the US petchem industry, as the blog will discuss on Tuesday. But more recently, this has led to a sense of euphoria, manifested by a number of announcements about new cracker expansions.

One of the great investment maxims is "If it looks too good to be true, then it probably is". The blog therefore believes that today's WTI ratios to natural gas are likely to prove transient.

It would be happy to discuss this argument with any company Board debating a cracker investment based on the opposite assumption.

There has been a dramatic shift in cracker feedstocks in the USA over the past 2 years, as crude oil prices have risen. Many US producers have been able to switch to ethane feed, and as a result have become some of the lowest-cost ethylene producers in the world.

As the chart* shows:

• In 2006, 47% of US ethylene came from ethane (blue column) and 31% from naphtha/liquid feedstock (light green)
• By Q4 2010, this had become 65% from ethane, and 16% from liquids

This has enabled the USA to become a major polyethylene and PVC exporter over the past two years, helping to compensate for the downturn in domestic markets.

Equally, the NPRA data on which the chart is based, suggests that those crackers still using liquid feedstocks have shifted towards gas oil, to maximise propylene and butadiene yields. Prices for these products have risen above ethylene's for the first time in history, as the blog discussed last July in its major series on olefin market developments.

Will this nirvana continue? Clearly new investments will be needed if ethane usage is to increase further. But would these still be attractive if the WTI/natural gas ratio returns to more normal levels? And where will the ethylene go, now China is reducing its US imports?

Its been a truly fantastic 2 years. But the blog somehow doubts that today's boom can continue indefinitely.

*Thanks to the hardworking experts in the ICIS Intelligence team, and the blog's IeC colleague Bob Townsend, for the above chart, based on NPRA data

There seems little doubt that China is increasingly worried by rising inflation.

The latest sign is Unilever, the giant consumer products company, being fined $300k (RMB 2 million), for discussing plans to increase prices due to higher raw material costs.

Those who can remember the US WIN (Whip Inflation Now) programme, or the UK's Prices and Incomes Board, will know what happens next.

Shortages will develop as companies refuse to sell at a loss. And China's position may be worse than the USA/UK's, as its army of small stallholders may instead start selling on the black market.

The incident also highlights worrying aspects of consumers' buying behaviour:

• Many supermarkets saw shelves cleared of soap, detergent and shampoos, as shoppers rushed to stock up before prices rose.
• This is the same pattern seen recently amongst chemical buyers, who have panic-bought in order to secure supplies as oil prices rose.

It therefore appears that inventories are well above normal, all along the value chain, even in China. This makes the blog question yet again, the widely held belief that the recent combination of higher prices and strong demand indicates a robust global economy.

Update: China reported today that inflation slipped slightly to 5.3% in April, whilst food price inflation stayed worryingly high at 11.5%.

The blog launched its Downturn Alert last week, since when we have seen dramatic moves in oil markets.

These may well lead to a slowdown in chemical orders, as buyers now have no need to secure supplies ahead of price increases, and may instead start reducing inventories to more 'normal' levels.

• Brent (dotted red line) is now up 24% since 1 January, versus 32% a week ago
• Benzene NWE (yellow) is up 14% versus 13%
• HDPE USG (purple) is up 25% versus 31%
• PTA China is back at 1 January levels, versus up 4%

The PTA move since the end of March is highlighted on the chart, as it may turn out to be a leading indicator for other products.

ICIS news also reported the following comments from a European PE trader on the new mood in the market:

"Suddenly there is much more availability in the market. Although producers might not be under so much pressure to sell, resellers are pushing volumes and cutting their losses. Buyers sense it, and so they wait. We offer reductions of €30-50/tonne to consumers, and they still want to wait for another few days before they buy".

The blog was very interested to see a recent ICIS interview with Torsten Penkuhn, BASF's petchem head in Asia, by Will Beacham. Penkuhn noted:

"We are more and more concerned at BASF about an increasing risk of overbuilding once again. We currently see a risk that people are becoming too ambitious, enthusiastic and optimistic. And that could lead us to where we have already been in this industry.

"Industry has a responsibility to look at cycles as man-made: we create them, they are not thunderstorms. I feel optimistic that people are able to learn from the past."Penkuhn was much more cautious than Dow about the short-term outlook in China, noting that:

"Underlying GDP growth in China is around 9%, with chemical industry growth perhaps into double digits. But if you look at Q1 results, you see 15-20% sales growth. So there is an underlying speculative element which comes from an anticipation of shorter availability of credit. There has been some pre-production by people worried about their credit lines being withdrawn."

Penkuhn also seems to share the blog's view that government efforts to control inflation will have a negative impact on China's manufacturing growth. "They cannot have inflation above 5% and they need to cool their economy".

A thousand years ago, the Viking King Canute had himself carried into the sea by his courtiers. He was the most powerful king of his time. But by showing that he could not turn back the incoming waves, he hoped they would understand that he was not all-powerful.

This is a lesson still to be learnt by European policymakers, including those at the European Central Bank (ECB). They continue to try to turn back the tide of debt restructuring in Greece, Ireland and Portugal.

Thus the EU Commission has told the European Parliament that Greece must not restructure its debts, because this would have "devastating implications" for Greece and the euro area. Whilst the ECB has said it would be "political suicide which would lead to poverty".

But if Greece clearly cannot repay this debt, pretending it cannot happen, helps nobody. Have policymakers not learnt the lesson from US Fed Chairman Ben Bernanke's experience, when he said in July 2007 the sub-prime crisis would only cost $100bn?

The problem, as the blog discussed back in December, is that the EU cannot have monetary union without fiscal union. Hopefully, the current talk from policymakers is just a smokescreen, whilst they develop a proper action plan. But if it isn't, and they really believe they can turn back the tide, then markets might have an very unpleasant shock ahead.

The blog is delighted to announce the title of its new eBook, jointly authored with fellow blogger, John Richardson.

It explains how Western BabyBoomers are changing chemical demand patterns, again. We believe it will become vital reading for all those working in the global chemical industry.

The first chapter of the book will be published online by ICIS next week. John and I look forward to bringing you more details then.

The CEO of ExxonMobil, Rex Tillerson, has provided powerful support for the blog's long-held view that oil prices are well out of line with fundamentals. He told the US Senate that:

"If you said: 'If I had access to the next marketable barrel, what would it cost?', its going to be somewhere in the $60 to $70 range".

Ironically, of course, the reason for today's high prices is the US government, in the shape of the Federal Reserve's $600bn QE2 programme. As the above chart from the excellent Petromatrix consultancy shows, there is a very close correlation between:

• The major increase in the Fed's POMO (Permanent Open Market Operations) activity - blue line, left hand scale
• The rise of speculative open interest in WTI futures - yellow line, right hand scale

As QE2 is coming to an end, this support is now waning. It is probably no coincidence, therefore, that crude oil prices seem now to have peaked.

What happens next is, of course, the key question. But the blog is a great believer in the fundamentals. It also has great respect for ExxonMobil's judgement. $60/bbl crude therefore looks like a reasonable next step, unless geo-politics or the Fed intervene again.

Q1 results were very good. But do they mean we are in a SuperCycle, as some analysts have suggested?

In a major 3 page article for this week's ICIS Chemical Business, the blog looks in detail at the risk from developments in China, Japan, the debt crisis and high oil prices.

It concludes that the outlook is most uncertain, and recommends that chemical companies develop robust contingency plans, in case H2 disappoints.

Please click here if you would like to download a free copy of the article.

Consumer giant Reckitt Benckiser sell major brands in 200 countries around the world. CEO Bart Becht's views on the current state of the retail market are therefore very troubling:

"In Europe, the situation continues to be very, very weak. In North America, it also continues to be rather weak. It is marginally better than it was maybe a couple of months ago, but it is not good enough in order to call it that we have a recovery. It is way too early for that."

Two years ago, the blog began to survey global stock markets on what turned out to be the day they began their major rally.

Its end-April launch of Downturn Alert may prove similarly fortuitous. Since then (shaded area), Brent crude oil is down 8%. Similarly naphtha is down 11%, benzene down 2%, HDPE 6% and PTA down 9%.

The chart shows prices since 1 January:

• Chinese PTA prices (blue line) are now 5% below January levels, after what ICIS pricing described as "panic selling" on Thursday.
• Brent (red dotted line) and HDPE USG (purple) are falling together, having risen together.
• In Europe, ICIS pricing reports on benzene that with "cheaper feedstock available, reformers are being run harder, which means that there is more material available".

Clearly buyers will no longer be rushing to secure supplies, with these price movements taking place.

It is still too early to be quite certain, but the blog's feared downturn is probably now getting underway. If it was still running a major chemical business, it would be asking the management team to check that the contingency plan is as robust as possible.

Japan's ageing population has led to slow economic growth for many years. It has battled for years to try and boost domestic demand, with only limited success, as the chart of GDP growth from the Wall Street Journal shows.

Occasional bursts of growth (green column) are only followed by more red ink. Thus the economy was already slipping back into recession in Q4 last year. Now, of course, the Disaster in March means any recovery will be further deferred.

Q1 GDP fell by 3.7%. And even the Economy Minister is only hoping for 1% GDP growth over the year to March 2012. Both consumer and business spending were down, and there is little sign yet of any stimulus from reconstruction.

Instead, the downturn is likely to intensify during Q2, as inventories are run down. And until power supplies return to some kind of normality, the rebuilding process will be very slow.

EU auto sales have been a two-speed market recently. Strong growth in Germany, France, Benelux and the Netherlands kept sales moving forward versus 2010 levels. But other key markets, including the UK, Spain and Italy have been weak.

April's sales suggest that this period is ending. But, as the blog has feared, the new trend is one of growing weakness, not a more general recovery. Only Germany, up 3%, saw increased volumes versus 2010.

As the chart shows, the overall market (red line) was down 4%. At 1.1 million, they were the weakest April volumes for many years:

• Spain remained very weak, down 23%
• France was down 11%
• The UK was down 7%
• Italy was down 2% versus its poor 2010 level

Of course, May/June may see better volumes, before people head off on holiday. But it is still likely we are at the start of a new multi-year trend.

Europe's ageing BabyBoomers, as we discuss in our new eBook Boom, Gloom and the New Normal, will probably need fewer new cars in future. Equally, their finances will be squeezed, as austerity programmes get underway in more and more countries.

Today, the blog is proud to publish the first Chapter of its new eBook:

'Boom, Gloom and the New Normal: how Western BabyBoomers are changing global chemical demand patterns, again'

It is co-authored with ICIS' John Richardson of Asian Chemical Connections.

A new chapter will be published each month. Please click here for Chapter 1. We hope this will help to build discussion about its key messages.

These are as follows:

• It is most unlikely that we will quickly return to the Golden Age of chemical consumption between 1990-2008
• This was driven by the enormous purchasing power of the Western BabyBoomers (those born between 1946-70)
• They were the richest, and largest generation that the world has ever seen. But they are now moving into the 55+ age group, when people typically save more and spend less
• This is already impacting key sources of chemical demand, including housing and autos. These will not recover to previous peaks
• Equally, the age of outsourcing production to the emerging economies is also coming to an end
• Western demand is reducing, not growing, so there are no longer any capacity constraints to be overcome
• Instead, Western and emerging economies need to adapt to the New Normal, and its very different demand patterns

The eBook argues that the next wave of global growth will not be a simple replica of the past 25 years. Instead, it will require major innovation in business models and technology.

The industry will need to develop a sustained focus on key megatrends such as increasing food supplies, water availability and life expectancy, whilst reducing carbon footprint.

These represent major challenges. But the industry faced similar challenges in the 1970's, and overcame them to launch the Golden Age.

We hope the new eBook will prove valuable for everyone currently working in the global chemical industry. Please click here to download a free copy of Chapter 1. John and I look forward to your comments.

US housing used to be one of the largest chemical markets in the world. In 2006 it was worth $35bn, with 2.2 million new homes each using $16k of chemicals, according to American Chemistry Council (ACC) estimates.

Yet as the chart above shows, it has completely failed to recover since the financial crisis began:

• Last month, housing starts (purple) were just 523k
• Building permits (red) were only 575k

Yet April should be one of the strongest months in the year, as the weather improves and people think about moving home.

These figures prompted an interesting question to the blog from a major investor this week. He asked, 'how can we see a proper recovery in the US economy, if housing doesn't recover?' Its a good question, and one that has so far not been widely discussed.

Instead, most continue to believe a recovery is just around the corner. The excellent ACC weekly report, for example, reports today that the consensus view amongst leading US economists is:

• Housing starts will total 620k this year, and rise 39% to 860k in 2012.
• 6 months ago, however, the same economists forecast 780k starts this year, and 1.44 million in 2012.

This suggests, to the blog at least, that the forecasters are in denial about what is really happening in the housing market. In turn, of course, this raises question marks about likely future levels of US chemical demand.

John Richardson and I set out to tackle this key issue in our new eBook, 'Boom, Gloom and the New Normal', to be published on Monday.

Q1 saw near record margins for European petchem producers. And there was also a scramble for product, as buyers rushed to secure product ahead of feedstock price-related increases.

But this remained a supply-led market. As the chart above shows, based on APPE data, Q1 production (red triangle) was just 5.1 million tonnes. It was slightly above 2010 levels (dark red line), and the dreadful Q1 2009 figure (blue). But it was 7% below the average Q1 volume of 5.5MT between 2003-7.

The reason, of course, continued to be the lack of demand for refinery output. This meant feedstock supply was lower and cracker operating rates (OR%) remained low at 82%. And so the surge of demand did not lead to any increase in production.

But is this situation stable? The blog thinks not. It is the difference between real and perceived demand:

• Real demand is when the consumer feels confident, and has discretionary income to spend on products that contain chemicals
• Perceived demand is when buyers rush to beat price rises, whilst consumers suffer a loss of discretionary income as oil prices rise

The blog was speaking at the World Refining Association's global petrochemical conference last week, and raised this issue during the Q&A. Worryingly, it still does not seem to be widely understood. And yet it means we risk a repeat of the Q4 2008 downturn.

Real demand seems unlikely to increase in the next few months, as austerity programmes start to bite, and the summer holiday season approaches. Thus considerable destocking may well lie ahead, all down the value chain, before current inventories rebalance with real demand.

It is now 4 weeks since the blog launched its IeC Downturn Alert. Since then, as the chart shows (based on ICIS pricing reports):

• Brent (blue dotted line) is down 11%
• Naphtha (red) is down 13% in Europe
• Benzene (green) is down 9% in Europe
• HDPE export (purple) is down 7% in the USG
• PTA import (red) is down 9% in China

These are serious price declines. They support the blog's fears that buyers have now retreated to the sidelines.

Downturn Alert was introduced to provide chemical companies of an early warning of a slowdown, after the euphoria of Q1's excellent results.

Of course, prices may still rally. But for the moment, the Alert is suggesting we may now be at the start of the downturn that has always followed previous periods of high oil prices.

The blog was interviewed today by ICIS' Will Beacham, on the launch of its new eBook 'Boom, Gloom and the New Normal', jointly authored with John Richardson.

Please click here if you would like to download a free copy of Chapter 1.

Plastic waste is an issue that doesn't go away. And, of course, the plastics industry is unfairly blamed for it. After all, the industry does not drop plastic bags on the street, leaving them to go who knows where.

Thus the blog welcomes the above spoof documentary from the Santa Monica 'Heal the Bay' group. Narrated by actor Jeremy Irons, it is modelled on nature documentaries of animal migration in Africa. But instead, it shows the journey of the plastic bag from the asphalt jungle of the US W Coast to its 'natural home' in the Pacific Ocean.

Well filmed, it makes a serious point about how this area of the Ocean, twice the size of Texas, has become filled with floating plastic waste.

China's economy has been on steroids for the past 2 years. Faced with the loss of export sales after the financial crisis began in 2008, the government doubled bank lending overnight (red column above). It also introduced a $580bn stimulus programme (13% of GDP).

This included subsidised sales of electrical appliances, and was great news for the chemical industry. But appliances need power to operate, as do the factories that make them. And building new power stations, plus the necessary transmission systems, can't be done overnight.

Electricity consumption (blue line) has since soared. In H2 2010 it was 26% above H2 2008, and China became the world's largest consumer. But this year, supplies have been running short. April's consumption was up just 11%, after a 2% fall in March, and the government fears shortages this summer may be worse than in 2004.

Equally, the combined impact of the lending and stimulus programmes has been to let the inflation tiger out of the cage. Food inflation has reached 11.5%, for example. This has caused the government to try and put the tiger back in the cage, by clamping down on price rises.

However, just as the blog forecast, this is not easy to do. A long and detailed analysis in the New York Times highlights the impact on electricity.

• 73% is coal-based, where prices are up 20% this year
• But power companies have only been allowed a 2.5% increase
• So they are now cutting supplies, to avoid bankruptcy.

6 provinces are already rationing electricity supplies, with another 5 preparing to do so. The Times also notes that

"Blackouts are starting to slow the nation's torrid growth of energy-intensive industries like steel, cement and chemicals. Unlike garment makers and other small manufacturers, the big factories cannot easily switch to backyard diesel generators....Equally, to support smaller businesses with diesel generators, China has banned exports of diesel fuel to conserve scarce supplies."

So now, the 'virtuous circle' of subsidies and increasing demand is turning vicious. Supply cannot keep up with demand. Equally, this is pushing up China's export prices for the first time in years. They were up 2.8% over the past 12 months.

And, of course, the great lending boom has caused its own problems. China's central bank has just held a closed door meeting with the largest banks, due to its concerns over "government backed loans and the property market":

• Property loans will now have a risk rating of 150%.
• Local government loans will have a risk rating up to 300%
• Even infrastructure will be at 110%

China's growth has been the mainstay of chemical industry demand over the past 2 years. Now we have to wait to see what happens next. And as the blog warned in December, there is an increasing risk that we will find we are in the middle of another 'China boom and bust scenario'.

UPDATE. Today, Tuesday, China announced electricity prices will rise 3%, in an effort to reduce power shortages over the summer. This will increase inflation by 0.5%, but the government had little choice.

The blog is excited about its first New Normal seminar in Frankfurt, Germany next month.

It follows February's successful launch in Singapore, and is being held in association with ICIS, on 16-17 June.

The Workshop aims to provide a comprehensive understanding of the factors that will impact the petrochemical market over the next few years:

• What is the New Normal and how will it change the petrochemical landscape?
• What will it mean for key feedstock and end-user markets?
• What will be the key margin drivers for the market?

The New Normal is being driven by the major demographic changes now underway in the Western world. The BabyBoomers born between 1946-70 led to massive gains in consumption, as they entered the 25 - 54 age group. This is when people typically marry, settle down and have children.

But now, they are entering the 55+ age group, when people normally save more and spend less. This is already having profound effects on demand patterns in autos and housing in the West. Whilst emerging countries now need to replace their export-driven economies with domestic consumption.

Please click here if you would like further details of the course.

Volume is a key driver for chemical company profits. High volume means operating rates increase, reducing unit costs. Companies also gain more pricing power.

But when volume is low, the reverse happens.

Thus the above chart from leading analyst Paul Satchell of Collins Stewart is telling an important story. It shows:

• Volumes were very strong from December, as buyers bought forward ahead of price increases
• But since mid-May, he is seeing "a sharp downturn" as buyers start to destock again down the value chain

Satchell says this trend is common across all 3 major consuming regions, and all 3 major petchem groupings:

• Asia is the weakest region, followed by Europe and the USA
• Aromatics are weakest, followed by olefins and polymers

Satchell concludes that "material weakness is volume has begun", with the most likely cause being destocking. He adds that "there are real risks to actual volumes traded in the short-term".

Satchell's analysis supports the blog's own belief that we are following the path of 1973/4, 1979/80, 1990/1 and 2007/8. As oil prices plateau, we first see buyers destock to a supposedly more 'normal' level of inventory. This will probably last over the summer period.

Then, from September, we may well find, much to our surprise of course, that higher oil prices have actually reduced demand - just as they have always done in the past.

Week 5 of the IeC Downturn Alert saw more stability in the markets. This was largely due to the efforts of the major investment banks. JP Morgan, Goldman Sachs and Morgan Stanley all issued 'buy' notes on crude oil, suggesting prices would soon return to $130/bbl, whilst Barclays said its current $102/bbl forecast was "conservative".

These banks have been active in persuading investors that commodities are a safe investment asset. Their profits would take a hit if this confidence was ever shaken. But as the chart shows, they achieved relatively little 'bounce' in the markets, despite 'wall-to-wall' coverage of their views in financial media:

• Brent (red dotted line) rose only $3/bbl in a quiet market
• Benzene Europe (yellow) fell $7/t and is down 10%
• HDPE USG (purple) was stable, down 7%
• PTA China (blue) fell $9/t and is down 10%

Petchem buyers clearly did not seem to share the bankers' viewpoint.

ICIS news noted in Asia that naphtha "demand is decreasing and the outlook is bearish", adding "its very difficult to find buyers these days". Whilst in polymers, they reported "a loss of buyer confidence and subsequent slowdown in demand (which) appears to have occurred on a global scale, freeing up the availability of certain grades dramatically".

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

Financing deals has become superficially much easier, as 'risk-appetite' has returned. In some areas, the market is more buoyant than in 2007/8.

But buyers are worrying more about the detail of deals. For example, working capital needs are now critically important, with today's high oil prices. Those providing this finance need to manage their risk, by hedging sales forward. They also want to gain greater insight into the detail of the whole value chain, to better understand risks to current and future revenue streams.

Operational excellence is similarly becoming more important, alongside environmental performance. This is opening up a new market for insurers who have the capability to cover these risks on a cost-competitive basis.

In addition, buyers worry about rising political risk in many countries. They often want to better understand likely future government/opposition policies, as well as how media/general population attitudes might evolve.

As a result, deals are becoming more and more bespoke, with all those involved trying to understand and manage the 10/15 key issues that will drive future value.