Chemicals & The Economy

The IeC Boom/Gloom Index is now 2 years old. It was developed as a measure of market sentiment, and so far its track record has been good:

• It is now at an all-time high (blue column), which mirrors financial market confidence and their belief that chemicals may be in a supercycle
• The austerity measure (red line) remains stable. This suggests, however, that fundamentals have not improved

The original idea of the Index was that sentiment can be as important as fundamentals, as it "tells us what markets think is going to happen next. Sentiment can often contradict fundamentally-based forecasts."

As can be seen, the Index dipped last summer, when it appeared that central banks might withdraw their liquidity from financial markets. But this clearly panicked the US Federal Reserve, who then announced their $600bn QE2 programme in August. Equally, Europe launched its €110bn Greek bailout, followed by further bailouts of Ireland and Portugal.

Since then, markets and the Index have not looked back. So it will be interesting to see whether confidence remains at current levels, with the QE2 programme ending this month, and Greece requiring a further bailout.

US house prices fell 4.2% in Q1, and have entered 'double-dip' territory, having fallen below March 2009 levels, according to the S&P Case-Shiller Index. They are now back to mid-2002 levels. Further falls are more or less inevitable. S&P suggest the 'shadow inventory' of homes is now 52 months at current sales rates, up from 49 months in December 2010.

There are also clear signs that Americans no longer regard housing as a good long-term investment. As the chart from the New York Times shows, home ownership peaked at 69.2% of the population in 2004. It is now down to 66.4%.

The great rally in home ownership came during the 1990's. It coincided with the period when all US BabyBoomers (those born between 1946-70), were in the 25-54 age group. This is when people have most need to buy a house, as they marry, settle down, and have children.

Now, of course, the Boomers are ageing, and the generation behind is too small to easily replace their buying power. We discuss this issue in chapter 2 of our new eBook, Boom, Gloom and the New Normal, to be published at the end of this month.

This downward trend has very serious implications for chemical demand. As the average BabyBoomer is now 53 years old, home ownership levels may well continue to decline. In turn, this implies housing is most unlikely to return to its boom status anytime soon.

China's stimulus programmes have been a major support for the global chemical industry over the past 2 years. In polyethylene (PE), for example, its total demand grew an astonishing 53% between 2008-10, from 11.7MT to 17.9MT.

But now, China's rapid demand growth seems to have slowed. According to Thomson Reuters, China's PE consumption actually fell 1.5% in Q1 versus 2010. This has potentially major implications for global H2 chemical demand.

Also, as the chart shows, PE imports (purple column) were down 14% in January-April versus 2010 (green), based on Global Trade Information Services (GTIS) data. Even more surprisingly, China's PE exports doubled to 168KT. And Sinopec, China's largest producer, is reportedly cutting production for the first time in its history.

The detail of the import data shows the pain has not been evenly spread:

• NAFTA was worst impacted: sales were 198KT versus 522KT in 2010
• NEA was down to 550KT from 662KT
• SEA managed a small increase to 468KT from 424KT
• But the Middle East saw its volumes jump from 871KT to 1MT

The ME-China 'strategic corridor', whereby the ME seeks markets and China seeks energy supplies, is clearly continuing to grow in importance.

Sinopec's cutbacks may be the most significant in terms of their implication for China's economic outlook:

• Its operating rate on ethylene has averaged 101.7% since 2000
• It has never cut back because of low margins

This is because Sinopec is 76% government-owned. It does not focus on profit, and its average EBIT (Earnings Before Interest and Taxes) in chemicals has been just 3.7% since 2000. Instead, it operates as a utility, providing reliable supplies of raw materials to China's factories, and helping to maintain high levels of employment.

Its reported cutbacks, are therefore unusual. They may well be due to lack of demand, combined with the need to produce more diesel to power local generators, as electricity shortages increase - (see earlier post). The fall in imports, and the rise in exports, seems to support this conclusion.

PE markets may therefore be telling us something very important indeed about the current state of China's economy.

Higher auto prices are slowing US demand. As the chart shows, sales in May (red line) were back below the 1.1 million monthly level again. This used to be a minimum in the pre-2008 period. Now, with just a few exceptions, it seems to have become a maximum.

Of course, the rise in May's average price to a record $29,817 will help chemical companies. They need to pass through Q1's feedstock cost increases, if margins are to be preserved.

The continuing shift to smaller, more fuel-efficient vehicles will also help boost demand for plastics and other products. The move to a New Normal is clearly now underway, with Ford, for example, reporting that sales of these were now 27% of total volume, versus 19% in 2010.

But worryingly for short-term volumes, we are likely to see a slow summer period. Unemployment is rising again. Japan's problems are still reducing component supplies, with Toyota not expecting a return to full production before November. Whilst GM noted that price increases meant "consumers clearly sat on their hands".

The major US investment banks saw their revenues from commodity trading jump 55% in Q1, as oil and other prices rose. According to the Wall Street Journal, JP Morgan (which employs 1800 people in its commodities unit), made $750m in Q1, well ahead of its $1.2bn target for the whole of 2011.

The driving force behind these bumper profits was the widespread belief that crude oil and other commodities were going tight. Yet as the above slide from Thomson Reuters shows, oil demand is actually falling in both N America (dark blue line) and Europe (yellow). Whilst Asian growth (light blue) is plateauing.

Thus the latest International Energy Agency forecast suggests average 2011 oil demand will only be 89.2mbd, lower than the Q4 2010 rate of 89.4mbd. Equally they report global stocks at comfortable levels of 58.8 days in March, even though this was peak refinery maintenance season.

Similarly in the USA, the valuable Petromatrix report shows inventories remain near record highs. These have grown by 20mb in the past 4 weeks. At the same time, US demand is continuing to fall. It was down nearly 1mbd over the past 4 weeks versus 2010.

Financial investors now have $410bn in commodity-related assets, according to Barclays Capital. This is double the amount at the 2007 pre-crisis peak. But in the end, fundamentals will always prevail. Absent geopolitics or similar, we are probably at a tipping point.

OPEC, and Saudi Arabia in particular, have much to lose from current prices continuing. These support much greater use of renewables, as Saudi Oil Minister Naimi noted last November, and so pose a real threat to the long-term demand for oil on which Saudi's economy depends.

Chemical companies had to buy forward during Q1 in order to preserve margins. But the downside risk is now instensifying, as markets start to price in the demand destruction that these high prices have caused.

UPDATE: OPEC's meeting today failed to agree the Saudi proposal to lift output by 1.5mbd. Naimi described it as "one of the worst meetings we have ever had". Thomson Reuters reports that "Saudi will now raise output unilaterally".

It is now 5 weeks since the IeC Downturn Alert was launched. The chart above therefore updates the blog's regular review of financial markets, showing how these have moved over the same period.

Most are down around 4%-5%. Russia is the worst performer (down 8%) and Brazil the best (down 3%). But government bond prices (light green column) have risen in the major countries, causing yields to fall, as investors focus on 'return of capital', rather than 'return on capital'.

Petchem markets were relatively quiet over the week, with public holidays in the US/UK, and China's Dragon Boat holiday today. ICIS reporters noted, however, that sentiment continued to weaken.

• Europe. PE, "stocks in Asia and Europe are widely agreed to be at high levels". Olefins, "more risk of a downside than seen previously".
• China. PTA, "persistently weak export of polyester products";
• India. Polymers, "demand in the local PE and PP downstream sector is still looking bad".
• USA. PVC, "global demand has weakened". PE, "traders saying now is not the right time to be purchasing cargo from US suppliers, given the low cost of material from Asia and the Middle East".

The blog will look in more detail at developments in China tomorrow, and in oil markets on Wednesday.

The chairman of the US Federal Reserve, Ben Bernanke, has issued a sober update on the current state of the US economy.

Expressing his disappointment that growth this year "has been somewhat slower than expected", he then listed a number of key problem areas:

• "Supply chain disruptions" caused by the Japan disaster
• "The jobs market remains quite weak"
• "All segments of the construction industry remain troubled"
• "State and local governments continue to cut spending and employment"

And he added that:

"Households are facing some significant headwinds, including increases in food and energy prices, declining home values, continued tightness in some credit markets, and still-high unemployment, all of which have taken a toll on consumer confidence".

The key question for Wall Street was, of course, whether he would indicate that QE3 would now be unveiled. This would pour more liquidity into the markets to support the high speed traders, and their friends on the commodity desks, in pushing oil and other commodity prices higher.

Yet this was always unlikely. The Fed has spent $600bn of taxpayers' money on QE2 since Bernanke launched the concept last August. And even he accepts that the economy is still a long way from full recovery.

After all, as the famous scientist Albert Einstein noted: repeating the same action, and expecting a different result, is a good definition of lunacy.

Between 1854 and 1982, the US economy was in recession for 35% of the time, according to Deutsche Bank research.

But between November 1982 and December 2007, as the chart shows, it was only in recession for 5% of the time, just 16 months in 25 years.

Something very unusual clearly happened during this period. This will be the subject of Chapter 2 of the blog's new eBook, 'Boom, Gloom and the New Normal', to be published at the end of the month.

The blog's view is that this Golden Age was due to the arrival of the Western BabyBoomers (those born between 1946-70). They are the richest and wealthiest generation that the world has ever seen:

• Between 1980 - 2005, 78 million Boomers entered the 25 - 54 age group
• This was a 25% rise from 311m to 389m

25 - 54 is the age when people typically marry, settle down and have children. It is therefore the period of peak demand for housing, autos and electronics. In turn, these drive chemical demand. Each new US home, for example, is worth $16k of chemical sales, and each new auto $2984, according to American Chemistry Council research.

Thus between 1980 - 2005, we got used to the idea of 'pent-up demand'. Recessions almost became opportunities, not problems. Higher interest rates only cooled demand temporarily, and it would bounce back at higher levels when rates were reduced. Companies learnt to set 'stretch targets', to ensure their managers' expectations weren't set too low.

But now the Golden Age has ended. The number of 25-54 year olds peaked at 392m in 2010. Instead, the 55+ age group is becoming the key growth area. Older people typically save more and spend less. And the Boomers have to save more, as they have an extra 10 years life expectancy compared to their parents:

• The oldest Boomer became 55 in 2001
• Since then, their numbers have grown 22%, from 223m to 272m
• By 2020, these will have grown 45%, to 324m

So there will be no more 'pent-up demand'. In fact, as we have seen since the crisis began, even 0% interest rates and $trns of stimulus packages have failed to revive housing and auto markets. Instead, we will probably return to the much shorter business cycles seen before 1982.

Deutsche Bank's work suggests that we should expect to see 3 recessions over the next 10 years, and certainly not a new supercycle or Golden Age. Their 'best case scenario' suggests start-dates in August 2012, April 2017 and December 2021. Their 'worst case scenario' is that recessions start in July 2011, March 2015 and November 2018.

This need not be a disaster for companies, if they recognise what is happening and prepare for it. As my fellow-blogger and co-author, John Richardson, noted this week:

"A few bad quarters should not mean the end of the world for those used to handling downturns. But a valid question to ask, after such an extended upswing, is: "Who in your company has been around long enough to have the experience to deal with a downturn?"

Many Greeks have always preferred not to pay taxes, and to retire in their 50s. This lifestyle was well understood by their new partners when they joined the Eurozone a decade ago, since when German/French banks have happily funded it with support from their governments.

The chart, from the Bank of International Settlements (the central bankers' bank), shows the scale of today's lending. French banks have lent $57bn, and German banks $34bn. Last December, they had $58bn more at risk of default. But in reality, little has been repaid. And Greece now needs a further EU/IMF bailout, after last year's $160bn.

Instead, the $58bn has been transferred to the European Central Bank (ECB). This now has $650bn of exposure to the PIIGS (Portugal, Ireland, Italy, Greece, Spain) - the euro countries most at risk of default.

Major arguments are now underway between the ECB and the German governments about what happens next, but the key facts are clear:

• Greece will remain in "can't pay, won't pay" mode
• Germany will get even more upset about paying Greece's bills
• Private investors will continue to pass their Greek debt to governments
• The ECB will worry about default, and its own stability if this occurs

Of course, the politicians will attempt to defer unpleasant actions for as long as possible. But there is little doubt that Greece will end up in default - if not this year, then certainly by 2013.

A managed default is therefore the priority. As this article from the UK's Daily Telegraph shows, forwarded by a blog reader, an unmanaged default could have very serious consequences for European financial markets.

When the blog launched its IeC Downturn Alert in early May, it noted that "they don't ring bells at market turning points". However, it hoped that the Alert would provide a replacement.

It seems to be doing its job. As the chart above shows, prices for all the products highlighted are now down between 9% - 15%. Financial markets seem also to have peaked, and so the blog is adding data for the US S&P 500 (red dots), as this is the main global index.

The blog fears this downturn may have a long way yet to go.

Policymakers, still very bullish when the Alert was introduced, are now talking of a "soft patch". This greatly minimises the problem, due to a fundamental misreading of future demand patterns. The blog will discuss this critical issue further on Wednesday. This is also, of course, the basis for its new eBook, jointly authored with John Richardson.

ICIS pricing reports highlight the position:

Naphtha Europe (brown dashed line), down 13%. "Market has become increasingly oversupplied this week due to a paucity of buying interest".
Benzene NWE (green), down 15%. Benzene is the blog's most reliable petchem market indicator, and first warned of the 2008 collapse.
PTA China (red), down 10%. "Peak season in China's textile industry has largely ended"; Indian inventories are reported at 2-3 months of demand.
HDPE USA (purple), down 9% . "Prices would need to come down by 10-12c/lb ($220-260/t) to compete with falling prices in Asia/Middle East".
S&P 500 (pink, dotted), down 7%.

These are major declines, especially over just 6 weeks. We are also unlikely to see much improvement over the summer months, so it may be September before we get a chance to properly assess the real state of end-user demand. Unlike most CEOs, the blog is also not optimistic about what we will then discover.

The main event last week was the failed OPEC meeting. The major investment banks, keen to protect their outsize profits on commodities trading, made great efforts to spin this as positive for prices.

But Friday's market action, when prices fell $2.50/bbl, tells us much more about likely future market directions. This is because there is one simple rule for successful oil trading, which is "never bet against Saudi Arabia".

And since the OPEC meeting, the world's largest oil producer has indicated it will increase production by over 10% from recent levels, to 10mbd. This is unlikely to prove a bullish sign for prices.

In turn, destocking is therefore likely to continue down the value chain.

There is worrying evidence that the US may be close to recession.

This may seem unlikely to those who have only known the world of the past 25 years. Between 1982-2007, US recessions were very rare. They took place just 5% of the time, as the wealthy Western BabyBoomers led to a SuperCycle of 'pent-up demand' during any slowdown.

But before 1982, the economy was in recession for 35% of the time.

Now, the US's best forecaster fears it may be close to a new downturn.

Readers may remember that in May 2008, the blog championed Martin Feldstein's view that recently released US GDP data was "grossly misleading". It felt he was in a good position to know, as chairman of the official panel that dates US recessions.

In July 2009, the US Commerce Dept finally admitted Feldstein had been right. The recession had indeed begun in December 2007, as he had said. The Commerce Dept noted that "the first 12 months of the US recession saw the economy shrink more than twice as much as previously estimated". Grossly misleading, indeed.

Now, Feldstein has been analysing the details of the US Q1 GDP report. His conclusions are alarming:

• Q1 GDP growth dropped to 1.8%, from 3.1% in Q4
• "Two-thirds of that 1.8% went into business inventories"
• "Final sales growth was at an annual rate of just 0.6%"
• "The actual quarterly increase was just 0.15%"

Feldstein then goes on to note that "after a temporary rise in March, the economy began sliding again in April". He adds that so far, May's data "are even worse than April's". Equally, the blog's own Downturn Alert suggests companies have been destocking for the past 6 weeks, since oil prices peaked.

It is still too early to be sure that we are entering a recession. But the evidence of the past 40 years would suggest Feldstein is right to worry. The above chart shows US recessions (shaded areas) and the oil price in $2011 terms (red line). A recession followed every time the oil price rose above $50/bbl. This happened in 1973/4, 1979/80, 1990/1 and 2007/8.

Today, as in May 2008, the consensus is ignoring Feldstein's argument. Most companies still have a strongly bullish outlook, and some even believe a new SuperCycle may be underway. But Feldstein was right before, and his new warning deserves to be taken very seriously.

The blog is delighted to be in Singapore next month, for its 5th Asian Aromatics & Derivatives Conference.

It will be the ideal moment to review the challenges facing the industry, and develop plans for H2.

As always, the Conference is being organised with ICIS, and features an excellent line-up of speakers:

Shell's Alexander Farina on the outlook for benzene and styrene
Reliance's Rajen Udeshi on PX/PTA markets
CICCC's Yu Jing on China's economy and plans for the BTX chains
Thai Oil's Pongpun Amornvivat on the South East Asian outlook

In addition, there will be major presentations from Purvin & Gertz, Polarwide, Nexant and ICIS on the prospects for oil markets, the economy, and the major value chains.

The blog will give its views on how to manage a difficult H2, and preview the next chapter of its important new eBook, 'Boom, Gloom and the New Normal'.

Please click here for more details and to register.

The blog continues to worry about signs of a slowdown in China.

Major commodity trader, Glencore, said this week "we see a pullback in China and it will continue". This challenges the views of Dow CEO Andrew Liveris last month, and Rhodia CEO Jean-Pierre Clamadieu - who said last week he saw "no material signs of a slowdown".

Clearly it is still an area where reasonable people can disagree. But this week's evidence on inflation and bank lending seems to support the downside view:

• China's inflation (see chart) hit a new 3 year high of 5.5% in May
• Even more seriously, food inflation was at 11.7%

• Bank lending is finally slowing
• January-May lending was 12% lower than 2010

Food prices matter in a poor country like China. Guangdong is a wealthy province but average wages for a garment worker are just $300/month. Farmers in poorer provinces like Sichuan earn less than half this. Unsurprisingly, social unrest is therefore spreading, with riot police reportedly used in Zengcheng, a Guangdong city of 800,000 people.

China's Academy of Social Sciences forecasts 6% inflation in June, after the energy price rises. And so calls are intensifying to further slow the economy. The central bank raised reserve ratios to a record 21.5% following the inflation news, and clearly more tightening is on the way.

As my fellow blogger, John Richardson has reported, lack of credit is already restricting chemical trade. Opening a letter of credit used to be as easy as calling the bank, in the boom lending days of 2009/10. But today, foreign currency credits are being restricted, meaning that maybe 3/4 banks have to be involved just to buy one cargo.

The length and depth of the downturn will depend on the property market:

• Prices have skyrocketed with easy lending, and Beijing is now the 28th most expensive city in the world, alongside Vienna and Copenhagen
• Speculation has led to 64.5 million empty homes, according to the Academy of Social Sciences. Whilst the Beijing Real Estate Association has warned there is "a rather big bubble in the city's real estate market".

The government thus remains between a rock and a hard place, as the blog has warned for the past 6 months.

If it makes lending too easy, food inflation will continue to soar. If it cuts back too hard, property markets could implode. Its task in now managing this delicate balance is not going to be easy.

Buyers' behaviour has changed completely since the IeC Downturn Alert launched 7 weeks ago.

ICIS news reported Friday a large polypropylene consumer commenting:

"I am not buying a lot, just one or two trucks at a time. I kept a high stock level when prices were going up, so now I am using that up. Why would I buy now when I know prices will be lower in July?"

This is exactly the same behaviour seen in the previous 4 oil price-induced downturns, as the blog has warned continually. This time may not be different, after all.

Efforts by the investment banks to support crude prices also lost momentum last week, with Brent (blue dashed line) falling $6/bbl on Wednesday. They will need to come up with new arguments this week.

The chart summarises price changes since January. PTA China and European benzene have been the leading indicators of the downturn. They are highlighting general weakness in the global economy, which in turn has weakened the US S&P 500 stock index.

ICIS pricing reports suggest other products see similar trends developing:

PTA China (red), down 7%. "Sellers were in a hurry to offload their cargoes to reduce additional losses".
Benzene NWE (green), down 4%. "The market was viewed as long, with demand for styrene slipping".
S&P 500 (pink dots), unchanged.
Naphtha Europe (brown dashed line), up 8%. "Market was again oversupplied this week, with cargoes accumulating".
HDPE USA (purple), up 18%. "Weak global market and aggressive pricing in Asia/Middle East contributed to sentiment that prices should fall".

The Dominique Strauss-Kahn affair may come to be seen as a critical turning point, when the story of the Greek default is written.

The then IMF head was en route to meet German Chancellor Merkel, when arrested in New York last month.

He had been at the forefront of the campaign to pretend that Greece has only a liquidity problem, and is not bankrupt.

Had he arrived, he would probably have persuaded her that the Greeks just needed a little more money. He would probably also have persuaded the Greeks that a little more austerity was worth the pain.

But he never made the trip. A month later, his deal is now getting harder to complete, as the 2 key questions remain unanswered:

• Will Europe end up offering Greece the money it needs?
• Will Greece accept the austerity package on offer?

Both sides have since hardened their positions. And the undecideds, who might have followed Merkel and Papandreou last month, are now doubtful.

Papandreou won the confidence vote on Tuesday, but no democracy will accept a decade of forced austerity to pay off foreign bankers.

As the blog argued last December, the Eurozone is approaching a critical crossroads. Strauss-Kahn's absence makes it much harder for policymakers to maintain his pretence that Greece will repay its debt.

But the options for solving the problem have narrowed over the past year. They are also equally unattractive:

• Will Greece default and devalue, which means leaving the Eurozone?
• Or will Europe move towards fiscal union and pay off Greece's bills?

And when the head of the European Central Bank says "risk signals for financial stability in the Eurozone are flashing red", we know that the odds on a happy outcome are reducing.

UPDATE: On Friday, the Governor of the Bank of England joined the blog in recognising that the Greek problem is one of solvency, not liquidity:

"Right through this crisis from the very beginning ... an awful lot of people wanted to believe that it was a crisis of liquidity. It wasn't, it isn't. And until we accept that, we will never find an answer to it. It was a crisis based on solvency ... initially financial institutions and now sovereigns."

UPDATE July 11: Bloomberg today confirms the blog's view that DSK's arrest was a turning point in the crisis:

"Strauss-Kahn's May 14 arrest on charges of sexual assault left a void atop the International Monetary Fund, busting the one thing that had gone consistently right in the handling of the euro-area debt crisis: cooperation between European leaders and the Washington-based IMF."

The two-tier market for autos in Europe is worrying manufacturers.

As the chart shows, May's sales (red square) were well down on the 2005-9 period, and only 7% above 2010's very weak number.

They are a continuation of recent trends, where demand continues to be sustained by a few key countries:

• Germany, France and the Netherlands remain strong
• The UK, Italy and Spain remain weak

ACEA (European Auto Manufacturers Association) note that overall sales this year are 1% below 2010. Equally, only two months (February, May) have seen higher sales versus the previous year since March 2010.

May might be the start of a more positive trend. But it is more likely that consumers were simply buying forward ahead of price rises, as supply problems ex-Japan continued to grow.

Last week's European New Normal seminar built on the successful Q1 launch in Singapore.

Attendees came from a wide variety of businesses. This led to very lively discussion and workshops, as people debated the likely impact of the major demographic changes underway:

• There was a 44% increase between 1970-2010 in the number of 25 - 54 year old Western BabyBoomers (those born between 1946-70)
• They were the world's wealthiest and largest-ever generation

• They drove a surge in global chemical consumption, as this is the age when people's need for housing, autos and electronics is at its greatest
• As the chart shows, this cohort (orange column) peaked at 392 million in 2010, and is now set to decline.
• Equally, the number of 0 -24 year olds (blue) fell to only 284 million in 2010, from 310 million in 1970

• The 55+ age group (green) is now key to future demand. By 2030, it will be 36% of the total Western population (arrowed line, right hand scale)

This means demand patterns are about to change quite dramatically, as John Richardson and I discuss in our new free eBook 'Boom, Gloom and the New Normal (Chapter 2 is published next week).

Those aged over 55 years do not have the same needs as younger people, as their families have generally grown up and left home. They also have to save more and spend less, as they have an extra 10 years of life expectancy compared to their parents' generation.

We also know very little about their potential needs. The 55+ group hardly existed even 50 years ago, when Western life expectancy was still around 65 years. And the over-55s are still largely ignored by consumer product companies, in spite of their increasing purchase power.

Similarly, the decline of the 25-54 generation in the West means emerging economies will have to focus on domestic consumption instead of exports to the West (now 46% of China's GDP, for example).

This will lead to major changes in their demand. Even well-off rural consumers only have typical incomes of $100-$500/month.

The next New Normal seminar will be in Houston, USA in October. John and I will hope to see you there.

The blog's old friend, Judith Hackitt, stirred up the media this week. She attacked the Wimbledon tennis authorities for stopping Centre Court TV broadcasts when the grass is wet, on 'health and safety' grounds.

Hackitt now runs the UK's Health and Safety Executive. She is clearly fed up with this trivialisation of health and safety. As a former chemicals manufacturing manager, she knows that real risks come from badly-run major hazard plants, not people walking on wet grass.

The blog applauds her letter to the Lawn Tennis Association (LTA), below:

"I was particularly disappointed to discover that the LTA/AELTC chose to explain its decision to ban spectators from Murray Mount as being 'on health and safety grounds'.

"Health and safety excuses are becoming as much a feature of the British sporting calendar as the rain. You will understand that, while we can do nothing about the weather, we will not let the excuses pass unchallenged."

UPDATE: Hackitt's letter clearly had an effect. The screen was operating Friday night for Murray's match, even though it was raining.

China's polyethylene (PE) demand in Q1 was down 1.6%. Now the blog's analysis suggests Jan-May demand was down 4% versus 2010 at 7.1MT.

As the chart shows, based on data from Global Trade Information Services and ICIS:

• Domestic production (blue) was up 5.6% to 4.3MT
• Imports (red) were down 12% at 3MT
• Exports (green) doubled to 240KT

The rise in exports suggests that destocking is still continuing. This is no great surprise after the speculative mania seen on the Dalian futures market over the past 2 years. Many players had bet heavily that crude oil prices would continue rising along with PE prices.

The rise in domestic production is also no surprise. The blog's Sinopec study shows it never cuts production to maintain margins. It acts as a utility, supplying raw materials to the factories to keep people employed.

Thus imports from NAFTA, NEA and Europe took the pain:

• NAFTA and Europe saw net imports halved to 231KT and 71KT
• NEA was down 25% to 589KT

• But the Middle East gained from its strategic relationship (energy for markets) and was up 16% to 1.25MT. Only Iran's supply problems (it was down 16% at 320KT) stopped a bigger rise
• SEA was also up 10% to 550KT, due to the free trade agreement

Volumes will probably remain under pressure as the government battles rising inflation, which could reach 6% this month. And although premier Wen claimed yesterday that "price rises will be firmly under control", he made similar claims last December when it was only 4.6%.

Thus NEA and NAFTA producers are likely to continue to suffer during H2. And product not sold in China, will no doubt be exported somewhere else instead. In turn, this will pressure margins in other regions.

The IeC Downturn Alert launched on 2 May. Later that day, the US S&P 500 - the world's most important stock index - hit a post-Crisis high of 1370. Last Friday, it closed down 7% at 1268 (purple dotted line above).

Many expect this to be just a minor correction, and still believe a new chemicals SuperCycle is underway. The blog, however, fears that we have simply seen a liquidity-fuelled rally over the past 2 years, funded by US, European and China's central banks.

Its arguments are set out in ICIS Chemical Business this week. Please click here to download a free copy. This summarises Chapter 2 of its new eBook (co-authored with John Richardson), Boom, Gloom and the New Normal - more details tomorrow.

ICIS news confirms the current weakness. A European producer told Stephanie Wilson on Friday that "ethylene is falling like a stone in the spot market and you can find any price in the PE spot market. Traders and producers are offering huge discounts just to get rid of their stocks."

The chart, based on ICIS pricing, updates since the Alert launched:

Naphtha Europe (brown dashed line), down 20%. "Sources spoke of crackers running at reduced rates of around 80-85%, further diminishing petchem demand".
Benzene NWE (green), down 16%. Traders are unsure of how the market would unfold in terms of pricing... Demand is said to be softening in the European styrene market".
PTA China (red), down 12%. "Sellers rushed to offload their cargoes to lock in profits in view of the current tight credit crunch".
Brent crude oil (blue, dotted), down 12%. The banks produced new arguments to support crude prices, and their year-end bonuses. But even Goldman Sachs now only forecast $105-107/bbl by the end of July.
HDPE USA export (purple), down 11% "A buyer said Asian and Middle Eastern imports (into Latin America) were 15-20 c/lb ($330-440/t) lower than N. American prices".

Chapter 2 of Boom, Gloom and the New Normal is published today.

In a completely new, and challenging analysis, we argue:

• The Western BabyBoomers boosted chemical demand for housing, autos and electronics during their peak consumption years between 1980-2000. But this demand is unlikely to be sustained, now they are entering the 55+ age group. A new SuperCycle is therefore extremely unlikely.

• Demographics ultimately drive chemical demand. Japan's BabyBoom took place around a decade earlier than the West's, and may therefore provide useful insight into the likely future course of events.

• Japan's experience post-1990 seems to indicate that stimulus programmes cannot counter the impact of an ageing BabyBoom generation over the medium and longer-term.

• Equally, it suggests interest rates in the major economies could well fall significantly, as the 55+ generation starts to save more and spend less, to fund their potentially lengthy retirement.

• This means funding should be available to tackle the key megatrend issues that will drive the next wave of global growth: ageing populations, increasing food and water supply, and reducing carbon footprint.

Please click here to download this free Chapter. You can also click here to download the 2 page summary article in ICIS Chemical Business.

Speculators, assisted by the US Federal Reserve, have driven crude oil prices to unsustainable levels over the past year. Now, the Fed is withdrawing the liquidity that has financed this rise.

The above chart from Petromatrix shows the surge in crude oil speculation on the Chicago futures market since August. The light blue line shows it taking off from net length of 50k contracts, to reach 200k by the end of the year.

The dark green line then shows it going even higher this year, to an all-time peak of nearly 300k.

It is no surprise at all that this 6-fold increase in futures demand powered crude oil prices higher. They jumped from $75/bbl in August to $125/bbl at their peak. Every chemical purchasing manager in the world had to buy forward as far as possible, to try and preserve margins.

But now the Fed's liquidity programme, QE2, has come to an end. Markets anticipated its arrival from August (it officially started in November). Now, since April, they have begun to anticipate a world in which supply/demand balances, not liquidity, determine prices.

How far has this move to go? One clue can be found from the fact that net length is still around 175k, compared to 50k in August. And, of course, there is nothing to stop it going negative, as it did in 2008 (light green line) and 2009 (red).

The Fed's aim with QE2 was to boost risk assets, and drive down the value of the US$. It thought this would kick-start consumer confidence. How wrong can you be?

European ethylene contract prices (CP) can be excellent indicators of profitability trends in the industry.

Buyers were caught short during December, as inventories had been run down for year-end reasons. So when crude prices started rising, they had to rush to cover their positions. The panic was particularly strong as most companies had set sales prices for the next 90 - 180 days.

As December progressed, buyers therefore scrambled to capture 'low-priced' product before it disappeared. Thus at the end of December:

• The January CP rose 10% from €1005/t to €1110/t ($1480/t)
• Brent crude oil, meanwhile, had risen $10/bbl to $95/bbl

Now, the trend is reversing. Buyers are trying to reduce inventories as they expect lower prices and slow demand during the summer months.

• The July CP has just been settled down 8% at €1090 ($1450/t)
• Brent, however, has only fallen (so far) to $110/bbl

As the chart shows, a US recession (shaded area) has followed every time oil prices were above $50/bbl in real terms ($2011, red line).

Now, companies have begun to issue profit warnings. AkzoNobel, the global paint and chemical company, was the first. It told investors this week that it had been unable to pass through higher prices to its customers, and added that demand remained weak.

Chemical company CEOs will now be planning their half-year reports. In Q2, only Peter Huntsman took the opportunity to remind investors of the threat from "high oil prices, unemployment and economic fragility". Others may now want to follow his lead.