Chemicals & The Economy

The blog was delighted to learn last night that 400 people have already registered for the next American Chemical Society 'Chemicals and the Economy' webinar.

This takes place tomorrow, July 7, at 14:00-15:00 pm US EDT.

It will focus on the transition now underway to the New Normal, and the challenges this presents for companies - and for all of us as individuals.

If you would like to register for this free event, please click here.

The blog is now 4 years old.

Its readership continues to expand around the world. It is read in 137 countries and 5379 cities, as shown on the above map.

Readers are also incredibly loyal. Over the past year, 39% have visited the blog at least once a week. This is up from 34% in the previous year. And overall, an astonishing 83% visited regularly over the past 12 months, up from 78%.

It also continues to expand its activities. The American Chemical Society offer a regular 6 monthly webinar to their 100,000 members, with the next one due on Thursday. They are very happy for any blog reader to join this free event, simply by registering here.

The regular YouTube interviews with ICB's Will Beacham also remain popular, as are the feature articles in ICIS Chemical Business itself.

The most exciting development has been the launch of the 'Boom, Gloom and New Normal' eBook, and the associated New Normal seminars. This is being done with fellow-blogger John Richardson.

A very senior European central banker commented of Chapter 1 that it was "terribly interesting, really important work" - which seems praise indeed. Whilst a senior US policymaker has described Chapter 2 as "very good, very relevant and very interesting".

Please click here if you have not yet got your free copy.

In addition, the blog continues to be invited to speak at major company, industry and sector events around the world.

Thank you very much for your continued support.

The last week of a half-year period often sees greater volatility in financial markets, as players rush to position themselves for client reporting.

This was most obvious in stock markets, with the US S&P 500 Index (pink dotted line) staging a 5% rally during the week. Brent crude oil (blue dash) eventually ended unchanged versus last week's average.

Other constituents of the IeC Downturn Alert were quieter, however, as players avoided taking new positions ahead of the US 4 July holiday. European naphtha inventories were reportedly at a 2011 high.

China has been the weakest link since March. Europe, and then the USA, have followed its lead. As ICIS' Nel Weddle, a long-time observer of European olefin markets, noted Friday, "opportunistic buyers have had their pick of cargoes and are relishing the availability and weakening prices after months of increases".

The chart, based on ICIS pricing, updates developments since January:

PTA China (red), down 10%. "The market continued on its bearish trend this week because of persistently weak buying sentiment amid soft PTA futures and a generally downbeat outlook."
Benzene NWE (green), down 5%. "Values were relatively range-bound throughout the week."
Naphtha Europe (brown dash), up 6%. Petchem demand was limited, and the widening price spread with propane led to switching.
HDPE USA export (purple), up 12%. "Prices for Asian and Middle Eastern material continued to fall, and remained at least 15-16 c/lb ($331-353/t) below US prices".
Brent crude oil, up 16%. Consultants Petromatrix suggest the 30.2mmb sale from the US strategic petroleum reserve will put pressure on prices.

There was a sustained rise in the number of wealthy Western BabyBoomers entering their peak consumption years between 1980-2000. In turn, stock market multiples rose (the US Dow Jones price/earnings ratio rose from 8 to 32), as investors valued earnings more highly.

'Buying the Dips' in the market became the easy way to make money.

Since 2000, the Boomers have been leaving the 25-54 age group, and entering the 55+ cohort, when people typically spend less and save more. As a result, financial markets have been held aloft by central bank liquidity programmes, rather than fundamental demand.

So far, this support effort has had one great failure between Q4 2007 - Q1 2009, captured in the IeC Boom/Bloom Index above (blue column). Sentiment ebbed away, as major financial houses began to collapse.

But then the Index recovered again, as central banks and governments added even more stimulus and liquidity to the markets. It dipped in Q2 last year, when it seemed these measures might end. But Greece's problems soon led to more support.

The Index is not designed to tell us when fundamentals will re-emerge as the major driver. But the Austerity measure (red line) is acting as a reminder of this underlying reality.

When this happens, 'Selling the Rallies' will be the key investor strategy.

Are we now at a turning point? This month's Index suggests we should be very careful. The Index itself dropped, whilst the Austerity measure rose strongly. The blog will continue to watch developments very closely.

New blog readers can find the Index methodology by clicking here.

Time was when US auto sales only rarely dipped below 1.1 million/month. Since the Great Recession began, however, they have only rarely been above this level.

Analysts are yet to take this change on board. So June's 1.05 million figure (red square) was described as a 'surprise'. Yet as the chart shows, most months this year (4 out of 6) have been below this level.

There are a number of reasons for this New Normal:

• With unemployment high, people think twice about buying a new car
• Cars today are more reliable, and last longer
• Consumers are thus now holding onto new cars for 63.9 months
• This is 14% longer than in 2008

Equally, of course, today's higher auto prices also discourage purchases. The average car cost $30009 last month, up 3% from 2010.

Since 2008, sales have been in the 10 - 12 million range, compared to 15 - 17 million from 1995-2007. Their value to chemical companies has declined from ~$50bn to ~$35bn, based on the American Chemistry Council's estimate of $3k worth of chemicals per auto.

This value should increase, as higher fuel efficiency drives greater use of plastics. But it seems unlikely we will quickly return to the SuperCycle days of sustained BabyBoomer demand.

The chemical industry is a well-known leading indicator for the global economy. This is because our products are used in so many applications around the world.

The above chart of global capacity utilisation, from the American Chemistry Council, paints a subdued picture. In May, capacity utilisation was actually lower than in May last year, at 87.3% versus 87.5%.

This is further confirmation that Q1's excellent results were based on supply shortages, not demand increases.

Readers may also remember the chart from the blog's January White Paper, Budgeting for Uncertainty. It highlighted the key question addressed in the White Paper, namely 'What Happens Next?':

"Will the recovery of the past 18 months continue, and take OR% back above the 90% level that would indicate things were really back to 'normal'? Will they stabilise at current levels? Or will they slip back, as governments cut back on stimulus programmes and move towards an 'austerity' diet of lower spending and higher taxes?"

As we start H2, it seems fairly clear that we are not headed back above the 90% level. If we are lucky, they may stabilise. But the risk they may slip back, is now far too high for comfort.

Since Q4 2008, China has been creating one of the largest credit bubbles in history. First, it doubled bank lending to $1.4trn in 2009 (one third of GDP), and then maintained it close to this level. Secondly, it added a stimulus package worth another 13% of GDP ($580bn), focused on providing cheap electrical goods and autos.

It also seemed not to realise that its own development process was about to move into a different phase. China can no longer depend on the constant supply of cheap labour to keeps its goods competitive in world markets. Instead, labour shortages have begun to appear, as we discuss in chapter 2 of our new eBook 'Boom, Gloom and the New Normal'.

Its most recent policy failure has been to imagine that price controls could keep inflation under control. In fact, just as the blog feared when the policy was announced, these have caused food prices to soar even further, as farmers cannot afford to sell at a loss:

• Pork prices, a staple food in China, are up 68%, having risen continuously for 10 weeks since the new policy was announced
• Food price inflation is now 14.4%, up sharply from last month's 11.7%
• Overall inflation is at 6.4%, nowhere near the government's 4% target

Equally, of course, worries are beginning to appear about the quality of lending that has taken place since 2008. Moody's, the ratings agency, warned this week that "the scale of such loans could pose a threat to China's banking system".

Sometime soon, the government may finally realise it has to get serious about controlling inflation. This is almost certain to require a period of sharply lower growth. Housing markets, which have been supported by the lending, could also come under major pressure.

The next 12 - 18 months may prove to be a rocky ride.

The start of a new half-year usually provides an excuse for the investment banks to publish bullish notes on oil markets. We discuss their role in Chapter 3 of Boom, Gloom and the New Normal, to be published later this month.

Thus Goldman Sachs last week suggested oil markets will become "critically tight" in 2012, adding "in our view, it is only a matter of time before inventories and OPEC spare capacity become effectively exhausted, requiring higher oil prices to restrain demand, keeping it in line with available supply".

The problem for the banks is that oil prices are already at levels which have always led to recessions in the past (new readers click here for details). The chart above shows just how far prices have risen since the market rally began in January 2009, with the period since the IeC Downturn Alert began highlighted in yellow.

Equally, it is hard to see how China's out-of-control inflation, or last week's disappointing US jobs figures, or the continuing Eurozone debt crisis, can really be bullish for demand.

The detailed moves since January 2009, with ICIS pricing commentary on market sentiment last week, are below:

PTA China (red), up 81% since January 2009. "Most market players would rather take a wait-and-see stance".
Benzene NWE (green), up 308%. "Upward movement was primarily caused by a $7/bbl hike in crude futures."
Naphtha Europe (brown dash), up 214%. "Demand from the petchem industry remains limited" with propane a more attractive feedstock
HDPE USA export (purple), up 88%. "Prices would need to fall into the lower 50 c/lb range before demand for US exports would improve".
Brent crude oil (blue dash, right hand scale), up 154%.
US S&P 500 Index (pink dot), up 51%.

Its now a year since the blog first highlighted the worrying rise in force majeures (FMs) since the Great Recession began. Most disappointingly, continuing strong profitability has not led to any improvement. In fact, as the chart shows, the position has worsened over the past 6 months.

It is based on the number of FM mentions in ICIS news each month since 2008. Clearly, the Japan Disaster did increase the numbers. But at the peak in March, this added 20 within a total of 78 reports, since when the monthly numbers have been very small.

Many in the industry are worried by the FM trend, which has implications for safety performance, as well as for profitability. They point to lack of maintenance as a crucial factor, particularly when many Western plants are already ageing, and so are more difficult to run reliably.

As the Head of the UK's Health & Safety Executive has noted, "At the most senior levels, there has been a growing lack of understanding and appreciation of the importance of process safety. Lagging indicators have taken the place of real-time measures of process safety and performance, while information technology has bred a sense of complacency.

In addition, of course, the trend towards larger-scale plants means any problems have a bigger impact. Whilst price volatility, and today's relatively high prices, mean inventories are generally lower than in the past, and less able to buffer outages.

The blog is therefore pleased to see that analysts Bernstein Research have followed up the issue in greater detail. They highlight "a sharp increase in FMs in the US offset by a decrease in Europe". And they share the blog's view that "technical issues, possibly arising from under-maintenance of assets, have been the prime cause of FM".

Bernstein also highlight the negative impact on profitability for those firms who suffer multiple FMs. Whilst they note that companies such as "BASF and Bayer continue to benefit from the operating issues of their competitors". Hopefuilly investors may take note, and question managements more rigorously about their operating performance.

Luxury stores are doing well around the world. The great central bank lending sprees have ensured up-market consumers still have money to spend.

But many other parts of the market are struggling, as consumers worry about unemployment. Higher food and energy prices are also reducing their discretionary spend - which, of course, has a direct impact on end-user demand for chemicals.

The USA highlights how the retail market is now polarising, away from the mid-market and into luxury or budget offerings:

• Top-end Saks saw same-store sales up 12% in June. And their CEO noted that their "focus is on full-price selling" with few discounts.
• But mid-range stores found themselves over-stocked, after a poor spring selling season. Thus they had to resort to "deep-discounting" according to the Wall Street Journal.
• This meant June's retail volumes appeared strong, up 6.5%. But orders for H2 are weaker, as retailers need to protect margins.
• Even so-called 'dollar stores', where key items cost just $1, are finding consumers are cutting back to essentials

Consumers have traded down to these deep-discount stores since the Great Recession began. Wal-Mart, the US's largest retailer, has suffered as a result since then. Now even these stores are finding that consumers are focused on real needs, not wants. As the WSJ reports:

"They are buying more food and other basics like cleaning products, which have relatively low profit margins, and fewer higher-margin discretionary products, such as apparel and home decorative items".

Consumer spending is the key driver of chemical demand. So these major changes are another clear sign that we are entering a New Normal. The next 20 years are going to be quite different from the BabyBoomer-driven SuperCycle seen since 1980.

New analysis by Bloomberg supports the blog's view last month that the arrest of former IMF head Dominique Strauss-Kahn (DSK) probably marked a critical turning-point in the Eurozone debt crisis

Not only was DSK no longer able to persuade German chancellor Merkel that the problems needed just "a little more time, a little more money". Instead, he was replaced at key meetings by an IMF technocrat, who focused on financial rather than political issues.

This is helpful to an extent, as it means the Eurozone is no longer relying on smoke and mirrors to obscure the real issue. This is whether Greece, Portugal and Ireland's problems are due to lack of solvency or liquidity:

• Solvency is whether one is able to pay one's total debts
• Liquidity is whether one can pay today's bills

As the chart from the Financial Times shows, Greece's 10 year bond is now trading at a 15% spread to its German equivalent. Portugal and Ireland are trading at a 10% spread. Thus ratings agency Moody's has downgraded them all to 'junk' status. Whilst spreads for Italy and Spain (the other members of the at-risk PIIGS group) are rising ominously.

The next head of the European Central Bank, Mario Draghi, has also warned very clearly about the risks of the current position:

"The solvency of the sovereign states is no longer something acquired, but something earned with high and sustainable growth, which is only possible if budgets are in order. Today's cost of credit reflects that new reality."

But, as readers will have spotted immediately, this desired "high and sustainable growth" cannot be achieved without German support:

• High growth requires capital to be available for loans
• But the only source of this capital is Germany
• Germany doesn't believe in 'bailing out' its Southern partners
• The PIIGS are therefore being forced to adopt austerity measures
• This will reduce their growth rates, not increase them

We therefore remain in exactly the same position as when the Eurozone crisis first began in May 2010. At least 3 of the PIIGS are clearly insolvent, and will never be able to pay their debts. Only prompt action now will resolve their problems, and protect Italy and Spain.

But as the blog argued back in December, this would mean the Eurozone would have to become a fiscal union (like the USA), as well as a currency union. One cannot exist without the other.

Germans and wealthy North Europeans would have to agree to pay their partners' debts. This seems unlikely in today's political climate.

Yet the alternative is not the status quo, as too many politicians still hope.

It is that the Eurozone could eventually break up, and in the process severely damage both the European Union and the wider global economy.

Our annual Asian conference in Singapore (co-organised as always with ICIS) was very interesting this week.

We had some fascinating presentations from major companies including Reliance and Thai Oil, and China insights from CICCC and Chemease.

Shell's GM for strategy, Alexander Farina, discussed changes in cost competitiveness between benzene (grey column) and propylene (red) over the past 15 years. As his chart above shows:

• In 1995-2001, benzene was ~75% of propylene's price (red line)
• From 2002-7, it rose to ~100% of propylene's price
• Since 2008, it has fallen back to ~80% again

As Farina noted "a 5 year cost advantage (for benzene) slowly slipped away about 10 years ago". But more recently, benzene has regained its competitive edge. This "has strengthened the cost position of polystyrene (PS) against polypropylene (PP)".

He noted that "substitution of PS by PP seems to have reached a plateau". Regionally, "reports from Asia confirm that PS substitution is no longer an issue", although he saw "on-going challenges for PS in N America and Europe, where perhaps 1/3rd of the market could be vulnerable to PP".

In addition, though, Farina highlighted the impact of shifting regional prices for ethylene. The recent fall in US ethane prices, for example, has enabled "US styrene producers to revitalise some underused capacity and export significant tonnages to Europe".

Farina's analysis highlights the growing complexity of chemical markets.

It is no longer enough to simply focus on the vertical silos in which we operated during the BabyBoomer-led SuperCycle. One now has also to track changes in feedstock prices, and be aware of the potential for inter-polymer as well as inter-regional competition.

This is all part of the transition to the New Normal.

The auto industry is a major source of global chemical demand.

Today, at the half-year point, the blog begins a 3-part series analysing auto sales trends in Europe (today), China (tomorrow) and total EU, China and USA sales (Thursday). Click here for current USA analysis.

For the past few months, Europe has seen a two-tier market develop. A few markets were very strong - Germany and the Netherlands, for example. But most were weak. Overall, volumes were therefore stable.

June, however, marks a potentially decisive break with this pattern. As ACEA (the European Automobile Manufacturers Association) comment:

"All important markets faced a downturn, leading to an overall 8.1% fall across the EU. Contractions ranged from -0.3% in Germany to -1.7% in Italy, -6.2% in the UK, -12.6% in France and -31.4% in Spain."

The severity of the downturn is shown in the above chart. June's sales (red square) were the lowest in the 2005-11 period. And a quick recovery is unlikely, as July and August are seasonally weak due to holidays.

The key question is whether demand will recover in September? Sadly, this is not guaranteed, given the depth of the Eurozone debt crisis.

Equally worrying, as the blog will discuss tomorrow, is that China also seems to have slowed.

China's auto industry has seen extraordinary growth since the downturn began in the West in Q4 2008. The government encouraged lending, and also cut taxes on auto sales. As a result, sales jumped 49% in 2009, from 6.9m to 10.3m. And then they jumped a further 29% in 2010.

In 2011, however, sales have slowed sharply, as the chart shows:

• In H2 2010, sales rose 19% in Q3 and 26% in Q4 (orange line)
• In H1 2011, they rose 9% in Q1 and just 2% in Q2 (red square)

Partly this was due to taxes being raised back to 10% from the 5% crisis level. But equally, cities such as Beijing have restricted car ownership, after the mammoth traffic jams seen last year.

Opinion is now divided on the outlook:

• The official Development Research Centre forecasts the market may triple in size over the next decade, to between 50 - 70m. They also expect 2011 to be up 10% versus 2010.
• But the head of China's Passenger Car Association has warned that sales might actually decline in 2011 for the first time since 1992.
• GM's China head is also cautious, having seen negative growth in May. He cites higher gasoline prices as a major discouragement to sales.

Clearly, reasonable people can therefore disagree about what happens next. However, the issue of gasoline price seems critical.

It was easy enough to encourage people to buy cars with borrowed money when taxes were also being cut. But China is a relatively poor country. To be 'middle class' means having an income over $3k/year, a long way below equivalent levels in the developed world.

Reuters reports China's gasoline prices are now 17% higher than last year. They are 50% higher than early January 2009. And, of course, food prices jumped 14.4% in June versus 2010.

Rich Chinese with Western-style incomes are still able to afford their luxury cars. But the blog suspects many ordinary Chinese have probably abandoned their dream of car ownership for the moment.

"Will he, won't he?" That was the only question in oil markets last week. On Wednesday, US Fed chairman Ben Bernanke seemed to suggest that QE3 might arrive, to follow on from his QE2 'LifeBoat' for the economy.

As the chart shows, oil prices leapt $3/bbl within 2 hours as he spoke. But then Bernanke's second thoughts led to a retreat on Thursday.

This is further powerful evidence for the blog's argument that today's high oil prices have nothing to do with shortages (global inventories are close to record highs) or supply problems. They are really due to:

• The Fed's aim to promote US exports via a lower US$, which encourages investors to buy commodities such as oil for their 'tangible value'
• The investment banks' focus on selling profitable derivative contracts to pension funds, thus creating strong 'paper' demand for commodities
• The availability of cheap money from the Fed to fund High Speed Trading, based on arbitraging oil and other financial assets

It is all a very long way from the blog's early days in chemicals trading in the UK and Houston, Texas, when fundamentals drove prices.

But Bernanke's sudden backtrack on Thursday could be very significant. The Fed would find it difficult to ignore opposition to QE3 from senior Republicans. Already, Senator Richard Shelby has warned "the Fed may be going in the wrong direction."

The detailed moves since the IeC Downturn Alert launched at end-April, with ICIS pricing commentary on market sentiment last week, are below:

HDPE USA export down 17%. "US prices are still a little too high to compete with global prices, despite price increases in China and India".
PTA China down 13%. "Sellers' sentiment was bolstered by the strength in futures".
Benzene NWE down 11%. "Stronger US market as well as temporary gains seen for crude/energy futures helped firm European benzene values."
Naphtha Europe down 10%. Reuters reported Rotterdam naphtha stocks at 2011 highs (3 times last year's), due to weak petchem/US gasoline demand.
Brent crude oil down 6%.
US S&P 500 Index down 4%. In another sign that fundamentals may be re-emerging, it dropped to a critical technical support level at 1316, the convergence of the 50 day and 100 day moving average.

The latest American Chemistry Council (ACC) weekly report has worrying evidence that the global economy may be at a turning point, as stimulus programmes are replaced by austerity.

The chart shows the latest leading indicators from the OECD (Organisation for Economic Co-operation and Development). As the ACC warn:

"The CLI (green line, Composite Leading Indicator) for May points to a slowdown in most major economies and even potential turning points in some economies".

The CLI provides early signals of turning points between expansions and slowdowns. The ACC add that OECD data now suggests:

"Slowdowns are underway in Canada, France, Germany, Italy, the United Kingdom, Brazil, China and India. In the United States, Japan and Russia tentative signs of turning points in the growth cycle are emerging."

Today's level of oil prices has always led to recession in the past. The OECD indicators make it even less likely that 'this time is different'. And they add to last month's warning by the US's best forecaster, Prof Martin Feldstein, who also correctly warned of the 2008 downturn.

This would be no real surprise. Between 1933 - 1982, the US economy was in recession every 4 to 5 years (109 months in 50 years). But 1983-2000 saw the BabyBoomer SuperCycle get under way. Its surge of demand, as the Boomers settled down and had children, meant the economy was in recession for just 8 months in 18 years.

The Fed extended the SuperCycle by pushing up home prices post-2000. This allowed Boomer homeowners to extract $564bn/year via mortgage equity withdrawal between 2001-5, adding ~7% to their disposable income. But now, the Boomers are ageing, as we describe in Chapter 2 of our new free eBook, 'Boom, Gloom and the New Normal'.

Most chemical company managers have grown up during the SuperCycle. Thus it is understandable that they are not used to the idea of recessions being regular events. But the blog is more and more convinced that today is not a time for 'stretch targets'.

The next few years could prove extremely challenging for the industry, particuarly if policymakers continue to believe that 'demographics have nothing to do with demand'.

This week's special blog series has focused on auto markets, a critical source of chemical demand. Today, it concludes by summarising developments in China, USA, EU, which account for ~55% of global sales.

They have moved in different directions since the Great Recession began:

• China's volumes soared in 2009-10
• The USA has fallen ~30% from 1995-2007 sales levels
• The EU was more stable, but seems now to be weakening

Overall, however, sales were stable in 2008-9 at 34.8m (purple, blue lines), and then rose 9% in 2010 to 37.8m (brown line).

The 2010 increase was entirely due to China, which was up 3m. The USA/EU were unchanged at a combined total of 24.5m. 2011 (red square) then saw a strong start in Q1 in all 3 regions, with sales up 12% versus 2010. But Q2 has been disappointing, with overall sales up just 2%.

Q3 may not show much improvement. Japan's production is recovering, as is component availability for non-Japanese auto manufacturers. But consumers in all 3 areas seem worried by rising food and commodity prices, and new government stimulus programmes are unlikely.

Those companies with major dependencies on auto sales will clearly want to make contingency plans now, as there is clearly a real risk we will face a disappointing end to the year.

Greece is about to become the first developed country to default on its debts since 1964.

On Thursday night, Eurozone leaders finally agreed to reduce Greece's €350bn debts, if only by 21%. They also agreed to take the first steps towards the creation of a European Monetary Fund.

After more than a year of defying the inevitable, this marks some progress towards recognising reality.

But will it prove 'too little, too late'? The blog hopes not. But the signs are not promising:

• The European Central Bank resisted the default until the very end
• It took a 7 hour French-German summit to finally broker the agreement

The leaders did talk about a Marshall Aid Plan for Europe to promote growth. But equally, the final agreement called for deficits to be reduced outside Greece, Ireland and Portugal by 2013.

Yet as Pimco's Bill Gross warned on Thursday, "debt is the disease, growth is the cure". Pimco, the world's largest bond fund managers, originally developed the New Normal concept back in 2009. And in their view, Europe and the USA now share the same problem:

• The burden of debt is still far too high
• Commodity prices have been allowed to spiral out of control
• Growth has become dependent on China

As a result, Pimco continue to warn that Western growth rates will reduce to 2%, or 'stall speed'. This creates a vicious circle. Companies don't invest, because growth is so low. Unemployment therefore remains too high. Central banks then create liquidity in place of the missing capital.

The ancient Greeks, of course, had a myth that describes the position. It is of Sisyphus (pictured) endlessly trying to push a massive rock uphill.

If policymakers recognised we are entering the New Normal, new forms of growth could be encouraged. The Shared Value concept is one powerful example. But if they stick with current thinking, the outlook for the next few years is not promising.

When you're the world's richest man, and have committed $36bn to philanthropy, you don't have to be politically correct.

Thus the blog was delighted to see Bill Gates' interview on energy needs with Wired magazine, where he noted:

• "The solutions that work in the rich world don't even come close to solving the energy problem
• "If you're interested in cuteness, the stuff in the home is the place to go.
• "If you're interested in solving the world's energy problems, its things like big solar projects in the desert."

As Gates notes, "over 90% of subsidies are on deploying technology and not on R&D. You can buy as much old technology as you want, but you won't get breakthroughs, which only come out of basic research. If we don't have innovation in energy, we don't have much at all."

And he went on to add that "sure, attaching solar panels to roofs, building windmills in backyards or deploying other small-scale energy technologies is a fine idea. But they can't significantly aid developing nations thirsty for cheap energy".

The blog sees reducing carbon footprint as one of the key megatrends for the New Normal. Many chemical companies are already working on potential answers to the problems.

But as Gates says, today's 'cute solutions' simply distract attention from the hard work that is needed to find real solutions.

Petchem markets have moved into an interesting phase.

Optimists will point to the recovery in crude oil and financial markets, plus higher prices for naphtha and benzene. They will see these as signs that we are just in the middle of a typical correction. And they will hope for further price increases over the summer.

Pessimists will point to the higher prices being focused on products where financial players dominate, such as the S&P 500 Index and Brent. Equally they will note that benzene's higher price is due to lower US production, not stronger demand.

Neutrals will note that some markets have improved and some, like HDPE and PTA, have stabilised. But they will be worried by developments in European propylene, where ICIS' Nel Weddle reports:

• "Customers were saying that they could not deal with inventory levels"
• "One propylene producer said, 'Being honest, I am desperate'."
• A consumer "described the current situation as a catastrophe".

The blog will continue to watch developments very carefully.

Detailed moves since the IeC Downturn Alert launched at end-April, with ICIS pricing commentary on market sentiment last week, are below:

HDPE USA export, purple line, down 17%. "More interest in US exports, particularly in South America".
PTA China, red, down 11%. "End-users were resistant towards higher prices because their inventories remain abundant".
Naphtha Europe, brown, down 9%. "Little interest in naphtha from the petrochemical industry, but healthy demand from gasoline".
Brent crude oil, blue, down 6%.
Benzene NWE, green, down 5%. The US again led markets higher due to "lower production rates and firming energy futures."
US S&P 500 Index, pink, down 1%.

The world's major central banks, particularly the USA and China, have been the main driver of financial markets since the start of the Great Recession, due to the liquidity they have provided:

• China's credit bubble has funded astonishing growth in futures markets
• Monthly volume in LLDPE* (above) has averaged 44MT since Q4 2008
• This is more than total global production in a full year

• The US Fed's 'quantitative easing' has had even greater impact
• It has enabled high frequency trading (HFT) to dominate the markets
• HFT now accounts for 60% of all US share trading

The context of this trading game were defined 20 years ago by the legendary trader, Victor Sperandeo, who noted that:

• An investor's concern is with the fundamentals
• A speculator's concern is with price movement

He advised that when markets are being driven by credit expansion, as now, it is prudent to speculate, not invest.

Yesterday's report from oil analysts Petromatrix provides an excellent insight into today's speculative mentality. They cynically forecast:

"If the US debt extension passes, then it will be spun as something extremely positive for oil demand. If not, then it will be spun as negative for the dollar and so positive for commodities."

The blog will look in more detail tomorrow at the speculative impact on oil markets.

* LLDPE = Linear Low Density Polyethylene

As promised yesterday, the blog looks today at the impact of high frequency trading (HFT) on oil markets.

This now takes place in micro-seconds. It is algorithm-driven via 'black boxes', and so fast that as Andy Haldane of the Bank of England notes:

"Around 40,000 back-to-back trades can take place in the blink of an eye. If supermarkets ran HFT programmes, the average household could complete its shopping for a lifetime in under a second. Imagine."

It also creates 'bunching', where all the black boxes try to out-trade each other. As we discuss in the upcoming Chapter 3 of our eBook, Boom, Gloom and the New Normal, the finest mathematicians and physicists in the world are now employed to develop Wall Street's version of computer games:

• First, they aim to block the competition
• Then they execute their trade. In micro-seconds.

However, the recent end of the Fed's QE2 programme has reduced the liquidity on which these computers relied.

As the chart above shows, oil markets are now tracing out a triangle pattern, just as they did in Q4. Only this time, the triangle's top line (red) goes back to July 2008, whilst its bottom line starts in December 2008.

This makes it an even more significant pattern than the short-term one seen in Q4 last year.

The key question is whether oil's recent run-up to $125/bbl constitutes what traders would describe as a failed 'test' of the previous high set in July 2008. If it does, then Sperandeo's trading rules would suggest a major trend change could be underway.

Either way, the triangle pattern suggests we could well be getting close to another major price move - upwards or downwards.

Crude oil and commodities markets have lost touch with the fundamental realities. This didn't just happen yesterday, but began a decade ago.

That's the argument put forward by my co-author, John Richardson, in the latest chapter of our new free eBook, 'Boom, Gloom and the New Normal - how the Western BabyBoomers are changing chemical demand patterns, again'.

John highlights how the supposedly 'informed commentary' that gets widely reported in the media is often focused on boosting income for the trading houses, not market understanding.

I describe some of the issues this raises for chemicals in the above 3 minute interview with ICIS' Will Beacham.

We are delighted with the support we are receiving for the free eBook. Please click here if you would like to download Chapter 3.

Last month, the blog suggested that CEOs might want to warn investors of the threat to earnings from high oil prices, unemployment and economic fragility.

BASF, the world's largest chemical company, have done exactly this today. New Chairman, Dr Kurt Bock warned:

"The economic risks remain: We continue to be concerned about the development of the euro as well as the debt situation in some European countries and the United States. Added to this is the persistently high oil price, which is having a negative impact on margins across our value chains and is leading to some customers being more cautious in their orders."

Investors were clearly unprepared for BASF's note of caution, and marked the share price down 5% in early trading. They clearly still believe in the SuperCycle theory, and want to believe that earnings will rise steadily over the next few years.

Dr Bock and BASF are to be congratulated for injecting a note of realism into this wishful thinking.