Chemicals & The Economy

Many readers have been taking a well-earned break over the past few weeks. The blog also continues to gain large numbers of new readers, as the financial crisis intensifies. As usual, therefore, it is highlighting key posts during August, to help you catch up as you return to the office.

Boom/Gloom Index suggests markets on the edge presciently forecast the recent volatility. Markets fall as politicians argue, US Fed policy may be going Back to the Future, Investors rush to save with the JUUGS, and US GDP still below 2007 levels explore the key issues

European cracker margins at 'top of cycle levels', China's PE market down 2.5% in H1 and Q2 chemical results raise concerns about the outlook look at the current state of chemical markets

China's power consumption hits new record looks at the strains now impacting China as it struggles to cope with an overheating economy. China's auto market goes ex-growth covers the same theme, as does China's bank lending nears its Minsky Moment

Policymakers remain in the Denial phase suggests the crisis is a long way from its end, as does Recession may now be very close and Towards a New Normal, not a new Supercycle whilst Goldman halves global ethylene growth estimate shows the analysts are slowly starting to recognise reality

Plus, of course, Chapter 4 of Boom, Gloom and the New Normal was published this week, and focuses on how the world may look in 2021

Sinopec is China's leading petchem producer. Its H1 results, out this week, confirm the blog's concern that China's growth surge has stalled.

The chart shows Sinopec's view of domestic demand growth for ethylene (blue line). After falling to zero in 2008 as the Great Recession began, growth rebounded to ~10% in 2009-10. But in H1 it was only 1.9%.

At the same time, Sinopec's own ethylene production jumped 19% versus H1 2010 to 5 million tonnes. Polymer and fibre intermediates also grew ~11%. And Sinopec expect ethylene production to continue rising in future years, as it aims to become world no 1 by 2014.

This would not be the strategy of a western producer, focused on profitability. But as the blog has discussed before, Sinopec's role in petchems is to be a utility, supplying product reliably to the downstream factories, to help keep employment high.

China's vast stimulus package and credit bubble have so far mitigated the full impact of its production surge. But if the world falls back into recession, its effect is likely to become more apparent in global markets

One characteristic of recessions is that recovery is always 'just around the corner'. We can see this pattern in today's US auto market. Since 2009, forecasters have been convinced that sales will quickly return to Supercycle levels of 15-17 million/year. But sadly, by around this time of year, it has become clear that nothing has really changed.

Thus the blog's own forecast in January, that sales will be in the 11 - 13 million range, looks likely to be achieved, with the annualised sales figures now down to 12.12m. As the chart above shows, August sales (red square) were once again below the 1.1m level, which represented a minimum in the Supercycle days..

The problem is that manufacturers and analysts remain in denial about the impact of the ageing BabyBoomers (those born between 1946-70). Their argument seems to be that 'demographics has nothing to do with demand'. Until we move beyond this phase, it seems unlikely that we can make much progress.

The pity is that the need to reduce carbon footprint, and improve fuel efficiency, could provide a major new growth paradigm. But it is unlikely to be realised, as long as the 'experts' convince themselves that a return to the Supercycle is just around the corner.

A recession is often defined as being when your neighbour loses their job. A depression is when you lose your job.

Latest industrial production data shows output is falling around the world. And US unemployment is rising again, with the wider measure at 16.2% as long-term joblessness becomes a major problem.

Last month's IeC Boom/Gloom Index suggested that financial markets were "on the edge" of a renewed recession, or worse. The Index had fallen to its lowest level since the US Federal Reserve 'rescued' financial markets last year with its QE2 liquidity programme.

This did more harm than good in the real world, by boosting oil and commodity prices, and thus destroying end-user demand. Now all of us, just as the blog feared back in October (when QE2 began), are having to live with the consequences of the Fed's mistake.

Even stock markets are becoming worried, as this month's Index (blue column) shows. It reflects the sharp change in sentiment since May, and is now back to the recession levels of 2008-9. Similarly, the S&P 500 (red line) has lost momentum, and is clearly slipping.

The fundamentals are also looking worse, as the politicians posture over Eurozone bailouts and the US debt position, and avoid the hard decisions. Whilst China's stimulus-induced inflation remains far too high for comfort.

The odds on a new recession are therefore clearly shortening day by day. As Deutsche Bank head Josef Ackerman warned yesterday, "'The new normal' is characterized by volatility and uncertainty. All this reminds one of the fall of 2008."

The failure of GDP in most Western economies to recover 2007 levels means this could quickly become a depression, despite (or perhaps because of) the $trns spent on global stimulus programmes.

Chemical markets are traditionally 6 months ahead of the wider economy, as they are so focused on consumer demand. September may therefore provide a 'moment of truth' for the IeC Downturn Alert, launched in April:

• The petchems downturn since April may now become apparent in the wider economy
• Alternatively, demand may recover strongly, signalling recovery remains on course

It would be unwise to jump to conclusions this early in the month. But the failure of the US economy to add a single job in August, for the first time since 1945, is not a good omen.

Equally, only one downstream market, PTA in China, is currently showing any pricing strength. And even this seems somewhat precarious, according to the latest ICIS pricing report below. Other 'bellweather' markets such as benzene and polyethylene seem potentially weak.

Bulls, however, will take heart from the fact that Brent crude oil prices and naphtha both managed a small increase, even though inventories remained high. Any resumption of demand could enable derivative prices to recover quite sharply from the falls shown in the above chart.

Price movements since April, and ICIS pricing comments this week are below:

S&P 500 Index (pink dot), down 14%.
HDPE USA export (purple), down 14%. "Lower Asian export prices are continuing to reduce interest in US material".
Benzene NWE (green), down 13%. " Wider economic jitters could potentially affect demand and pricing."
Naphtha Europe (brown dash), down 12%. " Market is again bearish, and has lengthened from the previous week due to poor demand".
Brent crude oil, down 9%.
PTA China (red), down 3%. "Some players expect a downward correction, while others see prices continuing to rise amid firm PX costs".

UPDATE. Worryingly, Swisss firm Clariant became the first chemical company to issue a profit warning today, due to "order sizes coming down and more insecurity in the supply chain" in Brazil, US and Europe.

Bloomberg quotes the blog adding "There appears to be no 'seasonal surge' in demand from Western retailers in advance of Thanksgiving and Christmas. This is further confirmation perhaps that consumer demand is taking a real hit."

Companies are now starting the Budget process for 2012-14.

As always, the blog will present its own view next month. It will also review last year's Budget Outlook, presciently titled 'Budgeting for Uncertainty'.

In the meantime, companies might like to use its recent 'The world in 2021' as a way of challenging their own thinking about the likely future.

Conventional wisdom is still convinced that any day soon, the world will somehow return to 'normal'. Demand will then resume its steady upward growth, and today's economic and political uncertainties will magically disappear.

Of course, conventional wisdom may be right.

But its record at major turning points is shockingly bad. It may not, therefore, be very useful in current circumstances.

Boards and business teams may therefore find it valuable to debate the blog's alternative view, to help develop their own shared view of the outlook.

You can download a copy of the 2 page summary, 'The world in 2021' by clicking here. The full chapter can be downloaded by clicking here.

The blog hopes you will find its analysis helpful in these uncertain times.

The Financial Times kindly prints a letter from the blog today, under the headline "The golden age of the baby boomers is gone - for ever".

It summarises the key ideas in its new eBook, Boom, Gloom and the New Normal, co-authored with John Richardson.

Coincidentally, it appears 4 years after the blog's famous letter to the FT on the US housing boom, "Every mania has its illusion".

This letter warned that "the myth behind the US housing mania is likely to become increasingly transparent". Yet as we know to our cost today, such warnings were widely ignored at the time. The blog hopes that today's letter receives a more considered hearing.

From Mr Paul Hodges.

Sir, Martin Wolf is absolutely right to highlight that the current downturn is among the longest seen in modern times ("We are floundering in our longest depression", Comment, September 2). The sad thing is that its cause is obvious, yet seemingly overlooked by most policymakers and investors.

These will come from developing a new growth paradigm, based on the emerging megatrends of increasing life expectancy and the need to improve water availability and food production, while reducing carbon footprint. The longer we ignore this demographic change, the longer Mr Wolf's depression will last.
Paul Hodges, Chairman, International eChem

China's auto market growth has clearly stalled.

As the chart above shows, August figures (red square) continued the trend of recent months, and were only 5% above 2010 levels (brown line). Rao Da, head of China's automotive association, also repeated his warning that "there is no sign of a market recovery".

The reason is not hard to find. Although August data suggests inflation may be peaking, its level of 6.2% is far too high for comfort. And food price inflation of 13.4% is a major problem for a relatively poor country such as China.

Many in the West simply do not realise that the official definition of 'middle income' means people who earn just $2/day - $20/day. The rich are those earning over $20/day, and are just 4% of China's population.

And even these figures overstate people's real earnings. The Asian Development Bank chooses to base them on its own more favourable version of the purchasing power parity (PPP) metric, not the amount actually earned in a pay packet.

What happens next is becoming a critical issue. The blog's co-author, John Richardson, notes JD Power's forecast that China is on track to produce 31 million vehicles in 2013, up from 17 million last year.

China boosted sales 46% in 2009 and 32% in 2010. But this was based on its 'no questions asked' lending surge. Now lending growth has stalled, due to the inflation problem. Sales are forecast to be just 19 million this year. Continued 5% growth would mean only 21 million sales in 2013.

So what will happen to all this capacity? And what will happen to all the new chemical and polymer capacity built to supply it? It doesn't take a rocket scientist to deduce that China has only two options:

• Ramp up its export sales
• Shut down surplus factories

Neither seems a very attractive option, given that the world was counting on China's continued growth to sustain global demand.

The New York Times notes that "any slowdown in growth is likely to shock the world's automakers". The prospect of 45% over-capacity by 2013 means such a shock may not be far away.

Alchemists have always claimed to be able to perform the impossible. The most common claim was that they could turn lead into gold.

In Europe, the European Central Bank has been trying the same trick. It claimed to turn near-worthless Greek bonds into German-quality euros.

Now its German board member Jürgen Stark has followed German Bundesbank president Axel Weber in resigning over the issue. The reason is obvious:

• The ECB action can only work for a short period. Greece, as the blog has argued since May 2010, will never be able to pay its bills
• Germany will then end up paying the bill, when it is finally agreed that lead is not gold.

The ECB has made a major mistake by becoming an alchemist. It has lost support within N Europe, which adds to the political issues now surrounding the fate of the Eurozone itself.

Across the Atlantic, the US Federal Reserve also became an alchemist when it launched its $600bn QE2 programme. As the blog has noted over the past year, this aimed to prove that liquidity was the same as capital.

Printing money can provide liquidity to financial markets. But it cannot repair the balance sheet in the housing market. As with Greece, banks that lent capital unwisely will not be repaid.

And just as in Europe, two Fed Governors, Charles Plosser and Richard Fisher, have rebelled against Fed policy. They argue that the Fed's focus on supporting the stock market has done nothing for the real economy.

Tomorrow, the blog will look at the key issue of why the two most important central banks in the world have made such similar errors of judgement.

The IeC Downturn Alert has hopefully done the job for which it was intended.

It was launched at the end of April, when the blog became convinced that the global economy was highly likely to enter a new downturn. It also realised from its experience in 2007-8, when it later became known as 'The Crystal Blog', that this view was probably not widely shared.

It therefore wanted to monitor the situation on a regular basis. It decided to select benchmark chemical products from the key regions, as a way of linking its wider concerns with the evidence on the ground.

The role of ICIS pricing, and its network of editors, has therefore been crucial. This has enabled the blog to follow individual product markets, and provide an objective analysis of their weekly fluctuations.

The chart above is, of course, a key reason why the blog was convinced a new downturn was near. As it noted in June, history shows that recession (shaded area) has occurred every time oil prices (red line) have remained above $50/bbl in real (eg inflation adjusted) terms.

Sadly, it appears that this time is not going to be different.

The evidence for a renewed downturn is now all around us:

• The OECD says "economic recovery appears to have come close to a halt in the major industrialised economies" with likely H2 growth at <1%.
• China's economy is slowing fast. Ethylene demand growth tracks GDP, and was just 1.9% in H1, compared to ~10% in 2009-10.
• The American Chemistry Council (ACC) reported Friday that "we see an economy still near stalling speed".

The blog hopes that the IeC Downturn Alert, coupled with its IeC Boom, Gloom Index, has helped to catalyse debate about the potential for a renewed downturn. We cannot avoid the severe problems that this will cause. But hopefully the Alert has provided companies with clear advance warning that problems lay ahead.

Equally concerning is the fact that Western central bankers and policymakers have so completely misread the underlying economic situation over the past 3 years. The blog will look at the likely reason for this terrible mistake over the next two days.

Price movements since the Alert launched, and ICIS pricing comments this week are below:

Benzene NWE, down 16%. "Values softened over the course of the week due to wider economic bearishness."
S&P 500 Index, down 15%.
HDPE USA export, down 14%. "Prices are still too high to compete with Asian prices".
Naphtha Europe, down 13%. "Demand from petchems remains weak".
Brent crude oil, down 9%.
PTA China, stable. "Underpinned by firmer feedstock PX prices and pre-holiday restocking activity by end-users".

The blog's Boom, Gloom and the New Normal eBook highlights the impact of the ageing Western babyboomers on future demand patterns.

Yet central banks such as the US Federal Reserve and the European Central Bank believe demographics have nothing to do with demand. For them, as one former central banker told the blog "demand is a constant".

They have invested years of effort, and $millions, in developing complex mathematical models of demand. The algebra behind these is the equivalent of the alchemists' search for the philosophers' stone, as shown in the example above from a May 2006 Fed paper .

But a mathematical model based on algebra cannot replicate human behaviour. Therefore the modeller needs to believe that human nature can safely be ignored as a input into the model.

Any reader who doubts this argument might like to read the latest speech by US Fed chief Ben Bernanke. It analyses the background to today's economic weakness. And it then goes on to ask the critical question, "Why has this recovery been so slow and erratic?"

It answers this question by referring to the idea of 'pent-up demand'.

This concept is a cornerstone of economic models, and was developed during the babyboomer-led supercycle, when interest rate changes really did lead to temporary ebbs and flows in demand for housing, autos etc:

• Higher mortgage rates led boomers to postpone major purchases
• Their demand quickly revived when interest rates were reduced
• Meantime, more boomers had also entered the 25-54 age group
• So the release of pent-up demand was even greater

The Federal Reserve and the European Central Bank have not changed their models since the end of the supercycle, to reflect changing demographics. So they believe that the same level of demand for housing, autos etc, still exists today.

On this basis, they have assumed that more buying of near-worthless Greek bonds, or more liquidity via a QE2 programme to boost financial markets, will ensure economic recovery in the end. They are sincere people, but the blog believes they are terribly wrong in this assumption.

As John Richardson, the co-author of Boom, Gloom and the New Normal has commented:

"If you've spent your whole career - and built your whole reputation - on pushing a particular model it must be really hard to stand back and say, 'Wow, I've been wrong for the last few years and everything has changed'.

"We also need to get past our own self-doubts, as it is really difficult for anyone less academically qualified than them (which is 99.9999% of us) to imagine that they could be wrong".The need to challenge the power of the models is urgent. Until this happens, the global economy will get worse, not better.

Europe is at the eye of the storm when it comes to energy pricing. This is the last thing required by its struggling economy.

As the chart shows, Brent in euros (green line, RHS) is now back at the same level as June 2008, whereas WTI is 35% cheaper (black line, LHS).

Such a divergence has never happened before, and is due to two factors:

• Brent is now at $25/bbl premium to WTI, vs its usual $1/bbl discount
• The euro has fallen 12% from $1.60 to $1.40

Brent's unprecedented premium is clearly not due to strong levels of European demand. But an excellent article by Javier Blas in the Financial Times highlights one potential cause - the growing lack of liquidity in the Brent market:

• The Brent contract includes 4 fields (Brent, Forties, Oseberg, Ekofisk)
• But their output is declining and is forecast to be <1mbd by next year

The result, as the Oxford Institute for Energy Studies notes in a major new study is that:

"While the volume of production is not a sufficient condition for the emergence of a benchmark, it is a necessary condition for a benchmark‟s success. As markets become thinner and thinner, the price discovery process becomes more difficult. Oil price reporting agencies cannot observe enough genuine arms-length deals.

Furthermore, in thin markets, the danger of squeezes and distortions increases and as a result prices could then become less informative and more volatile thereby distorting consumption and production decisions.Brent's current $25/bbl premium to WTI seems to provide prima facie evidence that such "squeezes and distortions" may now be taking place.

Brent's premium also creates a further problem for Europe's economy. Unlike the USA, its prices for natural gas are closely linked to oil prices. So today's high premium for Brent creates a double whammy for consumers, and intensive energy users such as the chemical industry.

Financial bubbles are like balloons. Only instead of air, they need to be constantly pumped up with new lending. Otherwise they begin to deflate, and the Minsky Moment occurs.

The above chart of China's bank lending shows, as discussed last month, that the Minsky Moment is getting close. August's lending (red square) was exactly the same as in 2010 at RMB548bn ($86bn). And so far this year, it is down 8% (RMB60bn) versus 2010.

Last year, lower official lending was supplemented by the 'shadow banking' system, as described by the blog's co-author of the Boom, Gloom eBook, John Richardson in a 2-part July post. But that was when the authorities still believed they could contain inflation below 4%.

Today with inflation above 6% and food price inflation over 13%, they have tightened up considerably. 2 major plastics converters, who were also acting as traders, reportedly went bust in Guangdong recently with debts of Rmb100m each.

This leaves the problem of all the inventory, bought on borrowed money over the past 2 years, which is now filling warehouses down the value chain. Some of this is disappearing into exports, where it is depressing Asian and global prices.

For example, data from GTIS, the global trade data experts, shows polyethylene exports were:

• 350kt in January-July, double 2010 levels
• They were also more than 3 times 2009 levels

Of course, the government may panic, if growth really starts to slow sharply, and allow lending and inflation to rise again.

But if it doesn't, then the owners of the inventory will eventually begin a rush for the exits. At this point, when distressed selling starts, the Minsky Moment will have arrived.

The blog has just returned from Lords cricket ground in London, where its Surrey team has just won the UK's 40-over competition.

It thought you might like to see above photo of the winning team (source: Cricinfo) at the moment of victory.

There seems little doubt that the global economy is now entering a new downturn. Pessimists may worry that it has already begun in Q3. Optimists might hope it will be delayed till Q4, or even Q1.

But almost all major indicators are pointing in the same direction.

• On the macro-level, the latest American Chemistry Council report notes that OECD leading indicators for "Canada, France, Germany, Italy, UK, Brazil, China and India (continue) to point to a slowdown", whilst those for the USA and Russia "are now also pointing more clearly to a slowdown".
• In the chemicals sector, ICIS news reports that "the problem for the market now, however, is that the mood is no longer upbeat and optimistic, but prices for many chemicals are still at or hovering below record highs. In such an environment nobody wants a warehouse full of material and no cash in the bank."

China, of course, is a major concern. It led the global economy out of the 2008/9 downturn, and justified today's high crude oil prices. Yet as the above chart from Petromatrix shows:

• Oil imports this year (black) are only 270 kbpd higher than 2010 (blue)
• Over the past 3 months, they are actually down 164 kbpd versus 2010

Equally, the Turkish chemical market is showing signs of distress. Turkey is an excellent leading indicator, due to its large domestic demand and low level of production:

• In tight markets, this means prices rise very quickly, as exporters see better returns in their own markets
• In weak markets, prices fall very quickly, as producers fight for volume

A long-time Turkish reader told the blog this week that in polyethylene, European producers are active at "very competitive levels...followed by ME producers who do not have enough volume in Asia". Similarly, he says "copolymer PP has lost its usual €50/t premium over homo", whilst "the PVC market is under huge pressure", with US exporters very active.

Price movements since the IeC Downturn Alert launched in April, and ICIS pricing comments this week are below:

Benzene NWE, down 19%. "Continued to struggle with global economic bearishness."
HDPE USA export, down 14%. "Prices too high to compete with lower Asian and Middle Eastern prices".
Naphtha Europe, down 12%. " Demand is weak from petchems and gasoline".
S&P 500 Index, down 11%.
Brent crude oil, down 11%.
PTA China, up 1%. "Prices rose after China's Yisheng Petrochemical shut 3.3 million tonnes due to a mechanical issue. They then dropped because of the bleak global economic outlook."

An abrupt change of direction is never a pleasant experience in global financial markets. Yet unfortunately, the blog's regular 6 monthly review suggests this has started to occur since March.

Investors are beginning to fear we may not be be entering a new Supercycle after all. Some are also worrying that high oil prices may be leading to demand destruction.

The blog's view remains that the ageing of the Western Babyboomers (those born between 1946-70) means we are entering a New Normal era. And there are certainly signs that bond market investors are now starting to accept the argument of Chapter 2 in its Boom, Gloom and the New Normal eBook, that we are following Japan's model.

This is quite a change. Investors mostly took no notice of the blog's article in the Financial Times a year ago, which suggested the consensus might be wrong. But as the above chart shows, the US 30 year bond (light green) is up 16% since March, due to the fall in US interest rates.

• Germany's stock market (green) is the biggest loser since March, down 22%. A China slowdown will impact it badly, and investors fear it will have to pay for the costs of Greece's looming default
• Investors also worry that other emerging economies are slowing. Brazil (pink) is down 14%, Russia (lilac) down 19%, India (orange) down 8% and China (blue-green) down 16%
• Japan (purple) is down 15% after the earthquakes and tsunami
• The US (dark blue) and UK (brown) are down 7% and 8%, as recent economic data has disappointed

Even the major investment banks are suddenly becoming cautious. Goldman Sachs has now cut its year-end forecast for the S&P 500 from 1400 to 1250, citing "heightened uncertainty in global equity markets".

However, its commodities team is still on the bullish tack, forecasting that Brent will rise to $130/bbl over the next 12 months. They believe "emerging-markets demand for key commodities, including oil, is holding up well".

Most of Europe goes on holiday in August, and so it is only now that auto sales for July and August have been reported.

As the chart above shows, the monthly sales figures continued the weak trend seen so far this year (red square):

• July's sales of 1 million were the lowest in the 2005-11 period
• August's sales of 750k were lower than any year except 2010
• Total sales of 8.9 million were down 1% versus Jan-Aug 2010

ACEA (Association of European Auto Manufacturers) also note that only Germany is showing any strength amongst the 5 main markets. It is up 11% in 2011, but France is at 0%, the UK down 6%, Italy down 12% and Spain down 22%.

This does not provide much confidence regarding the Q4 outlook for chemical and polymer demand in this important sector.

Oil supply is critical to today's global economy.

Now a new book by oil expert Daniel Yergin, author of 'The Prize', suggests that the outlook may be more promising than most believe.

Pessimists such as Marion King Hubbert have argued that the world is running out of oil. Hubbert, for example, gave his name to 'Hubbert's Peak', the original version of 'peak oil'. It suggested that US oil production would hit a peak between 1965-70.

Hubbert was proved right, as production did indeed peak in 1970. But Hubbert's other predictions were less successful. He forecast that US output would have declined to just 1.5mbd by last year. But in fact, new technology meant output was 7.5mbd.

Plus, of course, production would have been even higher if the US had opened up some of the most promising land/offshore areas for exploration. They are closed for environmental reasons, not because the oil doesn't exist.

Yergin's argument is that the truth is more complex than can be captured by a headline, or snappy sound-bite such as "peak oil". As his chart above shows, world oil production hit a plateau in the 1970s, and again over the past few years.

But higher prices are already leading to new supplies coming on stream. Equally, technologists are still getting better at extracting more oil from existing fields. Today, for example, only 35%-45% of the available oil is ever recovered from a field.

Yergin also notes that cumulatively, the world has produced ~1trn barrels of oil since the industry was founded 200 years ago. He adds that:

"Currently, it is thought that there are at least five trillion barrels of petroleum resources in the ground, of which 1.4 trillion are deemed technically and economically accessible enough to count as reserves (proved and probable)."

Next week, the blog publishes Chapter 5 of its 'Boom, Gloom and the New Normal' eBook, co-authored with John Richardson. This looks in detail at the major changes taking place in demand patterns as the BabyBoomers (those born between 1956-70) enter the 55+ age group.

This cohort already includes 272 million people, 29% of the Western population, and it is growing every day.

The book argues that the over-55s simply do not need to buy new houses, or extend their present homes. Equally, they no longer want to buy new autos every few years. So it is hard to imagine that these key sources of chemical and polymer demand can recover to earlier SuperCycle levels.

Stimulus programmes and tax cuts cannot force people to buy things that they no longer need or want.

This seems plain common sense. But our discussions with central bankers and policymakers over the past few months have made it clear that this is not a consensus view, as the blog discussed recently.

Equally, the chapter highlights the very real financial problems facing the over-55s as they reach pension age. The chart above gives an example of the mountain that has to be climbed.

It is based on official US earnings statistics, starting from 1979. Over the period to the end of 2010, a worker on median wages would have earned a total of $811,096, and have a pension fund of $242k by the end of 2010 (purple line), based on the assumptions that they:

• Earned median wages from 1979 - 2010 (blue line)
• Saved a regular 10% of this income (red line), a total of $81110
• Achieved the average S&P 500 Index growth as a return on their investment each year.

This employee would have earned $39k in 2010 on median earnings. Yet their pension fund would provide an annual pension of only ~$10k/year, with inflation proofing.

Of course, no one chart can cover all circumstances. Some people will have managed to save more, and will have been more successful with their investments. But saving 10% of income each year is a stiff target. And US earnings are generally higher than elsewhere in the West.

Clearly a pension of $10k/year will not fund the prosperous retirement that most people are expecting. In turn, it provides another reason why chemical companies should assume that demand patterns will change in the West, as we transition to the New Normal.

Will you still need me? Will you still feed me? The Beatles asked the right questions back in 1967, when singing 'When I'm Sixty-Four' on their iconic Sergeant Pepper album.

What would happen to the Western BabyBoomers when they became 64? Would they be about to die, as had previous generations? Or would their future be different? Today, we are starting to discover the answer to The Beatles' questions, as the oldest Boomer reached the age of 64 last year.

Chapter 5 in the blog's free 'Boom, Gloom and the New Normal: How Western BabyBoomers Are Changing Chemical Demand Patterns, Again' eBook co-authored with John Richardson, describes how companies need to adapt their business models to this New Normal.

One measure of the change underway is that two-thirds of all those who have ever reached the age of 65 years in the world are alive today. This is the demographic timebomb that faces us.

The Boomers are the richest, and largest, generation that the world has ever seen. But since 2001, they have been entering the 55+ age range, when people typically spend less and save more. By 2020, 33% of the developed world population will be over 55 years old.

It is not surprising, therefore, that recent 'recoveries' have proved so weak, in spite of massive 'stimulus' spending. The Boomers simply don't need more housing or new cars. Equally, they are becoming uncomfortably aware that their pension funds may now have to support them for one or more decades, rather than just a few months or years.

Western women are particularly likely to become more cautious in their spending, as equal pay for equal work remains only an aspiration for many. And whilst women have longer life expectancies than men, 25% are only in part-time employment, according to official figures from the Organisation for Economic Cooperation and Development. So their prospective pensions are even smaller.

Thus we must assume that future demand growth will be slower. We must also plan for a world where regular and deeper recessions are likely to become a feature of the global economy once more, in contrast to the relatively smooth growth seen during the Boomer-led Super Cycle.

But the Beatles provide a reliable guide, if we are prepared to listen to their message from 'When I'm Sixty-Four'. The megatrends such as an ageing population and the need for improved food production provide the key to future success.

FREE DOWNLOAD OPTIONS FOR CHAPTER 5
Click here to download a 2 page summary of the Chapter .
Click here to download the full Chapter
Click here to view the 7 minute video interview with Paul Hodges

The chemical industry has a turnover of $3.4trn, and is the world's 3rd largest industry. It matters to the global economy.

Many of its leaders are about to meet next weekend in Berlin for the annual European Petrochemical Association (EPCA) meeting.

The blog strongly believes that this should not be seen as a 'business as usual' meeting. We cannot simply assume that the global economy is in fundamentally good shape:

• IMF head, Christine Lagarde, has warned the global economic situation is entering a "dangerous place"
• World Bank president Robert Zoellick has described world finances as being in a "danger zone"

These are not sound-bites being made for effect.

The danger signs have been building for months. The blog, after all, introduced its IeC Downturn Alert nearly 5 months ago, on 2 May.

Coincidentally, this matched the peak of the US S&P 500 Index, since when financial markets and crude oil prices have fallen dramatically, as shown in the chart above.

Every week since then, with the help of ICIS news and ICIS pricing, the blog has chronicled the approach to today's Downturn:

• First we saw customers around the world buying 'hand to mouth'. They tried to run down inventories built up during the 50% rise in crude oil prices between December-April
• Then everything went quiet during the summer. The retailers destocked after seeing end-user consumption fall due to the impact of higher oil prices
• Then it became clear that China's economy, the previous motor of the global economy, was slowing fast, as the government reduced credit to combat high inflation
• Now, in September, it is clear that demand has not returned after the holidays. And the wider economic outlook is getting worse, not better.

The blog made similar efforts to alert the industry to the issue of demand destruction before the 2008 downturn, and was later awarded the title of 'The Crystal Blog'. But sadly, its warnings were not taken seriously at the time when they could have had an impact.

The industry's leaders need to ensure that 'this time is different' in Berlin. It is no exaggeration to say that the very future of some companies, and of important sectors of our industry, may be at stake.

Price movements since April, and ICIS pricing comments this week are below:

Benzene NWE (green), down 26%. "A swathe of imports coming into the ARA region were also keeping supply ample as demand struggled amid weak end user confidence."
Naphtha Europe (brown dash), down 19%. "The impact of refinery run cuts is starting to show, and it is thought that the naphtha oversupply would have been more severe if not for these".
HDPE USA export (purple), down 18%. "The Asian market has slowed down, in part because of a national holiday, and in part because of concerns about the global economy. Asian prices were expected to fall in China because of tightening credit rules."
S&P 500 Index (pink dot), down 17%.
Brent crude oil, down 14%.
PTA China (red), down 4%. "Most buyers were adopting a wait-and-see stance because of the unclear market trend. Only a few end-users purchased cargoes on a need-to basis."

Auto sales in the world's 3 main markets (China, USA, EU), saw much slower growth in the past 3 months.

The chart above shows how they have moved in 2011 (red square) versus previous years. It is clear that the stimulus-led boom seen since 2009 has come to an end:

• Overall, sales in the last 3 months were 9.2m, up just 2% on 2010
• Last year, China's sales were soaring, and masked the West's slowdown
• But now the need to fight inflation has ended its credit boom

Thus year to date sales in these 3 major markets were 26m at the end of August. This was only 5% higher than the 2010 level, and looks set to weaken further in Q4. By comparison, 2009 saw a very healthy 10% rise at this stage in the year, even though Q1 had been dreadful.

Last year, these three regions were nearly two-thirds of global auto sales. And it seems other global markets are also slowing: passenger car sales in India actually fell 2% in the April-August period versus 2010.

This slowdown was already evident back in July. Hopefully companies focused on these important markets have now had time to prepare their contingency plans, in case the slowdown continues.

The world's leading retailers have been extremely reliable leading indicators for the chemical industry, since the Great Recession began.

They were the first, back in July 2007, to highlight the major changes underway in consumer markets. Tesco, the world's 3rd largest retailer, warned then that they were changing their focus away from more affluent shoppers and green issues:

"Coming down the road is a tougher time, and that is why we are doing this now."

Now Tesco's UK CEO Richard Brasher, who gave that warning, has gone one step further. Launching a £500m ($775m) discount campaign, he explained:

"Today is the New Normal. Customers are challenged. They have got to make ends meet".

Tesco is seeing the same issues as Wal-Mart and Carrefour (world No1 and 2), as well as thousands of smaller companies. The Boomer-led SuperCycle of demand is disappearing, as the chart above shows:

• From the 1980s onwards, consumer companies developed the concept of 'mass customisation', which aimed to provide higher perceived value
• They could afford to do this by outsourcing manufacturing to lower-cost factories in Eastern Europe and Asia

Consumers loved this benefit. But now, the market is polarising again.

Luxury brands are still doing well, and so are the bargain 'Dollar Stores' which keep prices low. But the middle ground is disappearing.

Tesco and the other major retailers are having to make a choice about how they position themselves in the New Normal. Clearly, they have to go down-market, and compete on price, in order to survive as volume players.

In turn, of course, they will force the same choice on their suppliers.

Companies will therefore find it increasingly difficult to ignore the New Normal, if they wish to maintain their volumes and pricing power.