Chemicals & The Economy

Today's economic situation is getting worse, not better. The blog believes this is because most policymakers still refuse to accept the wisdom contained in the Beatles' 'When I'm Sixty-Four' song on their iconic Sgt Pepper album.

The Western BabyBoomers (those born between 1946-70) are the largest and richest generation that the world has ever seen.

But last year, the oldest Boomer reached the age of sixty-four. And ageing Boomers simply don't need more housing or new cars, as they no longer have to provide for growing families.

So demand patterns are changing, radically, just as they changed in the 1970's. This was when the arrival of the Boomers set off the economic SuperCycle, as they entered their peak consumption years between the ages of 25 - 54.

Chemical companies are therefore not only facing an imminent economic slowdown, as the blog has chronicled over the past 5 months with its IeC Downturn Alert. They also need to change their business models, to adapt to this New Normal.

This month's Chapter 5 of the blog's free 'Boom, Gloom and the New Normal' eBook, co-authored with John Richardson, aims to help with this process. The first step is for CEOs to establish a high-powered team, operating with the support of their Board and line managers, to quickly put in place the necessary Action Plan.

The team needs to answer the 4 key questions required for any successful plan:

• Why. The Board needs a clear view of the likely impact of an economic downturn, combined with the demand changes caused by the ageing of the Boomers.
• What. The team needs to highlight the key issues which its plan aims to tackle. Speed is essential, and only the really super-critical issues can be addressed short-term.
• How. Implementation plans are critical. Resources need to be available, and key managers must 'buy-in' to the process, otherwise it will fail.
• When. Timing is also critical. Short-term priorities (credit control, working capital) have to be balanced with the business model changes needed to adapt to the New Normal.

The outlook is very uncertain. Tomorrow's post will discuss the relevant Scenarios that need to be addressed. And on Thursday, it will highlight the Critical Success Factors against which plans need to be measured.

The blog will be happy to provide any support or advice that may be helpful to readers as they develop their Action Plans.

International eChem/ICIS are also running three training courses in Houston, Singapore and London in Q4, to help with detailed implementation issues. Please click here for further details.

The transition to the new Normal is likely to be painful and long-lasting.

Future demand growth will be slower as the ageing Boomers spend less and save more.

More 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.

Successful companies will also have to venture into the unknown, as until recently the 55+ generation had no real existence as a separate economic unit.

Previous generations usually found their needs at this age were focused on health-related issues - the Zimmer frame of popular mythology.

So as we venture into the unknown, Action Plans can't be too prescriptive about what we might expect to see over the next 20 years. Chapter 5 of the blog's free 'Boom, Gloom and the New Normal' eBook, co-authored with John Richardson, aims to help with this process.

As discussed yesterday, the Chapter outlines some potential Scenarios to highlight the key variables that need to be considered:

'All's Well that Ends Well'. In this scenario, the key dynamic is that there is a rapid adaptation to the New Normal. This may be driven by the observation of the major pain being suffered in countries already at the sharp end of some most unwelcome restructuring - Greece, Portugal, Ireland and Spain, for example. This gives Western politicians the courage to talk seriously about the issues that society now faces, whilst the wider population becomes prepared to listen to their messages and to accept that major changes need to be made.

'Muddle Through'. In this scenario, there is no rapid adaptation to the New Normal, and although a higher quality of dialogue takes place between policymakers and the electorate than in the past, no firm agreements are reached on key policies and objectives. However, and importantly, social cohesion is retained, and so society does not fragment into warring groups.

'If You Don't Know Where You're Going, Any Road Will Do'. A third scenario is based on the potential for politicians to remain more focused on sound-bites than on formulating policies that will drive long-term success for their populations. In this Scenario, the current dysfunctional state of many Western political systems, and their alienation from the wider electorate, is not a temporary phenomenon but a sign of the future.

'Don't Worry, Everything will be Just Fine'. This is the scenario under which the West had been effectively operating for the past few years, ignoring the demographic changes which are taking us in a new direction. It is characterised by an increasingly desperate belief that everything is just about to 'return to normal' (i.e. the former SuperCycle), via the magic elixir of either tax cuts or yet more stimulus.

Tomorrow's post will provide its view of the Critical Success Factors against which Action Plans need to be measured.

The blog will be happy to provide any support or advice that may be helpful to readers as they develop their Action Plans.

International eChem/ICIS are also running three training courses in Houston, Singapore and London during Q4, to help with detailed implementation issues. Please click here for further details.

Yesterday's Scenarios hopefully provided valuable insight into the challenges ahead for companies and individuals. They also suggest some Critical Success Factors for achieving a successful transition to the New Normal, as set out in the chart above:

1. Flexibility. This involves adapting to new circumstances and being willing to compromise rather than battling for an impossible nirvana.
2. Change management. The next 20 years will likely see rapid and unpredictable change in the business environment in contrast to the remarkable stability of recent decades.
3. Scenario Planning. Companies need to adapt their planning processes to cope with the greater uncertainty that will come from operating in a more 'events-driven' world.
4. Real needs. Over the past 20 years, Westerners have often confused 'wants' with 'needs'. In the New Normal, mere 'wants' are unlikely to be reliable market drivers for the future.
5. Action orientation. Uncertainty can breed a loss of energy, and so companies will need to encourage their employees to experiment creatively if they are to move forward.

The positive news is that most Boomers are likely to lead active and healthy lives well into their 60s and 70s. So the opportunities to capture their interest and their business are very large indeed. We will highlight some valuable case studies to help with this process in Chapter 7.

Companies focusing on the emerging economies face similar challenges, as we will discuss in Chapter 6 next month. Their core market will also consist of a currently underserved demographic, those just moving out of poverty and able to afford a bar of soap, or a bra and pair of panties, for the first time.

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.

The blog will be happy to provide any support or advice that may be helpful to readers as they develop their Action Plans.

International eChem/ICIS are also running three training courses in Houston, Singapore and London during Q4, to help with detailed implementation issues. Please click here for further details.

US subprime lending was the starting point for the economic crisis now spreading around the world. The blog believes a key cause was policymakers refusal to accept that the ageing of the BabyBoomers (those born between 1946-70) would cause a major change in demand patterns.

Instead, they have continued to believe that underlying levels of housing demand are the same today as in 1970-2000, when the Boomers were settling down and having children. Their idea is that 'housing demand is a constant'. They will not accept that ageing Boomers no longer need to buy new homes to house growing families.

Thus Fed Governor Sarah Bloom Raskin set out their thinking this week:

"The conventional tool of monetary policy is to modify the near-term path of interest rates.... This policy accommodation also tends to raise household wealth by boosting the stock market and prices of other financial assets. With greater household wealth and cheaper borrowing rates, consumers tend to increase their purchases of houses, cars, and various other goods and services."

Yet the chart above, based on US Census data, clearly shows that the policy has failed:

• Housing starts (purple) and building permits (red) remain well below anything seen since statistics began in 1959.
• Starts were just 571k in August, and permits only 620k.

This surely represents a generational shift in demand patterns.

Any scientist or engineer, faced with this situation, would re-examine their assumptions. They might well, like the blog, notice that a record 25% of the US population is now over 55 years old. Just 17% were in this cohort back in 1950. And the percentage is rising by 1% every 5 years.

Equally, this refusal to consider other factors is creating great pain for more and more Americans. Their equity in their homes has declined 54% since 2006 from $13.5trn to $6.3trn. 1 in every 5 Americans owes more on the mortgage than the home is worth.

We are now moving into Budget period for most companies. The blog believes it is vitally important that they include their own assessments of the outlook. It fears that the global economy is increasingly threatened by these failed policies.

• On Tuesday, it will outline a 4-point Action Plan for companies to review
• On Wednesday, it will propose 4 key Scenarios for discussion
• On Thursday, it will highlight 5 Critical Success Factors, to help guide implementation plans.

Sadly, it is becoming clear that we cannot rely on wise and far-seeing policymakers to guide the global economy in the right directions. In turn, this may mean that we all need to prepare for increasingly turbulent times ahead.

The IeC Boom/Gloom Index seems to have done its job.

It was launched in June 2009, as a way of reflecting the extremely positive sentiment then building in financial markets. And as the chart shows, it remained bullish until July (blue column). Since then it has plunged back to the low levels seen between Q4 2007 - Q1 2009.

This time, unlike Q3 2010, there has been no quick bounce from a new version of the US Fed's August 2010 launch of the QE2 Lifeboat Party.

Interestingly, the world's leading stock market index, the US S&P 500 has now followed its downwards path very quickly (red line). This is unlike the experience of 2007.

The start of the recession has since been officially dated to December 2007, 1 month after the Index gave its warning. But investors were very much slower to realise that a downturn was close.

Petchem markets are continuing to act as leading indicators for the global economy. The IeC Downturn Alert shows there was no September rebound in orders after the holiday period.

October will have to bring a sudden, and powerful reversal of the downward trend. Otherwise Q4 could be very difficult indeed. Benzene, the blog's favourite market indicator, is now down 27% since the Alert began 5 months ago.

Equally, crude oil prices are looking very weak, and seem to be heading towards the blog's $60/bbl target. The damage they have already created to demand means prices could end up much lower.

Meanwhile, financial markets have become dysfunctional under the influence of the super-computers. These now control 60% or more of trading in most markets. They are programmed to:

• Read and interpret financial market headlines in real time
• Issue thousands of buy or sell orders in response to these
• Then close their positions after micro-seconds, and start again

The computers are fine when it comes to reading numbers. But they completely fail when interpretation is required:

• Thus markets soared on Thursday, after German Chancellor Merkel won her parliamentary vote to support the European Financial Stability Facility
• But they then reversed direction on Friday, when new headlines suggested the vote had not resolved any of the Eurozone's problems.

This demonstrates how financial markets have lost touch with their real purposes - of raising funds to allow companies to expand, and of allowing producers to hedge commodity price risks. High-frequency trading instead simply creates unhelpful market volatility for the profit of those owning the most powerful computers.

Price movements since the Alert's launch, and ICIS pricing comments this week are below:

Benzene NWE (green), down 27%. "Market values have eroded throughout the past month on continued macroeconomic bearishness as well as slower downstream demand."
Naphtha Europe (brown dash), down 20%. "Refinery run cuts are reducing supplies...demand remains weak".
HDPE USA export (purple), down 18%. "Traders said US inventories were building....but very little export activity was yet taking place."
S&P 500 Index (pink dot), down 17%.
Brent crude oil, down 17%.
PTA China (red), down 10%. "Sellers were forced to offload their cargoes to take in cash ahead of the National Day holiday in China."

China was understandably a key item on most people's minds at this week's annual EPCA (European Petrochemical Association) meeting in Berlin. It has been the motor of global chemical demand growth over the past 3 years.

The blog's discussions identified a number of signs that this support may be disappearing:

• Many companies worry about the level of inventories being held down the value chain. Some fear these could be up to twice normal levels.
• Credit has become much tighter, as the authorities try to reduce inflation. Interest rates of 2%-3% a month seem to be quite common.
• Considerable inventory is controlled by property developers, who are using it to replace bank credit lines that have been cut off.
• The risk of bankruptcies is seen to be rising. At today's prices, this represents considerable credit risk for petchem suppliers.

Thus there are good reasons for companies to take a more cautious approach. In turn, of course, this further reduces potential growth levels.

At the same time, the latest data confirms major changes are underway in China's trade patterns. The chart above shows net polyethylene imports - eg imports less exports - using GTIS data for January-August:

• China's total net imports have fallen 11% in 2011 versus 2009
• Meanwhile, its net imports from the Middle East have risen 60%
• Its net imports from SEA have risen 17%
• But net imports from NEA have fallen 40%
• Net imports from NAFTA have fallen 51%

This trade data is key to understanding future demand patterns.

It shows China is refocusing its imports on strategic oil partners in the ME, and within the ASEAN Free Trade area. At the same time, it continues to increase its own production ahead of demand growth.

In turn, of course, this strategy intensifies competition in other regions, as traditional exporters to China are forced to seek new markets. This competition can only intensify, if fears of a China slowdown prove real.

The great film comedy Groundhog Day saw Bill Murray doomed to repeat the same day in his life, until he learnt to become a better person. Sadly, financial markets have yet to learn from his example.

Every quarter, the investment banks produce new stories aimed at pushing stock/oil markets higher. Then high-frequency traders make $millions in seconds by bidding prices higher.

This week saw the same pattern yet again as Q4 began.

Reuters, not known for its sensationalism, carries a detailed account of how the computers pushed prices 4% higher in the last hour of Tuesday's New York trading. Those who haven't yet read our own account of the process in Chapter 3 of 'Boom, Gloom and the New Normal', may well be amazed by the report.

Yet 3 days later, the Governor of the Bank of England, not normally an alarmist, told the BBC that: "This is the most serious financial crisis we've seen at least since the 1930s, if not ever."

It is a measure of the dysfunctionality of our financial systems that the two events could occur so close to each other.

The real world in which chemical companies operate confirms the Governor's outlook. The chart above shows price movements since the beginning of the year. It highlights the complete change of direction since the IeC Downturn Alert's launch on 29 April.

ICIS pricing comments this week are below:

Benzene NWE (green), down 17%. "Benzene players continue to struggle with softening demand and overall bearish sentiment."
S&P 500 Index (pink dot), down 9%.
PTA China (red), down 7%. "Market remained unchanged because of China's National Day holiday from 1-7 October."
Naphtha Europe (brown dash), up 3%. "Demand from the petrochemical industry remains poor, while from the gasoline sector it is mediocre."
HDPE USA export (purple), up 5%. "Prices trending lower based on plentiful supply and low feedstock costs."
Brent crude oil, up 9%.

The good news about US auto sales last month was that they were the highest September sales since 2007. The bad news was that they were still below the 1.1 million level, which was the minimum monthly sale from 2005 - August 2008.

The reasons for the slight increase in sales were also quite prosaic. The average age of autos on the road is now a record 10.7 years, and so people are being forced to replace older vehicles. And even so, a rise in incentives to an average $2716/auto was required to boost sales.

The blog's EPCA meetings also revealed that the size of the average auto sold is getting smaller, as consumers cut back spending. This reduces the actual amount of chemicals and polymers used per car. In turn, it means the benefit from the impact of greater fuel efficiency standards may be less than the blog had hoped.

The world has suffered a recession every time the oil price has reached current levels. And as the blog has warned for months, this time is unlikely to be different.

The reason is captured in the above chart. This uses:

• Oil production since 1970 as reported in BP's annual review
• Average annual oil prices as reported by BP
• Annual global GDP as reported by the UN (to 1979) and IMF (from 1980)
• US recessions reported by the NBER (red columns)

The red line shows the total cost of oil purchases as a percentage of global GDP. It uses average Brent oil prices for 2011, and assumes 3% GDP growth. A number of key issues jump off the chart:

• Oil costs above 3% of GDP have always led to a recession
• The problem seems to be the sudden drop in discretionary income
• Initially this is masked, as consumers buy forward to avoid higher prices
• But buying then falls away, as soon as the oil price stops rising

Today's economic outlook seems to be following the historical pattern. Oil costs at ~5% are the highest since the major downturn in the early 1980's. And, of course, the ageing of the Western BabyBoomers makes it even more difficult for the economy to sustain this burden.

Most policymakers seem blind to this development, just as they choose to ignore the impact of demographics on demand. We are all suffering from their mistakes.

The 10000 readers who downloaded the blog's first Budget White Paper in December 2009, 'Budgeting for a New Normal', will remember the issues highlighted in the triangle above.

At the time, they were being widely ignored, as policymakers assumed that the economy would soon return to its previous SuperCycle.

Today, this optimism has been revealed as wishful thinking.

Instead, much as the White Paper feared, we have learnt that "Extended downturns are difficult times. We would all like the certainties of future growth to return. And I believe they will in time, but probably not as quickly as the financial community currently expects. Disappointment is part of the experience of extended downturns."

The lack of attention has meant these issues have since become worse. And they highlight how the world is now moving away from the economic certainties that dominated the BabyBoomer SuperCycle:

• Then, steady economic growth led companies to focus on financial targets. The Shareholder Value concept was widely adopted
• Now, we are relearning that businesses cannot ignore the impact of politics and belief factors, when they come to make decisions
• Politics has led to the current impasse over the Eurozone crisis, and to lack of US progress on debt market issues
• Beliefs have driven geo-political issues such as the Arab Spring to the top of the agenda

All this means that the world is becoming ever more complex. New concepts such as Shared Value seem likely to become the main driver for future economic growth.

Equally, forecasting the future now requires robust scenarios to be developed, rather than simple straight line forecasts. As the White Paper also noted:

"Harold Macmillan, the former UK prime minister, summed up this dilemma when asked once about "his greatest worries". He famously replied, "Events, dear boy, events". This might be a good watchword for all of us, as we progress through the uncertainties of the current downturn towards the 'New Normal'."

The blog will discuss these issues in more detail in its annual Budget Outlook, to be published on 22 October. On Saturday, as usual, it will review the performance of its October 2010 Outlook, 'Budgeting for Uncertainty'.

Financial markets continued their start of quarter rally last week. But their volatility amazes even seasoned observers. The US Dow Jones Index has moved at least 100 points in 57 of the last 58 days, for example, whilst crude oil jumped $3/bbl on Friday alone.

Of course, the continued correlation between stock and oil markets is ultimately contradictory. Higher oil and feedstock prices can only do further damage to the prospects for economic recovery in the real economy, in which we all operate. The blog discusses this in the above short interview, recorded with ICIS's John Baker at EPCA.

But the volatility is likely to continue, as long as markets remain dominated by the high frequency traders and their computer games. Reassuringly, though, there are signs that next month's G-20 meeting might ban at least some of this dysfunctional trading activity. The blog will tip its hat to Andy Haldane at the Bank of England, and his colleagues, if this can be achieved.

The blog was also reassured by news that German chemical firms are studying "scenarios for a recession" as a result of the current financial market turbulence. Henrik Meincke at Germany's VCI chemicals trade group told ICIS that "Germany's chemical industry would be prepared" should a recession occur.

ICIS pricing comments this week, and price movements since the IeC Downturn Alert launched on 29 April, are below:

Benzene NWE, down 28%. "An air of nervousness was compounding the softer sentiment across the benzene market, as was the strict inventory management currently in place across the aromatics chain and downstream markets."
HDPE USA export, down 25%. "Prices continued to fall during the week. One source suggested some prices have been so low, producers might be trying to sell into China."
Naphtha Europe, down 16%. "Demand remains poor from both the petrochemical industry and the gasoline sector."
Brent crude oil, down 13%.
S&P 500 Index down 10%.
PTA China, down 8%. "Buyers had no confidence to purchase cargoes because of poor downstream sales."

The blog will publish its fifth annual Budget Outlook next weekend. As usual, it is therefore time to review last year's Outlook. Past performance may not be a perfect guide to future outcomes. But it is one of the best that we have.

The blog's 2008 Outlook 'Budgeting for a Downturn', and its 2009 'Budgeting for Survival', meant it was one of the few to forecast the Great Recession.

2010's 'Budgeting for a New Normal' was then more positive than most forecasts, suggesting "2010 should be a better year for the chemical industry, as demand grows in line with a recovery in global GDP".

The 2011 Outlook was titled 'Budgeting for Uncertainty'. This argued "Scenario planning will give businesses the chance to adopt the wisdom of the Scouting movement. Its motto, 'Be Prepared', seems the best possible approach in today's increasingly uncertain New Normal environment."

It described its Base Case as being "the classic 'muddle through' Scenario". This suggested we might see 3% global GDP growth, oil in the $60-$80/bbl range and continued financial market volatility. It was broadly similar to the consensus chemical company forecast.

But the blog then suggested that companies should also consider an Upside Scenario based on global GDP growth of >3.5%, "causing oil prices to rise above $80/bbl" and inflation to become a major issue.

It also suggested that plans should be tested against a Downside Scenario, where countries instead "put their own interests first and adopted beggar-my-neighbour policies". It suggested this could cause "the banking system to come under major strain".

It looks as though 2011 will see all 3 Scenarios occur at different times.

Equally, the blog's concern in the Outlook about the potential for 'currency wars' has proved well-founded:

• The US QE2 stimulus programme did force China and the other BRICs to allow their currencies to rise, and supported US export growth
• But as the blog warned, "when elephants fight, those around them need to be cautious". And we have seen increasingly violent swings in major currency values in recent months

The blog's aim is to 'share ideas about the influences that may shape the chemical industry over the next 12 - 18 months'. It hopes that its 2011 Outlook again helped readers to better prepare for today's increasingly difficult economy.

Its underlying viewpoint remains the same as in 2010's 'Budgeting for a New Normal' when it forecast that:

"We will start to see a rebalancing of the global economy. The West will see lower consumption, as people rebuild their savings, and borrow less. In turn, this will mean lower export demand for the emerging economies. The outcome will be a more sustainable world economy, but it will be a difficult journey."

Wall Street analysts have their bonuses to consider at this time of year. So it is no surprise that they are talking up the prospects for the Christmas season - the peak shopping period of the year in the West.

But those involved in shipping goods don't see the same rosy picture:

• In August, Bloomberg reported that container shipping rates from Asia to Europe were suffering "the longest stretch of near-zero rates in its half-century history", as retailers cut back on orders
• Now, the New York Times reports that imports via the 5 busiest US container ports "were lower in August than, or even with, 2010 volumes".

This should be no surprise, given the above chart, again from the NYT. It shows that median US incomes fell 9.8% between December 2007's start of the Great Recession and June 2011, according to new Census Bureau data. This includes a 6.7% fall since the official end of the recession.

The Census Bureau describe this as the largest decline "in several decades". They add that it evidences "a significant reduction in the American standard of living." And if this wasn't enough to restrain Holiday spending, Western BabyBoomers (those born between 1946-70) are also becoming aware that their pensions are under increasing threat.

Most US public pension funds use an 8% assumption when they come to assess likely returns on their investments. But as the Wall Street Journal warns, this figure is now hugely over-optimistic:

• It was reasonable during the Boom-led SuperCycle after 1980, when demand for assets like stocks and housing soared
• But as we note in Chapter 5 of the free Boom, Gloom and the New Normal eBook, the key S&P 500 Index actually fell between 2000 - 2010
• None of the large US state pension funds with >$20bn saw more than a 4% annual return for the decade through June 2010

The pension funds are now between a rock and a hard place. Either they cut promised benefits to pensioners, or they increase taxes/employee contributions. Both mean US consumers will have less cash to spend.

One example from the Centre of Retirement Research highlights the scale of the crisis. It suggests that states with large unfunded liabilities might see pension costs rise from 3.8% of state and local government budgets in 2008 to 12.5% by 2014.

Any business managers who believe the analysts' forecasts could face a difficult New Year, if these prove to have been wishful thinking.

Peggy Noonan is the blog's favourite political correspondent. She used to be President Reagan's speechwriter, so nobody can accuse her of being a 'socialist' or 'doomsayer'.

Recently, she has been writing some very important columns in the Wall Street Journal about what is wrong in America, and what needs to be done to put it right.

Today's column should also resonate with the chemical industry:

"At some point in the past year or six months, people started to realize: The economy really isn't going to get better for a long time. Everyone seems to know in their gut that unemployment is going to stay bad or get worse. Everyone knows the jobless rate is higher than the government says, because they look around and see that more than 9% of their friends and family are un- or underemployed. People put on the news and hear about Europe and bankruptcy, and worry that it's going to spread here. Eighteen months ago smart people could talk on TV about how we're on a growth path and recovery will begin by fall of 2010. Nobody talks like that now.

"And people have a sense that nothing's going to get better unless something big is done, some fundamental change is made in our financial structures. It won't be small-time rejiggering--a 5% cut in this tax, a 3% reduction in that program--that will get us out of this."Noonan is right about the outlook for the global economy. Her argument needs to be recognised by the leadership of the chemical industry, and all of us who work in it. We can then use our brains and our energy to help create the 'fundamental change' that is required.

Every day spent in denial, is a day wasted. The future depends on us.

Auto sales in the key global markets of China, USA and Europe present a mixed picture as we look towards year-end (red square):

• China had a strong September, and sales are now up 6% versus 2010
• But the Auto Association claimed this was due to a last minute rush of orders caused by the ending of subsidies on smaller engines
• They forecast Q4 sales will be down 5% as a result, and expect the market overall to be up just 3% in 2011

• Europe's September sales were steady, and down 1% in 2011
• Germany remains key, with sales up 11% so far in 2011
• In the other major markets, France is stable, whilst the UK is down 5%, Italy down 11% and Spain down 21%

• The US is up 11% versus 2011, but still adrift of the pre-2008 period
• In total, it should meet the blog's forecast of 11m-13m for the year

Overall, however, these 3 regions, which account for two thirds of global sales, are likely to show only minor growth of perhaps 3% in 2011, if China's sales fall as forecast. This is really not good news for a market which is of such key importance for the chemical industry.

Its the 'big picture' issues that we need to watch these days, no longer detailed forecasts of individual product growth rates. They are driving chemical product sales in every major region.

The chart above from the Financial Times highlights Europe's drive towards austerity. Long gone are the days of the 2009 G20 meeting, when everyone focused on stimulus spending. This year, austerity packages will hit household income in most countries:

• Greeks lose 14% of their income, €5600 ($7600)
• Ireland and Portugal lose 5%
• Spain loses 5%, and Italy 3%
• Even the average German household will lose 1%

And, of course, Europe will likely see bigger cuts next year, and higher taxes, to help pay for current deficits.

Equally, there are no easy 'solutions' to today's crisis. Recapitalising Europe's banks, the most urgent task, will mean banks lending less - as higher reserve levels will reduce their lending ability. That will push some businesses into bankruptcy.

Similarly, Greece's default will hit French and German banks hard. So they will need even more capital. If they don't have enough, then the market will worry more about their lending to Spain and Italy. But this could easily become a vicious circle - if France puts in a lot of capital to protect its banks, then it could lose its own AAA rating.

And, of course, there is also the political dimension. Instead of trying to lead the debate, France and Germany have tried to put off the hard decisions. President Sarkozy faces election next year, and Chancellor Merkel in 2013. They now fear, probably rightly, that voters will throw them out if they agree to pass more money to Southern Europe.

Equally, as with President Obama in the USA, neither leader really seems to understand the economic issues involved. Instead, they all continue to defer to the same advisers whose policies have led to the current crisis.

Sadly, therefore, it seems the only real area of doubt about the outlook is around just how bad the downturn will be, and how long it will last.

The 2012-14 Budget period offers great opportunities, as well as great challenges.

Will companies continue to focus on short-term developments in financial markets? Michael Porter's Shared Value concept instead offers us a powerful model for creating future growth.

Will policymakers stop focusing on the 24 hour news cycle and instead begin to set out the bigger picture? We need a vision for the future, and a clear idea of how to get there.

Are these decisions hard to take? No.

Has the world the resources to start in this new direction? Yes.

Would we enjoy the challenge? Yes

Can we start today? Yes.

We all know that companies are going to have to set difficult budgets for the next few years. They will also have to deal with continued uncertainty. We cannot rely on wise and all-seeing policymakers to lead us forward. They may well decide to do more of the things, such as Quantitative Easing, that will make the situation worse instead of better.

But larger companies, in particular, could also start to examine how to expand long-term R&D. And every company could add a future dimension to its Budget in respect of the opportunities that will arise from the new markets being created by today's demographic and societal changes:

• Nearly a third of the Western population is now in the 55+ age bracket. They have the incredible benefit of an extra decade of life expectancy, compared to previous generations. And they have money - maybe not a lot, but enough to buy useful products and services. Yet they remain woefully underserved and often unrecognised by most companies.

• People in emerging economies are starting to move out of poverty in large numbers. This 'bottom of the pyramid' market represents a wonderful opportunity to develop new products and services. Millions now have some money to spend for the first time in their lives.

The great megatrends of the future also offer vast opportunities for future growth. These involve the need to increase food production, improve water availability and reduce carbon footprint. They are vitally important, and also offer the potential for profitable future growth. So, of course, do the opportunities associated with increasing life expectancy.

Companies therefore have a clear choice as we move into the Budget period. The blog believes a New Normal lies ahead, as it is describing in its new Boom, Gloom and the New Normal eBook, co-authored with John Richardson.

Winners will accept the challenges that it offers, and begin to move in a new direction. Losers, however, will remain frozen in the headlights, unable to take the first steps that will lead them to success.

Collectively, as the world's 3rd largest industry, chemical companies have enormous potential to do good at this most difficult time. But progress depends on each of us as individuals being prepared to adopt a positive outlook in the face of the problems with which we are surrounded.

As always, of course, the blog will be delighted to help any company that wishes to accept the challenges that offered by the transition to the New Normal. It is confident that they will discover a potential to be successful beyond their wildest dreams.

SUMMARY
The global economy does not seem to be in good shape.

Policymakers seem to fail to grasp the importance of the demographic changes that are underway in both the Western and emerging economies.

Yet demographics drive demand.

The result of this failure by policymakers is that the world seems to be heading towards a period of austerity.

In the short-term, there is probably little than any of us can now do to change this outcome. So companies need to prepare themselves to survive what might happen next.

But they also need to remember that the greatest opportunities come at the time of greatest challenges.

Two vast, and virtually unserved markets are now opening up. And they will continue to grow, no matter what happens in financial markets.

This is the wonderful thing about population data - we already know within reasonable accuracy how many people will be alive in 5 and 10 years time, and how old they will be. The reason for this accuracy is that most of them have already been born.

So forecasting has a sound basis from which to work.

It tells us that in 2015, for the first time ever, there will be 300 million western BabyBoomers (those born between 1946-70) in the 55+ age group. They will have money to spend, and an extra decade of life expectancy ahead of them, compared to earlier generations.

Separately, hundreds of millions of people in the emerging economies will be moving out of poverty. They will have small amounts of money to spend for the first time. They will want to spend it on critical needs, and in a sustainable fashion.

The chemical industry is key to ensuring that the needs of these two growth markets are met. This is the great opportunity of the New Normal.

Budgeting for the 2012-14 period is therefore even more complex and critical than usual. Tuesday's blog will discuss the Challenges we may face as a result of a slowing global economy and rising austerity. Wednesday's blog will then highlight the Opportunities in more detail.

The 2012-14 Budget period offers great opportunities, as well as great challenges.

In the short-term, the challenges may well seem more important.

But they should not blind companies to the fact that the opportunities have probably never been greater.

Of course, it is hard to be very optimistic about the shorter-term outlook for the global economy and chemical demand:

• Oil prices are at levels that have always led to recessions in the past

• Western governments are cutting back on spending and raising taxes
• Emerging economies are raising interest rates to contain inflation
• Individuals are suffering from squeezed incomes and job insecurity
• Too many people are retiring with inadequate pension provision

The short-term risks are also more weighted to the downside:

• Many people still need to adjust to working in a more turbulent world. The BabyBoomer SuperCycle of demand meant the major economies suffered only 16 months of recession in 25 years between 1982-2007

• Governments have failed to recognise the impact on demand of demographics and the ageing western populations. They have raised debt levels via stimulus programmes for no real gain

• The banking system remains under severe strain:

o It is dramatically undercapitalised in Europe
o USA banks face problems if property prices weaken again
o China's banks face losses from non-performing loans after the credit bubble of the past 3 years

And then, of course, there are the risks of rising social unrest in many countries as austerity programmes bite. Equally, the current generation of politicians has failed to display any real leadership that would help to move us beyond today's more difficult times. And, as always, there remain geo-political threats, such as the potential for Middle East wars.

Thus the blog feels there is only one possible title for this year's Outlook, 'Budgeting for Austerity, and New Opportunities'. This is because the real question, of course, is what happens next?

As individuals, will we lapse into apathy, and just give up in the face of the perceived difficulties? Or will we do as previous generations did, and confront today's problems with a view to setting out in a new direction?

The blog will discuss these opportunities in more detail tomorrow.

Blog readers can choose their favourite leading indicator this week.

In financial markets, the US S&P 500 index continued its recent rally. If you believe the bullish analysts; a Greek default, lengthy arguments between Germany and France, and the need to expand the Eurozone bailout fund into the €1-2trn range ($1.4-2.8trn), are all good news.

As US Fed Governor Richard Fisher noted Friday, the Fed's new Operation Twist stumulus package has "so far been of greater benefit to traders and large monied interests than to job-creating businesses."

Meanwhile benzene, the blog's own favourite indicator, is now trading at the same price as naphtha - $893/t versus $888/t. This has only happened twice before in history - in the 2001 and 2008/9 downturns.

Other benchmark petchem products are giving the same message:

• In polyethylene, US producers are now planning to use their cost advantage to sell into China, due to lack of other available markets. Whilst European producers are targeting Asia, Africa and Latin America due to lack of domestic demand
• In PTA, lower paraxylene prices have led to sharp falls. China's Zhengzhou futures market went limit down (6%) on Thursday, a clear sign of weakness. India was already slow before the Diwali holiday, whilst China's polyester producers are lowering prices to try and capture sales

The key issue, of course, is the level of inventory down the chain. This is probably still quite high, as wholesalers and retailers built stock in H1 ahead of price rises and expected strong sales in the pre-Xmas season. This could pressure petchem/polymer volumes over the next few weeks.

In addition, today's crude oil prices are clearly out of line with fundamentals. Supply is good, with Libya coming back already at reasonable rates. Stocks are at relatively high levels compared to more normal times. And demand is suffering due to today's high prices.

There is thus a clear risk that oil/feedstock prices could fall quite sharply, and prompt further efforts to destock, if financial markets ever decided to move back towards reality.

ICIS pricing comments this week, and price movements since the IeC Downturn Alert launched on 29 April, are below:

Benzene NWE (green), down 32%. "Several cargoes have been booked to the USA to prevent a glut of benzene building in Europe."
HDPE USA export (purple), down 26%. "Prices continued on a downward trend, as global demand remained weak."
PTA China (red), down 18%. "Most market players are pessimistic as prices continue dropping amid tight credit and a slowdown in demand."
Naphtha Europe (brown dash), down 19%. "Demand from petchems remains poor, while from gasoline is moderate".
Brent crude oil (blue dash), down 12%.
S&P 500 Index (pink dot), down 9%.

Stock markets soared after the eurozone meeting this week. But the head of the German central bank warned "The envisaged leverage instruments are similar to those which were among the origins of the crisis, because they temporarily masked the risks."

It is clearly far too early to assume that EU leaders have really decided to take the difficult decisons necessary to restore long-term financial health. The key issue remains Italy, where major doubts remain over the government's willingness, as well as ability, to make the major cuts necessary to reduce its borrowing to manageable levels.

Unsurprisingly, international lending to Greek banks has dropped quite sharply over the past 12 months, according to latest data from the BIS (Bank for International Settlements). As the chart shows, it was $111bn at the end of June, compared to $174bn in June 2010, and $182bn in December 2009, when the blog first discussed the problem.

Greece of course continues to borrow the same amounts. Instead, it now borrows from the European Central Bank. This means Eurozone taxpayers are standing directly behind the loans, rather than indirectly when the loans were made by the big commercial banks.

This seems to confirm June's analysis of how the issue will play out:

• 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

The politicians' habit of 'kicking the can down the road' is not solving the key issues. Rather, it is increasing the overall economic cost, and the political risk associated with this.

Meanwhile, European commercial bank loans to the 2 major economies under pressure - Italy and Spain - were $1388bn. This is lower than December 2009's $1753bn, but an increase since December 2010's $1326bn. This perhaps explains investors' underlying nervousness about what happens when the politicians finally have to confront reality.

TUESDAY UPDATE. Greece's decision to hold a referendum on its austerity plan highlights the fragility of the political consensus behind the current eurozone plans.

A year ago, Petromatrix highlighted the short-term 'triangle' that was being drawn by oil prices. This describes a period when sellers and buyers are evenly balanced, and neither side can gain momentum to take prices in their favoured direction.

It usually leads to a sharp move, either up or down, when one side wins.

At that time, Brent was ~$60/bbl. And the 'triangle' was eventually broken by the bulls, using liquidity provided by the US Federal Reserve's QE2 programme. The move led to a doubling of oil prices, as buyers had to scramble to obtain supplies.

Now, as the blog noted back in June, a longer-term triangle is busy tracing itself out. The chart above highlights the peaks from 2008 and earlier this year. Its downside is the green 'support line' that has marked the bottom of the range since then.

Last year, the US Fed's $600bn QE2 stimulus provided the cash to fund the surge in the oil price. So far, its new replacement Operation Twist seems to have provided less firepower, although prices have risen $10/bbl since it was announced last month.

However, demand continues to slow under the influence of today's high prices, which have always led to recession in the past. In particular, the Reuters chart above shows China's implied oil demand last month was up only 0.6% versus September 2010.

Traders will clearly try to maximise their year-end bonuses by pushing prices higher again. But the fundamentals of supply/demand are even less supportive than last year. The blog will continue to watch the triangle to see what may happen next.

The brave new world of modern finance continues to amaze the blog.

It still has problems with the idea that the answer to having too much debt is to borrow some more. But last week's Eurozone summit not only did this (as noted by the German central bank), but added a new element.

Its new bailout plan suggests that the European rich should now borrow from the emerging country poor, via the IMF. Thus the support of Italy (income per capita of $34k) depends on loans from China (income of $3k). Or, to put it another way, the world's second wealthiest region aims to borrow from people who have some of the lowest incomes in the world.

Of course, President Sarkozy made some reference to 'old style reality' when he told the French people on Thursday night that "the problem is that we spend too much and we must work more." But this is unlikely to be the message on which he campaigns for re-election next year.

Naturally financial markets rallied strongly at the news, with the US S&P 500 Index jumping 4% during the week. But in the real world, where those of us in the chemical industry work, markets failed to show similar enthusiasm, as this week's IeC Downturn Alert chart above shows. Even Brent crude oil managed only a $0.85/bbl rise, whilst naphtha actually fell.

This caution was shared in the world of electical appliances, a key market for chemicals. Whirlpool and Electrolux, the two largest companies reported:

• "Sales gains in Asia and Latin America are slowing and aren't sufficient to make up for sluggish demand in the U.S. and Europe"
• Electrolux estimate "N American appliance sales this year will be 25% below the 2005 peak; W European sales will be down 15% from 2006"
• Whirlpool's CEO noted that the only "people who are buying, are people whose appliances break".

ICIS pricing comments this week, and price movements since the IeC Downturn Alert launched on 29 April, are below:

Benzene NWE (green), down 30%. "Market remains under downward pressure this week, largely due to continued weak demand."
HDPE USA export (purple), down 28%. "The window of opportunity for sales into China has basically closed as prices in Asia and the Middle East continue to fall."
Naphtha Europe (brown dash), down 21%. "Demand from gasoline is reasonably healthy, while from petchems remains poor".
PTA China (red), down 14%. "Demand remains weak on the back of limited procurement from the cloth and weaving sectors amid tight credit and higher inventory."
Brent crude oil (blue dash), down 11%.
S&P 500 Index (pink dot), down 6%