Chemicals & The Economy

Today's purchasing manager index shows China's manufacturing is now contracting across the country.

As always, petchem markets have been leading indicators of this slowdown. And worrying, China's polyethylene (PE) markets are showing no sign of any improvement as we head to year-end.

Volume grew 53% between 2008 - 2010 as a result of the government's massive stimulus and bank lending programmes. But the brakes have been applied since then to try and stop inflation getting out of control.

In addition, China's own supply portfolio is in the middle of major change, as the chart shows based on trade data from GTIS:

• Total demand in January-October was flat versus 2010
• Domestic production was up 2%
• Imports were also flat, whilst exports (from a low base) up 71%
• Middle East net imports were up 22% and SEA net imports up 13%
• Net NEA imports were down 21%; NAFTA down 37%; EU down 42%

There are also few signs that the situation will reverse quickly. Food price inflation is currently 11.9% and Premier Wen warned recently that prices might remain high during the winter.

This is not good news for any company hoping that growth in China during 2012 might substitute for the continued slowdown in Europe and the USA.

Long-standing readers may remember the video posted in January 2010 showing 'China's empty city'.

This was the new city being built in Inner Mongolia, to help ensure local officials met China's GDP growth target. Unlike the West, GDP in a communist country is a target, not a result. Thus East Germany under communism was alleged to have GDP equal to the UK. Reality was somewhat different, as was shown after the Berlin Wall fell in 1989.

Ordos was, and is, a great example of this policy inversion in practice. Since 1995, officials have been building a completely new city 30km from the old city of Ordos. It is meant to house 1.6 million people, and until recently speculators have ensured all the property has been sold.

The only downside is that the city is more or less empty.

Now the Wall Street Journal updates the story:

• 2 months ago, one of the main property developers committed suicide
• He left debts of Rmb 263m ($41m)
• He had borrowed at an interest rate of 3%/month

The boom was great whilst it lasted. As one saleswoman told the Journal, "everyone has at least two or three properties and lots of people have seven or eight." Now, prices have stopped rising and sales have slowed, as bank lending has been cut.

Nationwide, China has 306 billion square meters (3294bn square feet) of property under construction. But sales to the end of October were just 709 million square meters. And prices have begun to fall, as the government moves to reduce inflation.

As the Journal notes, "speculators buy property because it is rising in value". When prices stop rising, they often head for the exits. But as Hyman Minsky observed, they then find there is no way to sell.

China has an awful lot of empty property owned by speculators such as those in Ordos. Last year, for example, its Academy of Social Sciences estimated there were 64.5 million empty houses and apartments that were owned by somebody, but used no electricity.

The Minsky Moment for its banking system is probably now underway.

Financial markets jumped this week on news of liquidity moves by the central banks. But the blog's own IeC Boom/Gloom Index remains in negative territory, as the chart shows (blue column).

Investors seemed to forget for a moment that the eurozone crisis is not fundamentally about liquidity. It is about solvency. Greece, and some other countries, will never repay their debt. So the banks who lent to them will lose their money.

Equally, the size of the bill for the financial follies of the 2000s is slowly beginning to become clear. Official UK forecasts now suggest that people "will be worse off in 2015 than in 2002". Thus the 'austerity' reading (red line) is rising steadily, as governments cut spending and increase taxes.

Of course, the situation would improve if growth recovered. And this could happen, if companies began to target the needs of the over-55 age group, who are now 29% of the western population. This is one of the key messages of the blog's 'Boom, Gloom and the New Normal' eBook, available on free download.

Sadly, however, many companies still seem to be unaware of the opportunity.

Western banks now demand higher deposits when lending to first time buyers. The Bank of England expects this to increase the average age at which first-time buyers buy a home, and reduce home ownership.

This will hit demand for home furnishings and appliances, unless companies change their approach to the market.

The Bank's conclusions apply to other western countries. The reason is that 5 years ago, most banks were offering mortgages worth 95% of property values. So new buyers only had to save for a 5% deposit. This took them 4 years if the home cost 4 times their annual income.

Now, however, banks are typically demanding deposits of 20% - 25%. As the Bank's chart above shows, this means people have to wait longer before they can buy. On the assumption that people typically begin to plan for home purchase at the age of 28, the average age of first purchase:

• Was 32 years (red line) in the mid-2000s. Buyers began saving at 28 years, and achieved the 5% deposit after 4 years
• Will rise to 44 years with a 20% deposit. It takes 16 years of saving
• Will rise to 36 years (green dot) even if they double their savings rate to 10%. It still takes 8 years of saving

Home ownership rates thus fall from 71% to 52% (at 5% saving) or to 65% (at 10% saving). And the Bank notes that in the short-term "the flow of buyers falls very sharply". Instead, rental demand increases.

This shift also reduces demand for home furnishings and appliances.

Landlords are much less likely to replace these items than homeowners. They value their profit more than a tenant's comfort. Equally, young people saving for a higher deposit will have less spare cash to buy such items themselves.

This is yet another example of the dramatic changes in demand patterns that are taking place as we transition to the New Normal.

The blog was in Singapore last week, running the final New Normal workshop of the year with co-author John Richardson. The main topic during the breaks was the continuing concern over China's demand.

This is reflected in the latest Downturn Monitor above. On the positive side, China's PTA prices improved due to hopes of easier lending conditions. But on the negative side, US HDPE export prices fell 2c/lb ($44/t) as sellers adapted to lower Asian prices.

In Western markets, the Eurozone is still the main focus of attention. Prices generally firmed, with concerns about Iran sanctions also helping to support Brent crude oil, naphtha and benzene prices.

In general, however, trading remains very slow, with most players wary of taking positions before the long Christmas and New Year break, particularly as this will then be soon followed by Lunar New Year in Asia.

The chart shows how prices have moved during 2011, with the period since the Downturn began highlighted in yellow. Only Brent and naphtha are higher than at the start of the year. Downtream pricing remains relatively weak, as consumers cut back discretionary spending.

ICIS pricing comments this week, and price movements since 7 January for the benchmark products in the IeC Downturn Monitor are below:
Benzene NWE (green), down 20%. "Concerns surrounding Iran led to firmer crude values being reflected in higher December numbers".
PTA China (red), down 17%. "Expected increase of liquidity at the end of financial year inspired buying interest."
HDPE USA export (purple), down 4%. "Prices fell slightly, following global price drops in Asia and the Middle East."
S&P 500 Index (pink dot), down 2%
Naphtha Europe (brown dash), up 1%. "Market is set to remain long for the foreseeable future."
Brent crude oil (blue dash), up 16%.

There is much discussion of countries such as Greece being likely to leave the Eurozone.

Some even believe it is inevitable.

But on a practical basis, how would it happen?

This is a question that has been bothering the blog for some months.

But with another crisis summit meeting about to start, it is no nearer finding an answer.

In previous generations, a currency consisted of coins made from brass, copper, silver and gold. These had a value, depending on their weight.

But today's currencies have no value in themselves. So if Greece, say, left the Eurozone tonight, how would its citizens buy food and other essential tomorrow morning? Equally, would euro coins (see Wikipedia picture) that had been issued in Athens suddenly become worth less than those issued elsewhere?

Of course, today's currencies have great advantages for commerce and travel, particularly in our computer age. But replacing one currency with another can't be done overnight. It took 2 years to happen prior to the Eurozone launch in 2002, for example. Banks had to prepare to exchange newly minted euros for the former national currencies.

If any reader has the answer to the question, the blog would be glad to share it.

">The blog is greatly looking forward to its next Chemistry and the Economy webinar with the American Chemical Society (ACS).

It will be held on Thursday 15 December, at 14.00 - 15.00 EST. As previously, it will be moderated by Bill Carroll, Occidental Chemical VP and former ACS President.

Bill and I will look back at the roller-coaster year just finishing. We will also look forward to what 2012 may bring.

Registration is free, please click here.

Many analysts have argued that demand in India could easily replace volumes lost due to a slowing Western economy. Sadly, this week has provided further evidence of why this is merely wishful thinking.

As the chart shows, India's GDP is the same size as Canada's. But India's 1.4bn people means its GDP/capita is only $1371, compared to Canada's $46303. This matters, as it means India's needs are much more basic than those of the wealthy Western nations.

Equally, India's development is increasingly being held back by politics:

• Currently, 40% of India's food rots on the way to the consumer
• Last week, India's premier Singh announced major retail reforms
• Foreign retailers would have been able to own 51% of Indian companies
• This could have opened the door to major improvements in food supply
• It could also have increased polymer demand for storage etc

But this week, Singh was forced by his own party and the opposition BJP to withdraw the proposals.

It used to be said that progress in India came 'with two steps forward, one step back'. This week suggests the model has instead become 'one step forward, two steps back'. Not only will India's food continue to rot. But this failure will reduce the chances for reforms in other areas.

Equally, this will reduce still further India's ability to compensate for slowing Western demand.

Human beings go through a number of stages when confronted by a major change such as today's Crisis. As first described by Elisabeth Kübler Ross, the process starts with:

• Denial that any change is taking place
• Then Anger at the implications of the change
• Bargaining to reduce its magnitude
• Depression as reality begins to be confronted
• Finally Acceptance of what has happened

Last week's EU Summit reinforced the blog's belief that Kübler Ross' work is a good guide to the evolution of today's financial Crisis. It seemed to mark the end of the Denial phase amongst Europe's political elite.

For the past 20 years, they have been in the 'same bed, (with) different dreams', as Reuters' Paul Taylor described it. Germany has wanted to push ahead with fiscal union, whilst France has argued to retain a key role for nation states. Foolishly, they pushed ahead with the euro project without resolving this key issue.

Along with other world leaders, they then went straight into Denial mode when the Crisis began. As the blog noted in April 2009, the G20's London summit failed to agree "a contingency plan, in case the global economy does not begin to recover". Instead, they increased debt levels via massive stimulus programmes.

Fast forward to today, and there are few excuses left. In Europe, the leaders had been able to blame Silvio Berlusconi, the former Italian leader, for lack of progress. Now he has gone, the UK's David Cameron has taken his place.

Of course, the UK played its hand in the negotiations very badly. It is never clever to stand laughing outside your neighbours' house whilst a fire burns. And it was particularly stupid not to check whether the wind might soon blow the fire in its direction.

But that is really a sideshow. What is clear is that EU leaders are no longer in Denial mode. They have moved on to Anger, and want to blame someone for their mistakes.

This could have major implications for world trade, as the chart suggests. Angry politicians faced with mounting job losses amongst their voters will find it very easy to blame other countries for their own mistakes.

Companies need to monitor political developments very closely indeed over coming months. Protectionism may not be far away.

By now, companies should be reordering for the New Year. CFOs have achieved their working capital targets for year-end. And the commercial people should be planning Q1 sales.

So far, however, it seems that this restocking has proved rather weak. This parallels September's disappointment, when the return from the summer holidays also failed to produce a major recovery in order flow.

Business managers have indeed been increasing their list prices, in preparation for a wave of orders. And China's PTA producers have postponed planned commercial shutdowns. But DuPont, often a bellwether company for the global industry, summed up the general nervousness in their profit warning on Friday, when CEO Ellen Kullman noted:

"We are seeing slower growth in certain segments during Q4, driven by global economic uncertainty. This uncertainty is contributing to ongoing conservative cash management in some supply chains. The earnings revision reflects destocking across polymers and certain industrial supply chains that has accelerated during the fourth quarter. Consumer electronics demand has further softened, and housing and construction markets remain weak. Other markets remain as expected."

Kuhlman went on to add that "with customer inventories at very low levels, we are staying close to our customers to assure that we are ready to respond when demand returns". But she prefaced this with a reference to DuPont's "aggressive productivity initiatives". Companies expecting a quick recovery are not usually focussing their efforts on cost reduction.

ICIS pricing comments this week, and price movements for the benchmark products since the launch of the IeC Downturn Monitor on 29 April are below:

Benzene NWE (green), down 23%. "Market firmed though fundamentals still weak".
HDPE USA export (purple), down 22%. "Producers began to implement price increases but with falling Asian and Middle Eastern prices, trade to Asia was all but impossible."
Naphtha Europe (brown dash), down 21%. "Oversupply eases slightly on demand from Asia."
PTA China (red), down 18%. "PTA producers had initially planned a large-scale production cutback because of negative margins, but have not done so yet as they expect margins to improve in December"
Brent crude oil (blue dash), down 12%
S&P 500 Index (pink dot), down 8%

China's economy is slowing rather fast. That's the only conclusion to be drawn from the above chart. It shows a major collapse in producer price inflation (PPI), from July's 7.5% peak to just 2.7% in November.

The decline from September's 6.5% level has been particularly dramatic, with the index down nearly 2/3rds in just 2 months.

Usually such declines are linked to major falls in commodity prices, as in 2008. But whilst some commodities have slipped in price, others such as crude oil are still at Q3 levels. So one has to conclude that producers have suffered a major loss in pricing power due to a downturn in demand.

Thus the PPI numbers are another sign that the ending of the credit bubble is having a major impact. And once bubbles burst, particularly those of China's size, it usually takes a very long while for confidence to be restored.

Since the start of the Crisis, many policymakers have chosen to look backwards rather than forwards.

Instead of facing reality, the US has wasted $5trn on stimulus programmes and quantitative easing. Whilst China created a massive credit bubble by doubling bank lending in 2009 to reach 1/3rd of GDP.

Yet in the end, demographics drive demand. 29% of the Western population is now in the 55+ age bracket. And China's 'one child policy' since 1978 means it has 400m fewer people now available to join the wealth-creating 25 - 54 age group.

But as Japan's example shows, politicians find it hard to admit they have been heading in the wrong direction. Instead, they invent ever-stranger ways to try and turn back the clock. The use of tsumani restoration funds to support whale-hunting is thus a metaphor for our times.

These funds were set up after March's tragic disaster. They were meant to fund rebuilding work, and support those living in the devastated area.

Instead, Bloomberg's William Pesek has revealed $30m has been spent to support whale hunting. Apparently, the government believes that "a successful hunt will revitalise coastal communities". But as Pesek notes:

"You know what would help more? Some fresh thinking. The devastation from March 11 required new ways of viewing and addressing Japan's creaky economic model, aging population and waning competitiveness. It necessitated a reboot of politics, the government's role in the economy and Japan's change-resistant, consensus-obsessed mindset. What we're seeing instead is an inability to adapt on a national level."

The same could be said of many politicians in the East and the West. As we argue in 'Boom, Gloom and the New Normal', there are plenty of promising new opportunities which could take the world economy forward. But too many politicans instead seem fixated on their own versions of whale-hunt subsidies.

This mind-set needs to change, and to become more forward-looking. Otherwise, it is hard to see how the global economy itself can recapture momentum.

November (red line) was a mixed month for auto sales, as the above chart shows. It updates the state of the world's 3 largest markets:

• China remained the largest market with sales of 1.3m. Its Year To Date (YTD) sales are up 6% at 12.5m
• Europe is the 2nd largest market with sales of 1.03m, but YTD was down 2% at 12.1m
• The USA is 3rd, with sales of 1m, and YTD up 11% at 11.6m

In terms of total volumes, YTD 2011 was up 5% versus 2010 at 36.2m. This is a slowdown versus the 9% growth seen in 2010. But it is still respectable.

Interestingly, the USA is now leading the recovery, as both China and Europe have slowed. But its volumes are still a long way from the 15m-17m annual sales which were seen routinely until 2007.

China's growth has slowed very sharply. Its sales were up 49% in 2009, and 30% last year. But the ending of the stimulus programmes has reduced demand growth very sharply.

Europe, however, is the weakest link. Its volumes have been lower every year since 2007. And it has become dangerously reliant on Germany:

1. Sales there were up 3% in November, as its economy continued to benefit from China's demand.
2. But in the other major markets, the UK was down 4%, Spain down 6%, France down 8% and Italy down 9%.

Autos are a critical market for the chemical industry. They also provide an important insight into the wider state of consumer demand. Currently they are flashing an amber warning light that difficult times may lie ahead in all the main regions.

Whisper it softly, so as not to alarm the CEO. But the world is starting to look worryingly like the picture of mid-2008.

Official bodies such as the IMF are always cautious in forecasting a downturn. They rightly worry that they could help to cause the decline, by hitting confidence. But there comes a moment when saying nothing becomes the bigger risk.

This is what happened back in April 2008. As the blog noted then, the IMF threw caution to the wind and warned:

"It is now clear that the current turmoil is more than simply a liquidity event, reflecting deep-seated balance sheet fragilities, which means its effects are likely to be broader, deeper, and more protracted".

Now, its new managing director, Christine Lagarde, has gone much further. She warned on Thursday that the global economy faces the prospect of:

"Protectionism, isolationism and what happened in the 1930s (the Great Depression). There is no economy in the world, whether low-income countries, emerging markets, middle-income countries or super-advanced economies that will be immune to the crisis we see not only unfolding but escalating."

This, of course, has been the blog's concern for some time. As always, petchems have been a leading indicator for the global economy. So far, oil prices and the major financial markets have ignored their trend. But this may not last forever.

In some ways, therefore, it is a hopeful sign that the IMF has spoken out. Lagarde may be able to burst the bubble of complacency that seems to surround most of the major governments. But equally, it also emphasises once again the very real risks facing the global economy in 2012.

ICIS pricing comments this week, and price movements for the benchmark products since the launch of the IeC Downturn Monitor on 29 April are below:
Naphtha Europe (brown dash), down 23%. "The market has tightened slightly from the previous week."
HDPE USA export (purple), down 22%. "Globally, buying sentiment was weak, with China, Vietnam and SEA buyers not wanting to build inventories ahead of the Lunar New Year holiday."
Benzene NWE (green), down 21%. "Renewed downstream styrene production pulled material and kept supply levels balanced to tight".
PTA China (red), down 19%. "Demand dropped as textile factories have stocked up enough inventories in the past two weeks to cover their requirement for the rest of the year."
Brent crude oil (blue dash), down 16%
S&P 500 Index (pink dot), down 11%

NOTE: This will be the last Downturn Monitor in 2011, due to the Christmas and New Year period. It will resume on 9 January.

ExxonMobil's annual energy review is always a fascinating read. This year's issue looks out to 2040 for the first time. It thus forecasts the relative share of the major fuels over the next 30 years.

Interestingly, it also shares the blog's belief, as set out in our 'Boom, Gloom and the New Normal' eBook, that demographics will play a critical role in changing demand patterns over this period, noting that:

• "Demographics and economic expansion drive energy demand"
• "Population growth is slowing. In some places - many OECD countries plus China - populations will change little by 2040"
• China will see "a steep drop in its working age group"
• "India and Africa become some of the strongest areas of GDP growth"

EM also provide the above historical chart showing how fuel use has changed over the past 300 years.

Biomass, mainly wood (brown), was the main fuel from 1800. It began to be replaced by coal (light brown) from 1850. Then oil (green) began its reign from 1900. More recently, gas (red) has begun its rise. EM expect a 60% growth in its use by 2040. Hydro (light blue), nuclear (dark blue) and other renewables (yellow) are at an early stage of growth.

EM make the useful point that the variability of wind and solar power can be balanced by 'on-demand' sources. This will add to gas's more obvious advantages such as its relative abundance and low price.

The chemical industry, like many others, continues to be badly affected by the volatility of financial markets. Yesterday (Tuesday), for example, saw a 3% jump in US stock prices and crude oil prices.

The 'justification' for the surge was a minor rise in November's US housing starts to 685k. As the weather has been seasonally mild, this should hardly have been a surprise. And it certainly does not suggest a major recovery is suddenly underway in the housing market. 685k is one of the lowest figures even seen since records began in 1959.

The real reason was the activities of the 'High Frequency Traders' (HFT), who now dominate US financial markets with their 'correlation trading'. EPCA speaker Marc Faber points out in a recent note that:

"It is truly frightening to consider we have already surpassed the previous record of 26 huge downside daily swings in 2008, when the financial system nearly collapsed... never before have we seen a methodology overwhelm the US stock market as HFT has done".

The chart above, based on Faber's data, shows how bad things have got. The key is the number of days when virtually the whole market moves one way or another, with volume in a 9:1 ratio up or down.

• 2009, 2010 and 2011 have each seen more high volume Up and Down days than in the whole of the 10 years between 1997-2006
• 1997-2006 saw only 12 Up days of 9:1 volume, and 16 Down days
• 2011 has seen 13 Up and 32 Down (annualised through November)

Prior to HFT, it would take a really major event such as the 9/11 tragedy to move stock and oil markets on such a scale. Normally, some company shares would be up, and some down, as investors responded to recent news. Similarly, oil prices would also move independently, based on their own fundamentals of supply and demand.

But HFT requires vast numbers of shares to be traded by the (mainly) boys with the super-computers. So they jump on any bit of news, no matter how irrelevant, and turn it into a major event. Then next day, they can have more fun by reversing the trend again.

Nobody can plan ahead sensibly with this kind of casino mentality ruling financial markets. No single market now knows what it is pricing, when they all move together like this.

Someday, it will all end in tears. But as long as the regulators remain asleep at the wheel, the HFT traders will party on.

The other side of the short-term volatility in oil markets, as discussed yesterday, is that price movements are still trapped in their long-term triangle pattern.

As the chart shows, Tuesday's $3/bbl move was not part of a break-out to new high ground. In fact, Brent's prices remain within the same $99/bbl - $127/bbl range they have occupied all year.

The triangle highlights the continuing battle between the bulls, led by the high-frequency traders, and the bears, led by those who focus on fundamentals of supply and demand.

The bulls are making ever-more desperate efforts to push prices higher. But news that OPEC was maintaining current output quotas was clearly bearish. So is the fact that demand is clearly slowing in all major regions.

Of course, some major event might well arrive to force prices higher. If Iran blocked the Strait of Hormuz, they might reach $200/bbl, given the importance of those shipping lanes for world crude oil movements.

The blog will continue to monitor developments very closely, given the importance of the outcome.

Its now 3 years since the Great Recession began.

US GDP is still below previous peaks, despite $5trn of stimulus spending and quantitative easing.

The position in the Eurozone is even worse.

China's economy will be lucky to escape with a 'soft landing'.

Policymakers seem to have lost the plot. They have forgotten, or maybe never realised, that demographics drive demand. Yet:

• 29% of the Western population are now aged 55+ and in the New Old generation
• China has lost 400m babies due to its 'one child policy' since 1978. These children are not now maturing and available to join the 25-54 cohort of Wealth Generators

What can be done to realign our thinking and policies to this Demographic New Normal? This is the blog's 2011 Christmas Quiz question.

A failure to find the correct answer(s) will likely condemn countries to run deeper and deeper into debt, as policymakers try ever more desperately to return us to an economic SuperCycle that no longer exists?

The prize for correct entries will be a sustainable recovery in the global economy.

This will be based on Prof Michael Porter's concept that "Shared Value will drive the next wave of innovation and productivity growth in the global economy".

A month ago, the former UK Finance Minister, Alastair Darling, warned that the European Central Bank (ECB) had "to recognise they have to be the lenders of the last resort".

He added that "This is far worse than the banking crisis of 2008 in its seriousness and, if it is not solved by Christmas, I think the whole of the euro will break up."

Last Thursday, Darling was proved correct. The ECB provided an unprecedented €489bn ($635bn) in 3 year loans to 500 banks across the region. Otherwise, many of them would have gone bankrupt, and the Eurozone would indeed have broken up.

The reason for the near-disaster goes back to our old friends, greed and stupidity:

• Greed. Eurozone bankers - supported by governments - have maintained the fiction that they have sufficient reserves. This has allowed them to continue to make risky loans to the PIIGS (Portugal, Italy, Ireland, Greece, Spain).
• Stupidity. They seemingly failed to realise their source of deposits was about to dry up. As the above chart from the IMF shows, Eurozone banks have been dependent on the overnight 'wholesale markets' for 45% of their deposits, far more than any other region. And they have done little to reduce this risk since the IMF first identified it 3 years ago.

The IMF itself warned in April that they were playing a dangerous game:

"Moreover, a number of euro area banks have substantial short-term wholesale funding requirements. Current market conditions, with low short-term rates and a steep yield curve, may provide incentives for banks to maintain this short-dated funding. But such funding brings additional vulnerabilities given its high rollover rate and quick repricing. Some larger European banks also fund a significant part of their short-term positions in foreign currency, much of which is from U.S. money market funds. But this funding comes with further risks as it could be subject to quick withdrawal by money managers, as has been seen in the past."

Once US money markets funds realised that Greece was bankrupt, they stopped lending money overnight to Europe. And at that point, the banks were on the road to bankruptcy, just as Darling had warned.

Last week, the ECB finally agreed to become the 'lender of last resort'. But €489bn is a lot of money. When German and other North European taxpayers find out what has happened, they are unlikely to be pleased.

The blog suspects that the above chart may not feature prominently in the New Year reports about to be published by the main oil market brokers.

These will instead probably highlight the view that oil markets are very tight, and that prices should surely go higher. They have held this view for several years, and made good profits from selling high-priced futures to their pension fund and other clients, as we noted in chapter 3 of our 'Boom, Gloom and the New Normal' ebook.

The chart gives the history of US oil demand and inventories on a monthly basis since official US Energy Information Administration records began in 1963. It shows

• Total inventories in terms of combined 'days of demand' for crude oil and products (red line, left hand scale)
• Total supply of crude oil & products (kbd, green line, right hand scale)

February 2003's inventory at 42 days of demand was the lowest-ever level. February 1973 saw 45 days of demand momentarily. Inventory was also at 45 days in December 1999, and between December 2003-April 2004, and at 47 days in December 2007.

But since the Great Recession began in Q4 2008, it has not been below 54 days. Last September, the latest month available, it was at 58 days. This was very close to the average of 62 days for the whole 1963-2011 period.

The reason is that US oil demand actually peaked back at 21.7mbd in August 2005. Since the downturn began, it has never been above 19.7mbd. In September, it was 13% below the peak at just 18.8mbd

But, of course, a story that focused on lower demand, and comfortable inventory levels, would probably not produce too many positive headlines for prices.

US house prices were the original cause of the financial collapse in Q4 2008. Since then, the politicians have failed to grasp the depths of the problem. Now, the housing market seems about to start on a new downward leg.

The chart shows that prices hit a new low last month, down 33% from the May 2006 peak. The 10-city composite was down 1.1% versus September, and 3% versus a year ago.

The issue is not affordability, given current low interest rates and recent price falls. Rates are just 3.91%, the lowest since records began in 1971. Its rather that housing is in transition to the New Normal described in our free 'Boom, Gloom and the New Normal' eBook:

• 2011 single family home sales will be the lowest on record at only 300k
• Housing starts are only 687k, compared to 2.27 million in January 2006

The key, as Bloomberg notes, is that:

"Owners of more than 14 million homes are in foreclosure, are delinquent on their mortgages or owe more than their houses are worth, creating a shadow inventory that is holding down sales and prices".

Equally, as we describe in chapter 8 of the eBook (to be published at the end of January), underlying US housing trends have changed:

• Young people can no longer afford to move out of the parental home
• Older people, who are living longer, cannot afford residential care
• 'Multi-generational housing' is therefore the new growth sector

Lennar, the US's 3rd largest home builder, is now marketing its range of "Next Gen homes within a home". It is the first mass-market builder to spot this emerging trend.

The problem is the transition period is likely to be difficult. The recent pause in foreclosures only stabilised the market. Now, it seems set to fall again as foreclosures begin to increase again.

The blog celebrated its 100,000th visit during 2011. Its readership also continued to increase, and now covers 142 countries and 5992 cities. The map shows the major centres of readership, which include all the main petchem hubs.

Readers also remain very loyal, with 40% visiting at least once a week during 2011. Over the past 6 months, they have become even more loyal, with 54% visiting at least once a week.

The highlight of the blog's year was the launch of its 'Boom, Gloom and the New Normal' eBook, co-authored with John Richardson. This argues that demand patterns are changing, due to the ageing of the Western BabyBoomers. Its key messages have been receiving increasing attention from companies and policymakers.

Generous sponsorship from Vitol also meant that a hard-cover version of the first 7 chapters could be circulated at our European conference in November. The online PDF version is also still available, if you would like to click here.

The other notable feature of the year was the launch of the IeC Downturn Alert at the end of April. Its aim was to help ensure that the industry did not fall into the same trap of over-optimism that created such problems at the end of 2008. The blog hopes that its reports have helped to ensure that inventories remained under control in recent weeks.

The blog has also greatly valued the opportunity to speak at a number of industry conferences, and to share ideas with many individual companies and their management teams.

Thank you very much for your continued support.