Chemicals & The Economy

Finally, and far too late, policy makers are waking up to the damage that today's high oil prices are doing to the global economy. Q1's oil price averaged $119/bbl, just 7% below Q2 2008's record $127/bbl ($2012).

Thus Saudi Oil Minister, Ali Naimi, last week told the Financial Times:

"High international oil prices are bad news. Bad for Europe, bad for the US, bad for emerging economies and bad for the world's poorest nations. A period of prolonged high prices is bad for all oil producing nations, including Saudi Arabia, and they are bad news for the energy industry.

"The bottom line is that Saudi Arabia would like to see a lower price...There is no lack of supply. There is no demand which cannot be met. Total commercial stocks for OECD nations are within target, and enough to handle almost any eventuality".The chart shows that recession (pink column) has followed every time oil prices in $2012 (red line) have moved above $50/bbl (green dash):

• Today's oil price is now 5.5% of global GDP
• It was usually 1% - 3% during the 1982-2007 supercycle
• Consumers cannot avoid higher gasoline/diesel and heating bills
• So they have less money to spend on more discretionary items

Recession has been delayed this time by money-printing from the major central banks - the USA has lent $1.6tn via QE1, QE2 and 'Operation Twist': China has added $1.6tn in bank lending: and the European Central Bank recently added €1tn ($1.4tn) via its LTRO.

Policymakers also tried to postpone a downturn in the 2000s with the subprime credit boom. Previously in the 1970s they had allowed inflation to reach >10%. But both times, reality intervened and recession followed.

The blog would like to believe that 'this time will be different'. But as the great Spanish philosopher George Santayana wisely noted in 1905, 'those who cannot remember the past are condemned to repeat it".

ICIS pricing comments and price changes since the IeC Downturn Monitor launch on 29 April are below:

PTA China (red), down 13%. "Players are unsure of the downstream demand outlook in April"
Benzene NWE (green), down 11%. "Prices largely followed upstream crude movements this week amid a lack of any real activity."
HDPE USA export (purple), down 7%. "Traders continued to purchase very little material, saying US prices are too high to work in other regions"
Naphtha Europe (brown dash), down 4%. "Demand picking up from the gasoline sector as blending margins become more favourable"
Brent crude oil (blue dash), down 1%
S&P 500 Index (pink dot), up 3%

Globalisation had a golden age between 1982-2007. Trade barriers fell almost everywhere. Companies focused on achieving a 'lowest cost' position, in order to maximise their competitive advantage.

Today, however, the world is starting to look quite different.

The chart above summarises the changes underway. It shows US polyethylene net trade (PE) since 2009, based on GTIS (Global Trade Information Services) data, and updates that shown last November.

It presents a remarkable picture. Over this period, the USA gained major cost advantage, due to the increased extraction of ethane from cheap shale gas. Yet:

• Its net PE exports actually fell 39% from 2.6MT to 1.6MT
• Net exports to China were down 70% from 900KT to 266KT

The blog's many US friends naturally find this very difficult to understand. They believe China should simply shut down its high cost, naphtha-based production and import cheaper US product.

But China operates on different values. Its petchem industry operates as a utility, providing reliable supplies of raw materials to the factories to keep people employed. If it shutdown plants, then social unrest would increase, threatening the existing Chinese political structure.

Sinopec's own financial performance proves the point. Between 1998-2010, it invested RMB 166bn ($25bn) in chemicals capital expenditure. Yet its total EBIT (Earnings Before Interest and Taxes) was only half this at Rmb 84bn. No Western company would dream of investing on this basis.

But as the blog noted last week, China is continuing to expand production. And the government is currently expected to raise its stake in Sinopec from 76% to 78% over the next few months. It is paying the bills, not Western-minded investors.

The US thus faces a major dilemma. It has the 2nd cheapest ethylene feedstock in the world (after the Middle East). But its markets for this product are reducing:

• Braskem of Brazil is building new capacity in Mexico (with Grupo Idesa)
• It is also planning to build in Brazil
• Both expansions will reduce US exports still further
• Equally, Asian/ME producers are already expanding sales in Latin America, to compensate for lower import demand in China

The US position on ethane thus provides a good example of the changes underway as we transition to the New Normal. New value structures are emerging that focus on social and political factors, rather than economics.

The blog's IeC Boom/Gloom sentiment indicator (blue column) continues to be neutral on the outlook. As the chart shows, this is quite unlike its performance in early 2009. Then it rose rapidly from February - accurately forecasting the major recovery that was about to start.

The problem, of course, is that the austerity reading (red line) remains too strong for comfort. Central bank lending has masked the issue, as banks have always been able to borrow more money from them. But lending only helps with cash flow, it doesn't help with solvency problems.

The major problems today are in Europe. The European Central Bank averted near-catastrophe in December with its €1tn ($1.4tn) LTRO, Long-Term Refinancing Operation. This was meant to provide the banks with time to rebuild their balance sheets.

Instead, just as one would expect, they have chosen to play even more games in the hope of boosting short-term profits. Thus in Spain, probably next in line after Portugal for another bailout, they have been busy doing deals with bullfighting companies. As the Wall Street Journal reports:

• Fans can't afford to go to bullfights, with the economy in recession
• This means loans to the bullfight companies are at risk of default
• So now, the banks are lending season-ticket money to bullfight fans

In the short-term, this means the banks avoid a costly default. But instead, they will probably face bigger losses next year. With Spain suffering rising unemployment, repaying a bullfight loan is unlikely to be high on the priority list for many fans in 2013.

Every now and then, genuinely good news comes along in terms of consumer demand. Today is one of those days.

As the chart above shows, US auto sales in March (red square) were the highest monthly total since March 2007. They also followed relatively strong sales figures for February, which adds to the good news.

Of course, the interesting question is 'what happens next'? The blog first highlighted the industry's recovery potential in January, on the basis that the average age of the US auto fleet was at a record, close to 11 years, whilst scrappage rates were at an all-time low of just 4%.

Equally encouraging for chemical industry sales is that buyers are clearly adopting a New Normal way of thinking. They have not gone back to buying the gas-guzzling SUVs of the supercycle period. Instead:

• 40% of GM's March sales gave fuel economy of over 30mpg (7.8km/l)
• This was the first time GM have sold 100k/month in this category
• Toyota's more efficient models were 60% of sales for the first time
• Ford's Focus models with 31mpg saw sales jump 65%, whilst sales of its Expedition models with only 16mpg fell 17%

In fact, those who can afford to buy new cars have clearly decided that today is a good time to buy. They can capture savings from increased fuel efficiency immediately, with average gasoline prices at $4/gal (€0.80/l). And auto purchase loans are easier to obtain, for the moment.

The warmest winter on record has also helped to lure buyers into the dealerships. For the moment, therefore, the blog will maintain its forecast at 13.5m (compared to 12.8m in 2011), whilst hoping that Q1's 14.5m sales rate can be maintained through the rest of 2012.

Some things are too 'obvious' for highly-paid professionals in the financial world to accept. If life was this simple, then clients might ask why their fees were so high. Therefore they maintain a fiction that what is obvious is not the full story.

Interest rates are a classic example of a simple issue which is over-complicated by the professionals. They really depend on just one factor:

• Do I trust you to repay the money?

If the answer is 'no', then I won't lend the money. This is what happened to Greece, and now threatens the other PIIGS (Portugal, Ireland, Italy, Greece, Spain). As the chart shows, their interest rates have risen sharply since May 2010, when the blog began warning of the crisis ahead.

Spain's new prime minister summed up the issue this week, when he warned:

"Spain is facing an economic situation of extreme difficulty, I repeat, of extreme difficulty, and anyone who doesn't understand that is fooling themselves."

Spain is the 12th largest economy in the world. Its $1.4tn GDP is larger than S Korea's ($1tn), and similar to India's ($1.6tn). If it is in "extreme difficulty", then any investor is going to become even more concerned about return of capital, rather than return on capital.

Investing with the JUUGS (Japan, UK, USA, Germany, Switzerland) thus becomes an even simpler decision. As the chart also shows, their interest rates continue to fall, as more and more savers seek safety.

It really is that simple.

Parabolic price movements are great fun whilst they last. The dot.com technology stock boom was a great example, when prices would jump 1% or 2% a day towards its end. And then, sadly, it all collapsed.

The NASDAQ technology index doubled in a year to reach 5000 during its final, parabolic run-up to March 2000. It then lost half its value in the next 9 months, and carried on falling until it bottomed at 1200 in July 2002.

Today, the above chart of the ratio between WTI crude oil and US natural gas prices is showing the same parabolic picture:

• Gas prices have fallen from $13.4/MMBTU in July 2009 to $2.1/MMBTU
• WTI prices have risen from $33/bbl in January 2009 to $103/bbl
• The ratio has thus almost reached 50:1

Of course, there are lots of reasons for the recent divergence in performance between natural gas and crude oil.

The dramatic rise in shale gas availability has caused gas storage problems. Users have been slow to convert from oil to take advantage of cheap gas prices. And the high-frequency traders have focused on the much larger WTI market when playing their computer games.

But fundamentally, WTI has ~6 times the energy content of natural gas. And its historical average, due to its logistic/storage advantages has been 9.9 times gas prices.

Equally, today's sustained record oil price levels are not based on either a shortage of product, or strong demand. In fact, the reverse is true, with demand destruction taking place in all major markets.

'Reversion to the mean' is the most profitable investment concept. And when markets go parabolic, this is generally a good sign that the trading has become very one-sided. It then only takes a relatively minor incident to change the seemingly-unstoppable trend.

It is hard to be very optimistic about the demand outlook for Q2.

Demand in Q1 was lacklustre, even though it should have been the strongest quarter of the year. H1 is seasonally strong, and Q1 also benefited from Easter being in Q2. Equally, the Chinese holidays fell in January, so February and March should have seen a major recovery.

Just as in April 2011, the oil price rally seems to have peaked, so there is little need for buyers to buy forward. More likely, we will see destocking down the value chain instead. CFOs are clearly worried about today's high levels of working capital, given that bank credit can be difficult to obtain.

The real problem is that the years since the start of the Crisis have not been used to solve the major problems. The banana skins highlighted by the blog in January have become more dangerous, not less:

The USA has not solved the housing crisis, the original cause of the Crisis. Homeowners have suffered a $7tn loss of wealth, and 12m (1 in 5 with a mortgage) now owe more than their house is worth.

Europe is still suffering from its debt crisis. Policymakers continue to mistake sound-bites for action, and their recent move to impose austerity will only increase social tensions, rather than solve the problems.

China, meanwhile, has done little to refocus its economy on domestic consumption. Premier Wen's speeches are clear about what needs to be done, but he seems unable to carry his senior colleagues with him.

In addition, Western policymakers have allowed oil prices to increase to record levels. They mistakenly believe that stronger financial markets will increase consumer confidence. Instead, high oil prices destroy demand, and make today's tight credit conditions even more difficult.

The chart shows price changes since the IeC Downturn Monitor launch on 29 April, with ICIS pricing comments:

PTA China (red), down 13%. "Most players were staying at the sidelines during the two trading days of the week because of the unclear outlook for downstream polyester demand in April"
Benzene NWE (green), down 10%. "Traders suffer weak demand, as players take a wait-and-see approach with regard to upstream crude oil"
HDPE USA export (purple), down 6%. "Globally, prices were slightly lower on weak demand"
Naphtha Europe (brown dash), down 2%. "Demand from the petrochemical industry remains subdued"
Brent crude oil (blue dash), down 1%
S&P 500 Index (pink dot), up 3%

Last December, the blog raised the question of how a country like Greece could actually leave the Eurozone. Many people believe this is inevitable. But how would the practical issues be solved?

Now Wolfgang Münchau has taken up the challenge in the Financial Times. His research suggests there are only two possible exit routes:

• A Treaty change, to reverse the Lisbon treaty
• To leave the European Union (EU) itself under Article 50

Münchau rules out the Treaty change option as being impossible. The Lisbon Treaty took 9 years to complete. Agreeing to leave would similarly need an inter-governmental conference, plus agreement by all national parliaments, and national referenda.

So leaving the EU itself is the only practical option.

If, for example, Greece left, then it would lose all its agricultural subsidies and structural funds for highways etc. It would also have to redominate all its contracts from euros to drachma, and default on all foreign contracts.

And, of course, the currency change would have to be done within days, if not hours. Otherwise, Greeks would simply move their money abroad, and the economy would collapse.

The end-result would therefore be chaos. Those owed money by the government or companies would sue to try and recover their losses. Investors would also pull out of other PIIGS countries (Portugal, Ireland, Italy, Greece, Spain) where a similar disaster could take place.

And even then, there would be no solution to the problem of euros, like that pictured, which have Greek origin. Would these still be accepted in other Eurozone countries? Many shops and businesses might well not want to take the risk of default. This would create more chaos.

Münchau concludes that those who argue that a country could easily leave the Eurozone are fooling themselves. He believes that there is no "situation in which an exit can be effectively and voluntarily negotiated".

Investment bankers and development economists like to talk about China being a 'middle class' country. Yet Asian Development Bank data shows that 96% of the population earn less than $20/day on a (PPP) Purchasing Power Parity basis.

Similarly, China's 'luxury market' remains very small. Latest data suggests it was just €12.9bn ($16.9bn) in 2011, or <0.3% of China's total GDP. The UK is spending almost as much ($14.9bn) just to host the London Olympics for 2 weeks this summer.

These myths matter, because they help to explain why China's housing market is in such trouble. The official China Daily reports that Beijing new home prices fell 21% in Q1. But they still averaged Rmb 12400/ ($1950) sq metre.

Equally, average house price to income levels were 14:1 in Tier 1 cities such as Beijing in January. By comparison, US ratios at the height of the sub-prime boom were 'only' 5:1. These prices are clearly now unaffordable for most people, without stimulus subsidised loan finance.

Equally, low wages mean that food price inflation is vitally important for most people. As the chart from the Wall Street Journal shows, food price inflation (green line) climbed again to 7.5% in March. Vegetable prices surged 21%, whilst meat and egg prices rose 11%.

This makes it very difficult for the government to launch further stimulus efforts, like those seen in 2009-10. Instead, as premier Wen has emphasised, the focus remains on further reducing home prices to bring them back to a "reasonable level".

Remarkably, crude oil prices are continuing to trade in their triangle formation. As the chart shows, they tried to break out higher in recent weeks. But there was no follow-through.

The high-frequency traders were clearly hoping the US Federal Reserve would announce a new round of quantitative easing (QE3), and provide the firepower for a further increase. However, the Fed disappointed them. And so prices have come back down again.

Equally, the fundamentals of supply and demand continue to make today's high prices look quite absurd. Not only is there no shortage of oil, as Saudi Oil minister Naimi reminded the world last week. But demand forecasts continue to be reduced, whilst supply is increasing.

Thus the US Energy Information Agency (EIA) has reduced its estimate for 2012 demand to 88.81mbd, whilst increasing its supply estimate to 88.97mbd. It notes that higher prices caused US gasoline demand to fall 2.8% in Q1, despite it being the warmest winter for 50 years. It also projects US production at 6mbd, the highest since 1998, and rising.

Of course, the bulls still hope for disruption in Iran. But US Defence Dept briefings suggest the US has very little desire to support any military action at the moment, terming it "a catastrophically bad idea".

Equally, Saudi Arabia is understandably still upset by the alleged assassination attempt on its US ambassador. So its promises to make up for any Iranian shortfall seem very believable.

Last week saw yet another example of the damage being caused to financial markets by the computerised high-frequency traders (HFTs).

As the chart shows, the S&P 500 jumped 20 points on Thursday (1.5%), whilst the Dow Jones Industrial average jumped over 200 points. The cause was a rumour that China's GDP would come in at 9% for Q1.

This, of course, was most unlikely. One of China's top economic officials, Zhang Xiaoqiang, said on 3 April that Q1 GDP had slowed to "around 8.4%", and premier Wen had announced a 7.5% target for the year. Anyone following China's economy would have known these facts.

But the computers don't follow real issues. Nor do they make human-style judgements. They are simply programmed to follow the crowd. So the more people talked about the rumour (and it was on the Wall Street Journal site by 10.51am), the more the computers rushed to buy.

Of course, next morning, the GDP figure was officially announced as being 8.1%. And so the computers then sold off all day. The market ended on Friday less than 2 points higher than its Thursday opening.

This highlights yet again how markets have become diverted from their real purpose of price discovery, into zero-sum trading games.

The chart shows price changes since the IeC Downturn Monitor launch on 29 April, with ICIS pricing comments:
PTA China (red), down 13%. "Players said demand will continue to be weak throughout April and May"
Benzene NWE (green), down 10%. "Buyers and sellers appeared reluctant to move up amid wider economic uncertainty"
HDPE USA export (purple), down 6%. "Traders said they expected to see prices slide in the next few weeks, if ethylene spot prices continue to fall"
Naphtha Europe (brown dash), down 4%. "Petchems continues to show limited interest in naphtha"
Brent crude oil (blue dash), down 3%
S&P 500 Index (pink dot), no change

Interestingly, the S&P 500 has now followed Brent crude oil in retracing its 'break-out' from its previous trading range. It is back at the 1370 level, the key 'technical level' highlighted last month.

China's leaders have a lot to worry about. The purge of Bo Xilai has now been followed by news of his wife being suspected of murder. This makes the run-up to October's leadership transition even more difficult.

Only 3 months ago, Bo was being tipped by some to join the Politburo, and even to become premier. Li Keqiang, the long-time favourite for the post, seemed to be under pressure from Bo's populist campaign and his strong army connections.

Now Bo is gone, but many of his supporters are still in powerful positions. This means that major new policy initiatives are unlikely, due to the need to try and rebuild a consensus amongst the top Party leaders.

China's lending policy offers a fascinating example. It was the focus of the massive 2009-10 stimulus programme, when lending was doubled in 2009 to reach 1/3rd of GDP. This credit boom, of course, led to rampant inflation in consumer and food prices, as well as in real estate.

Now China has to achieve a difficult balancing act. It needs to slow credit growth enough to keep inflation under control, but not too much to cause housing markets to crash. Its answer, given the political paralysis at the top, is to stick to previous targets and to fine-tune some details. As the chart shows:

• Lending (red square) was well below target at the end of February
• It therefore surged in March to hit the Q1 Rmb2.4tn target ($380bn)
• Now the State Council is discussing "fine-tuning" policies
• It aims "to leave more room for new policies and prepare for hardships and challenges"

Of course, China does not only face major political challenges. It also has to transition from an export-based economy to one more based on domestic consumption, as we discussed in chapter 6 of 'Boom, Gloom and the New Normal'. And it has to do this when key markets such as Europe are on the edge of recession.

The problem with restructuring the economy is that it requires a complete change in approach. New figures show urban residents had average per capita disposable incomes of just $1079 (Rmb 6796) in Q1, whilst rural residents (50% of the population) had just $406. And it is the rural areas where consumption growth is most required.

China's sudden lending boost in March may therefore not be the last panic reaction to an increasingly difficult political and economic landscape.

The blog's many friends in the petchem industry in S Europe have become more frequent visitors to London in recent months. Often, they are in the process of buying flats or houses. As one long-standing friend commented, "would you want to leave your money in Spain today?"

They are not alone. A detailed analysis by Bloomberg shows that "Europeans are increasingly losing faith that the currency union will hold together". As their chart shows, capital flight is also now happening on an unprecedented scale within the Eurozone:

• People in Italy (red column), Spain (purple), Greece (blue), Ireland (green), Portugal (light grey) and Belgium (light blue) have moved €789bn out of their countries
• They have instead deposited it in Germany (dark blue), Netherlands (black) and Luxembourg (dark grey)

Bloomberg add that:

"As the capital flight figures demonstrate, the stricken nations of the euro area are bleeding private money and becoming increasingly dependent on taxpayers. In all, the debts of struggling banks and sovereigns to official creditors such as the EU, the ECB and national central banks now exceed 2 trillion euros, much of which would be lost if the debtor nations dropped out of the currency union."

The next test, as the blog discussed in January, will be this weekend's first round of the French presidential elections.

Markets became used during the 1982-2007 Supercycle to the idea that only economics mattered. Now, they are suddenly having to realise that politics may well matter more in the New Normal.

The above slide appears to be a series of random lines, at first glance. But it comes from an important speech from the vice chair of the US Federal Reserve, Janet Yellen, on US unemployment patterns.

It describes the so-called Beveridge Curve, which highlights the relationship between unemployment (horizontal axis) and the job vacancy rate (vertical axis). It shows this for the past 3 major downturns:

• 1973-1976 (black line). Unemployment rose from 5% to 9%, but then reduced to 7.5%. Job vacancies fell from 5.0 to 3.4, but recovered to 4.0.
• 1979-1983 (green). Unemployment rose from 6% to 11%, but then reduced to 8.5%. Job vacancies fell from 5.5 to 2.8, but recovered to 4.0
• 2007-2012 (blue). Unemployment rose from 4.5% to 10%, but then reduced to 8%. Job vacancies fell from 3.2 to 1.8, and are now at 2.5

As a result, Ms Yellen worries that

"An exceptionally large fraction of those now unemployed - more than 40% - have been out of work for six months or more. My concern is that individuals with such long unemployment spells could become less employable as their skills deteriorate and as they lose their connections to the labor market."

Today's job market is clearly much weaker than in past recessions. This is largely due to the greater influence of short-term pressures from financial markets. Companies fear that share prices will fall if earnings disappoint. And as revenue growth remains slow, they feel they have to cut jobs.

This pressure did not exist in the 1970s and 1980s. Managements were expected to manage for the longer-term, as the blog discussed in an 2007 post in relation to its former company, ICI. Today's short-termism is instead leading us to a dead-end, where continued job losses risk destroying the skillbase on which future recovery depends.

Sir Maurice Hodgson was chairman of ICI during the 1979-83 downturns. He also pioneered strategy planning within the global chemical industry after his appointment in 1965 as ICI's first strategic planner.

He suggested there were '3 very specific questions' that Boards needed to address:

• Where are we going if we don't change?
• Where would we rather be going?
• How do we need to change to get from one to the other?

Ms Yellen's speech highlights the critical need for Boards to once again start asking themselves Hodgson's important first question.

Autos are the largest single market for chemical and polymer sales. And the USA, China and EU are the 3 largest markets, accounting for 2/3rds of global sales last year.

Disappointingly, as the above chart shows, their sales were up just 1% overall in Q1 versus 2011 at 10.6m. Even this gain was only due to March being the strongest month on record with 4.25m sales.

Each market also showed quite different trends:

• US sales were the most encouraging, up 13% at 3.5m
• China's sales were disappointing, down 1% at 3.8m
• EU sales were awful. They were down 8% at 3.3m, with March sales the worst since 1998

Optimists can point to recent strength in the USA, and the need to replace older vehicles as a driver for future demand. They can also hope that China's demand may resume its growth later this year. In Europe, they can take comfort from Germany's continuing strength, with sales up 1%.

Pessimists can instead argue that US strength in Q1 was supported by the return of Japanese cars to the market after the supply problems last year. They can also argue that China's growth curve has now been flat for some months. Whilst in Europe they can speculate that China's slowdown will soon impact Germany's economy, as its exports slow.

Reasonable people can see merit in both sides of the argument. We can all hope that the optimists are right. But we may also worry that the pessimists have good arguments too.

The auto market is thus another example of the general uncertainty that continues to hang over the global economy.

It is almost a year since the blog launched its IeC Downturn Monitor. The aim was to try and avoid the problems seen in H2 2008, when operating rates remained high down the value chain whilst demand fell.

The above chart shows the weekly changes in its 4 benchmark products from 1 January, with movements since 29 April highlighted in yellow. (The US S&P 500 Index and Brent crude were added later for comparison).

1 January to 29 April had seen major price increases:

Naphtha (brown dash) rose from $858/t to $1100/t
Benzene (green) rose from $1158/t to $1310/t
HDPE (purple) rose from $1257/t (57c/blb) to $1642/t (74.5c/lb)
PTA (red) rose from $1275/ to $1330/t
Brent (green) rose from $95/bbl to $125/bbl
S&P 500 (pink) rose from 1272 to 1364

Naphtha, HDPE and Brent had risen ~30%, whilst benzene was up 13%, the S&P 500 up 7% and PTA up 4%.

It is also probably fair to say that the blog was in a minority of 1 when calling the top of the market on 29 April. Its reasons were two-fold:

A. "There is growing anecdotal evidence, from chemical buyers and the main retailers, that we may have reached at least a temporary market peak. And Brent crude oil has been stable for 4 weeks at $125/bbl.

"Equally, since 1970, sustained periods of oil prices above $50/bbl in real terms ($2011) have always led to economic downturns. Some may hope that 'this time it may be different', but the blog prefers Einstein's famous phrase that 'the definition of insanity is doing the same thing over and over again and expecting different results'.B. "HDPE seems the most optimistic market, as its jump last week means it has matched the rise in Brent. But ICIS pricing report that "spot exports are becoming decreasingly viable" versus supplies from the Middle East, China and South East Asia. The price move therefore seems more supply-related than consumer-driven.

"Equally, the failure of both benzene and PTA to pass through the latest rise may turn out to be particularly significant."Only PTA of the benchmark products has since been above its 29 April price - it reached $1340/t for just one week in September.

Next week, to mark the 29 April anniversary, the blog will review whether the downturn may be ending, as some now hope. For the rest of this week, in a special series, it will look at what chloralkali and PVC markets are telling us about demand trends.

ICIS pricing comments this week, and price movements since 29 April are:

PTA China down 13% to $1157/t. "Sentiment weakened in the later part of the week following softer polyester sales and lower buying interest from end-users."
Naphtha Europe, down 9% to $1006/t. "Prices declined for much of the week, following the lead of crude oil"
HDPE USA export, down 6% to $1542/t (70c/lb). "Prices for US material were too high to work in most other regions"
Benzene NWE, down 5% to $1240/t. "Domestic supply levels have dropped and the wave of restocking has helped boost the prompt market"
Brent crude oil, down 5% to $118/bbl
S&P 500 Index, up 1% to 1378

As promised yesterday, the blog is running a special series of posts this week focused on chloralkali and PVC markets.

Caustic soda is a key indicator for the global economy. This is because it is used in a wide variety of basic industries, including mining, pulp and paper, detergents and water treatment.

The USA is the largest producer, and the chart above shows the evolution of its net export position between 2009-11, based on GTIS data (Global Trade Information Services):

• Volumes soared in 2010 (blue column) versus 2009 (purple)
• The key was increased exports to the major mining countries such as Brazil, Jamaica and Australia, plus lower imports from NEA
• Overall, net exports rose 72% in 2009-11 from 1.5MT to 2.7MT.
• Net exports to Brazil rose 37% from 1.4MT to 1.9MT

The driver for the increase was China's massive stimulus programme. This was focused on infrastructure investment, and led to major increases in its metal imports from Brazil and other mining-based economies.

However, as the chart also shows, growth rates reduced in 2011 (orange column). Overall, US net exports were up only 12% versus the previous year. 2012 US trade data to the end of February confirms this trend. Export vloume of 690KT showed no overall growth versus 2011 levels.

Caustic markets are thus confirming China's slowdown is continuing.

Yesterday the blog discussed caustic soda, and the recent importance of China's metal demand. Today it focuses on chlorine and PVC.

PVC is the largest end-use for chlorine. It is also critical for chloralkali producers when caustic demand is strong, as recently. Chlorine itself cannot be safely stored in large volumes, and so instead they rely on being able to combine chlorine with ethylene to make EDC/PVC.

In turn, housing is the key market for PVC - being used in pipes, wiring and house cladding. Thus US producers have faced a major challenge since 2006. New housing starts have fallen from an annual rate of 2.2m to just 650k, dramatically reducing US chlorine and PVC demand.

Potentially, therefore, US producers could have been forced to cut back profitable caustic sales, if they had been unable to move chlorine into PVC. But shale gas, and the cheap ethylene it provides from ethane, has come to the rescue.

Currently a remarkable ~40% of US PVC production is being exported.

The chart shows the history of this growth, based on GTIS (Global Trade Information Services) data. Net US exports of PVC more than doubled between 2006 (red column) and 2008 (blue) to 1.2MT, and then increased still further to 2.7MT in 2011 (orange):

• China's 2009-11 stimulus programme led to a surge in PVC imports to feed its housing bubble. US net exports grew four-fold from 77KT in 2008 to 334KT in 2011
• China's boom also boosted Latin America's mining exports (as discussed yesterday), and so supported the domestic economy. Net US PVC exports to the region thus grew 61% to 577KT between 2009 - 2011

US producers would have struggled to compete in export markets without the ethylene cost advantage provided by shale gas, especially since 2009. Equally, their ability to make profitable co-product caustic soda sales would also have been reduced.

Worryingly, though, latest GTIS trade data shows net US PVC exports now seem to have gone ex-growth. 2012 data to the end of February shows them similar to 2011 levels at 395KT.

There also seems little sign of any major recovery in US housing markets, as the blog will discuss on Saturday.

The blog continues this week's special series on chloralkali and PVC markets by looking at EU developments on PVC.

Historically the EU has had strong export positions into markets such as Turkey and Russia, which lack major local production. More recently, as in the USA, strong export demand for caustic soda and weak domestic demand for PVC into housing led to an increased focus on PVC exports.

This created direct competition with US exporters. And helpfully, the US switch to ethane as an ethylene feedstock provided a silver lining for EU producers. US output of propylene and butadiene has been reduced by the switch to ethane feeds, and so overall EU cracker margins have been supported by higher co-product prices for both products.

Thus as the chart shows, based on GTIS (Global Trade Information Services) data, the EU has also been able to increase PVC exports:

• EU net exports of PVC rose 24% from 508KT to 631KT between 2006-8
• They then grew a further 51% to 954KT by 2011
• Overall, net exports rose 88% between 2006-11

GTIS data also provides a fascinating picture of the main battlegrounds:

• The US maintained net exports of ~325KT into China between 2009-11 (yesterday's post gives details). EU volumes have fallen from 108KT to 17KT over the same period
• The US has also boosted net exports to Russia from 30KT to 209KT, whilst EU volumes grew only 35KT
• But the EU has done better in Turkey. Its net exports more than doubled from 221KT to 494KT, whilst the US saw only a 60KT increase to 192KT

Overall, therefore, China's stimulus programme has compensated for the downturn in US/EU housing markets. It created major demand for caustic into mining-based economies, as well as for PVC in their housing markets and in China itself.

Today, however, there are worrying signs that this virtuous circle is ending, as China's economy slows. GTIS data shows EU 2012 PVC exports to the end of February were slightly down at 171KT. This confirms the slowing trend seen for US caustic and PVC exports discussed on Tuesday and Wednesday.

Since 2007, every spring sees a rush of forecasters to claim that - finally - the US housing market has hit bottom. Sadly, for those trapped in foreclosure, and for those in the chemical industry who depend on housing sales, there is little real evidence today for such optimism.

Housing also provides a good example of the way in which markets are becoming increasingly complex, as we discuss in chapter 11 of Boom, Gloom and the New Normal, to be published next week.

In the past, prices would usually 'bottom-out' when inventories of unsold homes were ~6 times the volume of those being sold each month. In March, the average ratio was 6.3 times. But this hides the real picture.

The scandal of 'robo-foreclosure', where unauthorised people signed documents to evict people from their homes, means that most foreclosures now suffer long delays whilst legal ownership is properly established. This means, for example:

• The average foreclosure process is taking nearly a year (348 days)
• In Florida, one of the worst-hit states, it takes 806 days
• In New York, it takes 1019 days

At the end of 2011, nearly 1.9m homes had some form of foreclosure filing on them. If all these foreclosures were on the market today, they would nearly double current inventory to ~11 months - in line with the level seen in the dark days of 2008.

Another feature of the robo-signing delays is that they have temporarily boosted US retail sales. Those facing foreclosure obviously stop making payments on their mortgage. Barrons, the US investment magazine, calculates this is currently adding 1.2% to US retail sales ($42bn). But as they add "soon enough, the 'savers' will have to spend on rent".

The chart shows how the S&P Case-Shiller index of US home prices initially fell 34% from their peak to March 2009. They then plateaued, as apparent inventory began to reduce. But now they have started to fall again. Prof Robert Shiller of Yale University, the co-founder of the index, is not optimistic:

"I'm more concerned about the downside than most people. I could see it staying languishing and edging down for years."

He notes that home values took eight years to reach a bottom during the Great Depression and 11 more years to regain their lost ground. Nominal US home prices fell about 30% from 1925-33 and didn't return to their pre-crash peak until 1944, the year before World War II ended.

Housing is at the centre of the US economy, and was the principal cause of the current financial crisis. Yesterday's disappointing 2.2% GDP growth is yet another reminder that true recovery will remain a distant dream until the housing crisis is resolved.

The above chart reflects the weekly changes in the 4 benchmark petchem products that launched the IeC Downturn Alert exactly a year ago. PTA (red line) was the only product to ever rise above its price on 29 April 2011 - and then only by $10/t, and for just 1 week.

The original aim was to try and help avoid the problems seen in H2 2008, when operating rates remained high down the value chain whilst demand fell. More recently, it has hopefully provided business and commercial managers with an insight into the overall state of the global market.

The key question today, of course, is whether we are about to see a repeat of last year's May downturn? Superficially, the two situations appear the same - crude oil prices peaked in recent weeks at $125/bbl and end-user demand is weakening. There are also some key differences:

• A year ago, the blog was very much alone in worrying about a downturn. Most expected Q1's strong performance to continue
• Today, the overall mood is one of uncertainty. Few people are confident about Q2 performance, but some expect an H2 recovery
• Capacity utilisation globally has slipped to 86.8%, compared to 88.8% a year ago, according to the American Chemistry Council (ACC)
• The ACC also report that US railcar loadings are down 0.7% versus 2011, despite the stimulus from much lower natural gas prices

The blog would like to be optimistic, and it has been searching for possible bullish scenarios. Sad to report, it has failed. Instead, it worries that the impact of high oil prices is much worse today than a year ago:

• They have now been above $100/bbl for a record 200 days. Even in 2007/8, the run ended after 170 days
• Recession has followed every single time since 1970 when oil prices have risen above $50/bbl ($2012)

Equally, reviewing the current state of play with its New Year 'banana skins' does not increase confidence:

• The Eurozone debt crisis is becoming quite scary. Spain's foreign minister was not exaggerating on Friday when warning "This is like the Titanic. If there is a sinking, even the 1st class passengers drown"
• China's housing bubble is not only bursting, but is now accompanied by its worst political crisis since Tiananmen Square in 1989. Little seems likely to change in the run-up to the leadership changes in October
• US housing markets remain difficult, as discussed on Saturday

And on the ground, ICIS reporters paint a consistent picture of difficult markets, as captured below in the blog's usual round-up of ICIS pricing comments this week, and price movements since 29 April:

PTA China down 13%. "A spate of plant shutdowns in South Korea, Taiwan and China did little to underpin prices."
Naphtha Europe, down 10%. "Market has become more bearish. Propane stocks are said to be abundant"
HDPE USA export, down 10%. "Offers fell, along with other global prices. However, traders said prices for US material were still too high to work in most other regions"
Benzene NWE, down 4%. "Availability for the prompt market is being squeezed by restricted pygas supply"
Brent crude oil, down 5%
S&P 500 Index, up 3%