Chemicals & The Economy

Over Christmas, the blog spent some time considering whether its IeC Downturn Alert had served its purpose. By luck, or possibly judgement, it had been launched at the exact market peak on 29 April. And hopefully it had helped to alert companies to the difficult times that lay ahead.

But by December, most analysts and commentators were arguing that the worst was over:

• US markets were expected to strengthen
• China was certain to provide strong demand
• Europe's debt crisis was finally resolved
• Rising oil prices confirmed that a strong recovery was underway

6 months later, the blog is glad it didn't listen to these consensus views.

Of course it wants the economy to do well. Of course it wants the industry in which it has worked for 30 years to prosper. But as the chart above shows, its caution has been fully justified:

• US polyethylene export prices ((purple) are down 29% since January. And the American Chemistry Council says its new leading indicator of demand "is signalling a slowing US economy"
• PTA prices (red) in China are down 43% due to lack of demand
• Naphtha prices (brown dash) in Europe are down 31%
• Oil prices (blue) have tumbled 29%, after rising strongly till March

Only benzene prices (green), up 10%; and the US S&P 500 Index (pink dash), up 22%, have risen. Benzene markets have suffered major supply outages; whilst liquidity from the US Federal Reserve has enabled financiual markets to ignore developments in the real economy.

Equally, prices today in all 6 markets are lower than on 29 April 2011. This strongly suggests that the strength seen between December to March was a typical bear market rally, and not the start of a sustained upturn.

Benchmark price movements since the IeC Downturn Monitor's 29 April 2011 launch, with latest ICIS pricing comments, are below:

Naphtha Europe (brown), down 32%. "Demand from the petrochemical industry remains minimal, with rival feedstock LPG continuing to be priced far below naphtha"
PTA China (red), down 31%. "Major polyester makers offered lower prices to encourage sales and relieve their inventories"
HDPE USA export (purple), down 29%. "Export prices were stable to weaker, as falling feedstock prices pushed some prices lower"
Brent crude oil (blue), down 25%
Benzene NWE (green), down 7%. "June was an extraordinary month in terms of pricing, which skyrocketed because of various planned and unplanned outages"
S&P 500 (pink dash), down 0.1%

Banks are essential in any modern society. Their role is two-fold:

• To take in deposits from companies and individuals
• To lend out this money prudently to other companies and individuals

Both are difficult roles to fulfil. Banking therefore requires employees who have both talent and integrity. They must be able to look after people's money safely, and they must have the ability to manage financial risk.

Most bankers conscientiously aim to fulfil these challenging roles. But the examples of JP Morgan and Barclays highlight how the top leadership of many banks now appears to have a completely different agenda.

JP MORGAN CHASE
CEO Jamie Dimon apparently either never knew that one of his key units was taking vast trading bets, or he didn't care to ask. He even denied the first rumours of major trading losses, when the story began to emerge in the financial press, calling them 'a storm in a teacup'.

Today, the size of the eventual losses is still not known. But they are now expected to be at least $5bn.

BARCLAYS
CEO Bob Diamond is the head of a bank that has paid a $450m fine for systematically abusing the process by which LIBOR (London InterBank Offered Rate) was set over many years. This is no small issue.

The LIBOR rate is used to price an estimated $350tn of derivatives. Lenders and borrowers all over the world have potentially been affected.

Astonishingly, both Dimon and Diamond are still in their jobs today. No executve director of either bank has taken responsibility for these scandals and resigned*. This single fact shows the depths of the problem at the top of many banks.

The root cause of this problem was Congress' 1999 repeal of the Depression era Glass-Steagall Act, which separated commercial and investment banking. Top bank executives abandoned their role as prudent lenders. Instead, they focused on increasing their profits as fast as possible via the use of maximum leverage.

In the process, as we argue in chapter 12 of Boom, Gloom and the New Normal, they encouraged the short-termism that has destroyed many companies. One casualty was the blog's own former employer, ICI - once the largest chemical company in the world.

As the Financial Times notes:

If, as now seems likely, many banks were involved in fiddling rates, this raises questions not just about the leadership of one bank but that of the whole industry. For there to be a real change of heart and expectation, it may therefore be necessary to retire this generation of flawed leaders. This newspaper does not endorse banker-bashing for its own sake. But if the bashing is to stop, the banks themselves must change.

* The only resignation so far is of 65 year-old Marcus Agius, Barclays' non-executive chairman. He had been chairman since January 2007, and was presumably coming up to retirement shortly.

Financial markets cannot make up their minds about the outlook. As this month's IeC Boom/Gloom Index shows, sentiment (blue column) remains exactly at the dividing line between optimism and pessimism.

This parallels the behaviour of the S&P 500 Index (red line). It had recovered strongly from March 2009, but has since found it very difficult to break through the 1370 level (thin red line):

• It peaked at this level in April 2011
• It broke though briefly in March/April this year, but then slipped
• It is now making its 3rd attempt

There is nothing 'magic' about the 1370 level. In good times, markets trade on fundamentals and will move forward if companies seem confident and earnings forecasts are positive.

But these are not good times. Markets are being kept alive by liquidity injections from central banks in the form of quantitative easing (QE). They rally, as last month, when these QE programmes are extended.

But successful traders are not stupid. They know that today's economy is very fragile. So they are very careful about how they place their bets. 1370 has been the top of the range for some time, so they will be wary about becoming too optimistic.

Of course, the central banks may be right, and the blog wrong. Perhaps these latest QE efforts will succeed, where all the others have failed.

But the Boom/Gloom Index suggests caution remains the operative word.

The chart above should be of great interest to anyone who hopes to retire on a pension. It should also be required reading for any executives planning their business portfolio for the future.

Published by the Financial Times, it shows the actual performance of pension funds in selected OECD countries since 2001:

• The blue quadrants show the 2001-2010 annual percentage return
• This is ranked in order, so Chile is best with 5.3% per annum
• The USA is worst, with a negative return of -1.3% per annum
• Yet most pension funds still assume 6%+ as their target performance

• The red quadrants show performance since the crisis began in 2007
• This shows pension fund returns are getting worse, not better
• Only Germany has seen a positive performance, up 3.3% per annum
• All the other countries have seen negative returns

This data confirms a key message from Boom, Gloom and the New Normal:

Life expectancy has increased, but our thinking about pension schemes hasn't adapted. The money we now save is still only enough to pay for a few years of retirement, not a few decades.

29% of the Western population (272m people) are now in the New Old 55+ age bracket. And their numbers are rising all the time, as the BabyBoomers are a much larger generation than their successors.

This means lower economic growth is inevitable. It also means people's expectations of their likely retirement income are often wildly over-optimistic.

In turn, this means companies need to focus on affordability, and real needs. Their customers might want to continue buying semi-luxury products. But 'wanting' is not the same as 'needing'.

Bob Diamond, Barclays CEO, has finally resigned this morning. It is a scandal that he, or any of the Bank's Board, ever thought that he could hold onto his job. He was, after all, head of Barclays Capital when the fixing of LIBOR rates took place.

It is also a measure of the confused sense of morality at the top of many banks that Diamond will now be temporarily replaced by Barclays' non-executive chairman, Marcus Agius. He, after all, had already announced his resignation over the issue. As the Wall Street Journal comments:

"The idea he should now stay on and lead the search for Mr. Diamond's successor is astonishing".

And, of course, Jamie Dimon still expects to be announcing JP Morgan Chase's next set of results, despite their ever-increasing losses from the supposedly unauthorised trading of 'The Whale'.

There is a deep-seated problem with the management of many major banks. Equally, the regulatory system has some important questions to answer. How were the banks allowed to take these risks in the first place?

Hopefully, Diamond's resignation will be the catalyst for these important issues to be faced.

Last week saw the 20th EU 'Crisis Summit'. Like the previous 19, it achieved little. Yet everyone at the meeting knew what had to be agreed:

• A banking union which operates across national borders
• The issuing of joint Eurozone bonds, guaranteed by all euro members
• Adoption of a Federal budget and economic policy

These measures would create the essential fiscal union required to support the euro as a common currency.

Equally, this is not a new debate. It was spelt out in 1990 by German Chancellor Kohl and French President Mitterand, when the concept of the euro was first discussed. As the US example shows, monetary and fiscal union also requires political union.

But today, the two countries at the heart of the euro project are as far away as ever from agreement:

• Germany wants to have central controls over spending
• But France will not agree to give up national sovereignty.

Equally, as Reuters notes, the leaders continue to talk different economic and political languages. The 'crisis summits' thus resemble the efforts to build the biblical Tower of Babel, pictured above by Breughel.

Thus in German, the word for 'debt' is Schuld, which also means 'guilt'.

So in Germany, the Eurozone debate is a morality play, where those in debt are 'sinners':

• It wants the debtor countries to introduce a stability culture of low inflation and low debt, via a savings policy based on austerity
• But new French President Hollande won election on the basis of a 'growth policy' based on spending, not savings.

Pensions policy highlights the difference. Germany is raising pension ages to 67 years. Whilst France has just reduced them from 62 to 60 years.

The European Central Bank is caught in the middle. It provided €1tn ($1.4tn) of emergency funding in December to avoid the collapse of the banking system. But it cannot force the politicians to accept the need for fiscal and political union to support monetary union.

Thus as the blog warned a year ago:

"The alternative (to agreement) is not the status quo, as too many politicians still hope. It is that the Eurozone could eventually break up, and in the process severely damage both the European Union and the wider global economy."

Once again, the chemical industry has performed its role as a reliable leading indicator of the global economy.

On Friday, the IMF warned their next forecast:

"Will be tilted to the downside and certainly lower than the forecast that was published three months ago"

This will not be news to blog readers. As the chart above shows, chemical markets peaked on 29 April 2011. They staged a temporary rally from December - March, as policymakers pumped more liquidity into the markets and pushed up crude oil prices again.

But these efforts were self-defeating, as they addressed symptoms not causes. Higher oil prices have actually destroyed the very demand that the policy was supposed to create. And by adding more debt, quantitative easing has further lowered future growth prospects.

Thus prices for the benchmark products have not recovered to the levels seen before April last year, as the yellow shaded areas confirm. The only marginal exception has been benzene. And even it is the exception that proves the rule.

Recent plant problems have certainly pushed prices higher in the short-term. But these higher prices cannot be passed through downstream, and have served only to further reduce demand in the medium-term.

Benchmark price movements since the IeC Downturn Monitor's 29 April 2011 launch, with latest ICIS pricing comments, are below:

HDPE USA export (purple), down 29%. "Buyers stress that they see no reason to pay more for July exports than they had in June"
Naphtha Europe (brown), down 27%. "Demand from the petchem industry remains subdued, with LPG still priced significantly below naphtha"
PTA China (red), down 26%. "Sales rally was considered by some polyester makers as speculative buying by downstream textile industry"
Benzene NWE (green), down 4%. "Some derivative producers may scale back output because of the high cost of benzene and ongoing weak demand both in Europe and Asia"

The chart above opens chapter 7 of 'Boom, Gloom and the New Normal', which looks at the changes taking place in consumer markets.

June's US retail sales provide clear evidence of the trends it describes:

• They grew at the slowest pace in 2 years, despite falling gasoline prices
• Mid-market stores suffered the biggest hit to volume
• Instead, consumers focused on the discount stores

Of course, as novelist F Scott Fitzgerald once wrote, 'the very rich are different from you and I'. They still have money to spend, and high-end stores posted 6 - 8% sales gains.

This pattern is very different from the economic supercycle years between 1982-2007. Then, the spending power of the BabyBoomers created a new 'middle market'. Companies no longer needed to focus on being either low cost, or on delivering high perceived value.

Instead, they developed a 'mass customisation' model that opened up a new middle market. Costs were kept low by outsourcing, whilst prices increased as lifestyle brands became the norm.

But those days of easy, and constantly increasing, profits have now disappeared. And we are not simply moving back to the pre-1982 world. The Western population is older, and it has less money to spend.

Companies that proactively adjust to this New Normal will see rising sales and profits in the years ahead. But sadly, far too many Boards remain in reactive mode, hoping against hope that 'recovery is just around the corner'.

2 great myths are helping to destroy company profits as we transition to the New Normal:

• In the West, it is that 'recovery is just around the corner'
• In emerging economies, that everyone is now 'middle class'

Sadly, this latter claim makes no sense at all.

The reason is that it is based on an income definition of $2 - $20/day, on a purchasing power parity basis; an annual income of just $730 - $7300.

This myth of a rising middle class unfortunately blinds many companies to the real opportunity. This is that countries like China have made great strides in moving people out of absolute poverty, defined as earning less than $1.25/day ($365 per year):

• 20 years ago, 41% of China's population earned less than $1.25/day
• Today, only 1% are still living in absolute poverty

China's own companies do not make this mistake. They know only Communist Party officials can afford luxury cars like the Audi A6L. It is the most popular luxury car, but still sold only 58k between January-May.

The real growth market is for people trading up from motor bikes. And China's automakers are starting to flood the emerging economies with cheap and cheerful cars aimed at these buyers.

As the chart above shows from the New York Times, China's vehicle exports are racing ahead. They were up 21% in January - May this year, and up 43% in May itself, as China's new auto production comes online.

The reason is that they are very affordable:

• A Chery S21 costs just $5500 in Chile, for example
• A similarly featured Toyota costs $12000

Of course, today's Chinese cars aren't made to same quality as Western cars, nor to their safety standards. But by 2018, according to analysts JD Power, they will have caught up.

As we warn in chapter 6 of Boom, Gloom and the New Normal, it is wishful thinking to believe that demand from a new middle class in emerging economies will magically replace lost Western demand.

But companies who focus on affordability will do very well in the transition to the New Normal.

The next webinar in the 6-monthly American Chemical Society (ACS)Chemistry and the Economy series is on Thursday.

As usual, it will be moderated by Bill Carroll, Occidental Chemical VP and former ACS President, and will take place between 14.00 - 15.00 EDT.

Bill and I will look at 4 key issues:

• H1 performance, and the outlook for the rest of the year
• Developments in Europe and China
• The impact of shale gas on the USA
• Managing a chemicals business in a VUCA world

Registration is free, please click here.

The arrival of the internet should make it easier to source key data from around the world. But instead, it seems to encourage Twitter-like behaviour, where everyone simply repeats what has already been said.

How else to explain the almost universal view that government bond yields in countries such as the US and UK are in a major asset bubble? Almost no serious commentator dares to suggest an alternative view.

Yet detailed yield data for UK government bonds is available from 1900, and for US bonds from 1926, in the annual Barclays Equity Gilt Study. As the chart above shows, this gives a completely different picture:

• UK government bonds (blue column) averaged 3.7% between 1900-49
• US government bonds (red) averaged 2.7% between 1926-49

Yields then began to increase as the Western BabyBoomer generation (born 1946-70) created a surge in demand. They reached a peak in the 1970s-90s, when UK rates averaged 10.4% and US rates averaged 8%.

But since then, they have returned to more normal levels. Since 2000, they have averaged 4.2% in the UK and 4.5% in the US - still higher than the pre-1950 pattern. This suggests they are reverting to the mean, as usual with major investment classes, rather than in an asset bubble.

This matters enormously for the global economy:

• People will have to save much more money for their pensions
• They will therefore have less money to spend before they retire
• Income levels in retirement will also be lower
• Thus growth is likely to be slower than in the 1982-2007 supercycle

This also confirms our argument in chapter 2 of Boom, Gloom and the New Normal. There, we suggest that Japan's experience over the past 20 years is not unique. Its BabyBoom took place earlier than in the West. And therefore its society is already well down the path of adjusting to a world of lower growth and much lower inflation.

The good news is that the blog's 6 monthly review of force majeures shows considerable improvement from H1 2011's performance. As the chart indicates, the number of ICIS news reports of force majeures halved from 375 in 2011 to 179.

Some of the decline was, of course, expected as there has thankfully been no repeat of Japan's disaster in March last year. Equally, output has been reduced in recent months, and so any outages have not necessarily led to the need to declare force majeure.

But good news is good news. It is also sound business sense for companies to maintain their plants properly, and train staff to high standards. Investors greater awareness of safety issues post Deepwater Horizon has probably also been helpful.

Of course, during tight markets, unplanned plant outages only serve to push prices higher, so the penalty for poor performance is minimised. But when markets weaken, customers have more choices.

They tend to remember those who were reliable suppliers. And they often penalise those who weren't. As a result, the weaker performers find contract sales harder to achieve. And very often, their selling prices also suffer - just at the moment when they can least afford this.

How many more empty cities like Ordos does China really need? Are 64.5m empty apartments enough, or should there be more? Should we build more steel mills, to add to the current 220MT of over-capacity?

These are the questions facing China's leadership today, as they debate the economic slowdown. Growth has slowed to a relative crawl as the lending boom has ended. Electricity consumption (red line) is the best real-time indicator of the economy, and as the chart shows:

• It rose 21% in H1 2010, as lending (green) doubled to 1/3rd of GDP
• Growth then slowed to 9% in H1 2011, as the economy over-heated
• And H1 this year saw it grow just 7%

The slowdown in the West means fewer orders for China's factories, so they need less electricity. Equally, the government's need to control house prices has reduced this source of major domestic demand.

So what would blog readers do, if they were running China today?

One answer, of course, is to kick off another lending boom. This has already begun to increase again. It was up 16% in H1 versus 2011. And the government is approving new steel mills capacity again, to help boost GDP growth after Q2's slowdown to 7.6%.

Another way would be to follow the path outlined by expected new premier, Li Keqiang, back in March. Speaking to the National People's Congress, he stressed the importance of economic reform. In particular, he argued that the power of the state owned enterprises should be reduced in favour of private enterprise.

The first option gives easy wins in the short-term. But as the People's Daily wrote in February, a failure to reform now will lead to an "even greater crisis" in the future. The second option requires a more long-term approach, accepting some pain today in return for a better future.

But, of course, whichever option is chosen still leaves the problem of China's housing bubble to be resolved. Prices in Tier 1 cities such as Beijing and Shanghai are now at ratios of 14:1 to average earnings, having risen every year since private ownership was first allowed in 1998.

There is, of course, another option. This is the one that the outgoing leadership seems to have chosen. Aim to do enough in the way of new lending to keep the show on the road, until the new leaders are selected in H2. And then bow out gracefully.

Pity the poor purchasing manager, who:

• Must keep inventories low as end-user demand remains slow, and the CFO remains very worried about the working capital risk
• Must keep inventories high, to minimise the risk of running short if supply problems develop and prices jump

Benzene (green line), as always, is the great example of what can happen. As the chart shows, prices began to fall in early March, as oil prices fell. But May's plant problems pushed them back up. Since then they have been down again, then up, then down. And then up again.

These moves are not being driven by a recovery in demand. This, from all accounts, remains as weak as ever. They are supply-driven, where any problems are magnified in a thin market. Thus prices have risen 16% over the past 2 weeks, having previously fallen 11% in 3 weeks.

This is a good example of the VUCA world in which we now live. Volatility, Uncertainty, Complexity and Ambiguity dominate.

The only solution is for companies to develop their own VUCA in response - Vision, strategic Understanding, Clarity over implementation plans. And, especially if you are a purchasing manager, Agility in response to unforeseeable events.

Benchmark price movements since the IeC Downturn Monitor's 29 April 2011 launch, with latest ICIS pricing comments, are below:

HDPE USA export (purple), down 28%. "Producers were making few offers and seeking a higher price for any material they were offering"
PTA China (red), down 26%. "Polyester makers offered price discounts during the week to encourage sales"
Naphtha Europe (brown), down 25%. "Market lengthened this week as a result of imports from other regions boosting stocks, and demand from the gasoline sector declining."
Brent crude oil (blue), down 20%
S&P 500 Index (pink), down 1%
Benzene NWE (green), up 8%. "Ongoing tightness for July, gains on crude futures, as well as firmer prices in Asia and the US, have all helped put more upward pressure on the European benzene market "

Chloralkali production is an excellent indicator of market direction in the short-term. Unlike petrochemicals, cellrooms can quickly reduce or increase operating rates. This is essential for efficient operation, as the price for electricity can change every 30 minutes.

Thus as the above chart of European chlorine production shows (based on Eurochlor data), demand seems to have fallen sharply in June (red line):

• It fell to 760KT, equal to June 2009
• H1 output was thus down 3% versus 2011 levels

Operating rates also fell sharply to 73.5%, compared to 77.5% in May.

Producers are clearly anxious to avoid the experience of H1 2009, when caustic soda stocks jumped 44% between January - April, as end-user demand tumbled during the financial crisis.

Their quick response suggests EU demand is weakening quite fast, as the Eurozone crisis continues. Equally, it confirms the slowing export trend, as China's downturn continues.

Affordability, rather than value-in-use, will be key to success for companies as we transition to the New Normal.

This means, as we note in Chapter 9 of 'Boom, Gloom and the New Normal', that manufacturing will have a major role to play in achieving the changes required. Waste will need to be greatly reduced, if costs are to remain competitive.

The above chart from a major new UK government report provides a helpful summary of the 4 main areas by which this objective can be achieved. 2 of these areas are, of course, already well understood:

• Waste Minimisation has always been a major focus for businesses
• Green Products are media-friendly, but often have low market shares

This leaves two areas which have been relatively ignored:

• Clean Operations use new technology to reduce waste by design
• Product Service Innovation enables new ways of working with supply chain partners

There is nothing terribly 'clever' about either of these approaches. Most companies could achieve quick wins if they decided to move forward with them, as we discuss in the eBook.

Boards and manufacturing unit managers simply need to move them up the agenda. The business justification is clear. Clean operation and product service innovation are the only tools that offer major scope for achieving further cost reductions in the near-term.

The world's 3 major auto markets - USA, Europe and China - currently account for ~70% of global sales. And as the chart above shows, H1 performance has been volatile over the 2005-11 period:

• 2005 was the last year of the US subprime boom, and the US (red) was easily the largest market with 8.6m sales. H1 sales this year were down 15% at 7.6m
• Europe (green) was the 2nd largest market in 2005, with sales of 7.6m. This year, sales were down 13% at 6.6m
• China's growth (blue) rescued overall sales volumes. It sold just 1.8m in 2005, but volumes rose 280% to 7m this year
• Overall, therefore sales in H1 2012 were up 16% versus 2005, at 20.9m versus 18m

US sales continue to make modest progress. 7 years is a long time to keep a new car, and so the high volumes of 2005 have led to strong replacement buying since 2010. And Japan's tragedy last year created a tight market until recently, further encouraging price-sensitive consumers to believe there was no point in waiting for major bargains to appear.

Europe is the key problem area. 2010-11 saw marginal improvement in a declining trend, due to the stimulus programmes. But 2012 has seen a 7% decline versus 2011. Only Germany and the UK of the major markets are showing increased sales - Germany due to export strength, and the UK to homeowners seeing record low mortgage interest rates.

China is the major question mark. Sales leapt from 4.5m in 2009 to 6.7m in 2010, due to the government's lending and stimulus policies. But since then they have plateaued at ~7m. China counts factory shipments as retail sales. And worryingly, the national dealer association claims its inventories have jumped from 45 days in April to 2 months in June.

They also note that more cities are starting to restrict car sales. Beijing, Shanghai, Guangzhou and Guiyang have introduced limits, due to the road congestion problems created by the sudden increase in sales. Guangzhou will now allow only 10k new cars each month on the roads.

Equally, Audi's result underline the dependence of the luxury segment on China. It sold 193k cars in H1, due to its position as the favoured car of communist party chiefs. This was 50% of its global sales.

'Waiting for Godot', the great play by Irish writer and Nobel Literature Prizewinner, Samuel Beckett, deals with the meaning of existence. Written just after the Second World War, its two characters wait endlessly for the arrival of Godot.

US financial markets are currently staging their own version of the play:

• They no longer see their role as providing new investment to enable companies to build their businesses for the future
• Today, they are operating in reverse. Companies are not raising new money, but are instead returning it to investors via share buybacks
• Remarkably, as the Financial Times notes, in recent years "companies have become the only net buyers of shares"
• Markets have thus become casinos, where the main players are the high-frequency traders, for whom tomorrow seems a lifetime away

This, of course, is a major reason for the slowdown in the wider economy. Cash used to fund buybacks cannot fund the investment in Research & Development and factories required to provide future growth.

Even worse, it means markets have become ever-more dependent on injections of short-term cash. Since the crisis began, they now look to the Federal Reserve's August meeting in Jackson Hole, Wyoming, for news of further support:

• In 2010, Fed Chairman Bernanke introduced the $600bn QE2 program
• Last year, he indicated they would add $400bn via Operation Twist

Liquidity bubbles need ever-increasing amounts of cash if they are not to burst. So last month, the Fed was forced to add another $267bn via an extension of Operation Twist. But this has only enabled the S&P 500 and Dow Jone Index to stabilise, as traders know the extra money will soon be used up.

Thus 'Waiting for Bernanke' is the hottest play in US financial markets at the moment. If, like Godot, he does not appear this time, then the audience risks being mighty disappointed.

Benchmark price movements since the IeC Downturn Monitor's 29 April 2011 launch, with latest ICIS pricing comments, are below:

HDPE USA export (purple), down 28%. "Prices were stable to slightly higher, with material in short supply"
PTA China (red), down 25%. "China's polyester demand improved this week, driven by firmer feedstock prices"
Naphtha Europe (brown), down 21%. "The fundamentally weak European market continues to gain support from the stronger Asia market"
Brent crude oil (blue), down 16%
S&P 500 Index (pink), no change
Benzene NWE (green), up 3%. "There was a general sense both in Europe and the US that the market had become overheated"

This week marks the opening of the 3rd London Olympics. To celebrate, the blog today looks at developments in government bond yields since the 1st London Games in 1908. On Thursday, it will look at GDP per capita changes since the 2nd London Games in 1948.

In 1908, UK interest rates were the benchmark for the world. And as the chart shows, based on Barclays Equity gilt study data, they averaged 2.9% during the 1900s. In 1908 itself, they were 3%. Today, long-dated 30 year government bonds yield exactly the same amount.

In fact, as the chart shows, rates have always been around this level, with the exception of the 1970s-1990s. Many commenators make the mistake of focusing on recent history, and argue that higher yields are 'normal'.

But they are not. It was only the arrival of the BabyBoomers (those born between 1946-70) that created a major increase in demand as we moved into the 1970s. The rise in UK births was quite astonishing:

• They averaged 784k between 1921 - 1945
• They jumped 15% to 901k in the next 25 years, 1946 - 1970
• Since then, they have fallen 17% to average just 744k

Unsurprisingly, bond yields have fallen back to historical levels again.

Equally, fewer people in the Wealth Creator 25 - 54 age group means that overall demand levels will be lower. Plus, UK life expectancy has risen from 50 years in 1908 to around 80 years today.

This means 18m people, 28% of the UK population, are now in the New Old 55+ age group. They need to save more, and spend less, in order to finance their extended life span.

As we argue in Boom, Gloom and the New Normal, demographics drive demand. Those companies who adapt to the changes underway will win the medals in years to come.

Sinopec is China's main company in refining and chemical markets. Although it is listed on world stock markets, the government remains its largest shareholder with a 76% stake. As such, it follows government priorities rather than western commercial logic.

The chart above, from the blog's major new study of the company, highlights some of the key issues. Between 1998 - 2011, Sinopec has:

• Spent a total of RMB 181bn (~$27bn) in chemicals capex (blue columns)
• Earned just RMB 110bn at EBIT level (Earnings Before Interest and Tax)

No western company would dream of spending this amount of capital for such poor returns.

But Sinopec operates as an arm of the government. Its role is effectively to act as a utility, ensuring reliable supplies of raw materials to the factories, to help maximise employment. For example, on ethylene it has:

• Inreased production by 14% per year over the period, from 2MT in 2000 to 10MT in 2011
• Normally run on a continuous basis (green columns), ignoring market downturns, at average operating rates of 102% over the same period

Thus it has enabled its downstream customers to maintain unbroken production schedules, and helped to ensure their reputation as reliable suppliers to global markets.

As discussed last November, Sinopec is thus an excellent example of our argument that economic factors are becoming less important in the global economy. Instead, social and political factors are beginning to dominate.

The Indian economy is one of the most misunderstood in the world. It holds great opportunities, because unlike China it still has a relatively young population. But it is also desperately poor. Thus the opportunities are around providing very basic needs, not for western-style goods.

The above 'Business Standard' chart based on National Sample Survey reports, highlights the key issues. It shows how incomes have improved for both rural and urban dwellers between 2004-5 and 2009-10. But it also shows how low these incomes are in absolute terms:

• 90% of urban dwellers spent <3200 rupees/month in 2009-10 (red line)
• In 2004-5, the comparable figure was 2800 rupees (grey)

• 90% of rural dwellers spent <1500 rupees/month in 2009-10 (blue)
• In 2004-5, the comparable figure was 1400 rupees (dark grey)

1000 Indian rupees are worth ~$18. So 90% of urban dwellers spent less than $700/year in 2009-10. And 90% of rural dwellers spent less than $325/year. And as the chart shows (x-axis) 50% of both urban and rural dwellers spent less than half these amounts each year.

It is sheer wishful thinking to imagine that these people can be described as 'middle class' in any sense of the word. It also blinds companies to the real opportunity that these people represent.

The data shows that 50% of India's population increased their spending power by ~$2/month between 2004-5 and 2009-10. This was an ~8% increase for urban dwellers, and a ~15% increase for those in rural areas.

This was real progress for India's 1.2bn population. Designing products to meet the needs of these ordinary Indians is the real opportunity for the future.

Update, 31 July. Just as this post was published, much of India suffered a major electricity blackout. A second blackout has occured today, cutting power from half of India's 1.2bn population. The area affected stretches from Kolkata to New Delhi. The news highlights yet again how India's need is for the provision of basic services, not luxury goods.

Tomorrow sees the opening of the 3rd London Olympic Games. As promised, the blog today looks at the change in GDP per capita in the UK economy since the 2nd London Games in 1948

GDP per capita is the best measure of a country's standard of living. It shows how the economy has grown, in terms of the number of people in the population. As the chart shows, the UK has done very well over this extended period of time:

• In terms of money of the day (red line), GDP/capita has grown from £239 in 1948 to £24168 last year
• Adjusting for inflation (green line), it has grown 338%. The UK thus ranks 22nd in the world

This confirms that western countries still enjoy much higher standards of living than anywhere in the emerging economies, thanks to the arrival of the BabyBoomer generation. China, for example, is in 88th place with just 14% of the UK's GDP/capita.

Of course, nothing lasts forever. The green line also highlights how the UK's GDP/capita has begun to slip in recent years. Policymakers have failed to recognise the importance of demographics, and have ignored the potential impact of the ageing of the Boomers on the economy. But that is tomorrow's problem.

Today, the blog is preparing to cheer on the athletes who have gathered from all over the world. And it will be cheering especially for Beth Tweddle, daughter of its former ICI colleague Jerry Tweddle, in the gymnastics. A gold medal to accompany her world championships would be a marvellous achievement.

Chemical markets are often rather good at providing important insights into wider economic trends. China's polyethylene market is no exception.

As the chart shows for the H1 period, based on trade data from Global Trade Information Services, demand has continued to slip:

• It was down 1% (red column) versus H1 2011 (green) , and down 3% versus H1 2010 (blue)
• China's own production has plateaued temporarily, up 4% versus 2010
• Imports were down 9%, and exports up 82%, versus 2010

One major learning is that PE demand seems unconnected with GDP. Many commentators have argued that China's PE demand will grow at 1.5x or even 2x GDP. But there is no evidence for this optimism over the past 2 years.

Equally, there is little evidence to support US optimism over its ability to export increased PE volumes due to its feedstock cost advantage from shale gas. In fact, the reverse is true, with China's imports from NAFTA down 59% versus 2010.

The data does, however, provide support for the idea that China's economy is much weaker than the published GDP figures suggest. Last month, the blog highlighted the problems developing in the city of Wenzhou, often a leading indicator for the rest of China.

It is in the affluent coastal province of Zhejiang. And now the provincial government has released a report which was summarised in the official China Daily newspaper as follows:

"Weak demand, rising labor costs and strained liquidity are ravaging enterprises in East China's Zhejiang province, a traditional stronghold of China's entrepreneurship, and forcing them to scale down or even halt production. The report, based on a month-long investigation and interviews with local government officials and businessmen, said that falling earnings, rising production costs and dwindling orders are now plaguing most of Zhejiang companies

"The report warned that the bleak situation for Zhejiang's enterprises could snap their capital chains and threatens to cripple the credit system."

The last few days have seen financial markets rallying, whilst the news from the real economy gets worse. US GDP growth in Q2 was just 1.5%. And the Wall Street Journal notes the recovery since 2009 has been the weakest in the post-War period.

But that doesn't matter to the computerised trading systems that now dominate financial markets. Their owners simply hope this bad news will encourage policymakers to provide them with more firepower for their high-frequency trading, via further stimulus efforts.

The chart shows the periods (yellow arrows) of QE1 from March 2009, QE2 from August 2010 and Operation Twist from August 2011. These have led to enormous trading profits in financial markets. But by also increasing oil prices to record levels, they have destroyed any prospect of a recovery in consumer demand.

As the great scientist Einstein wisely remarked, a good definition of lunacy is to repeat the same action, and expect different results. Clearly the 3 rounds of quantitative easing have so far failed to produce a meaningful recovery. So why should a 4th be any different?

Meanwhile in the real economy Dow CEO, Andrew Liveris, spelt out the key issues in his H1 report on Thursday:

"The new reality is that this world is not in a normal growth mode, and it does not appear that we will see this for at least 12-24 months. The global GDP will struggle to get close to 3% in the next 12-24 months on a sustained basis."

On China, his outlook was even more sobering, as he warned that its GDP was now "Probably running at very low numbers right now, a 3%, 4%, 5% number at best."

BASF chairman, Kurt Bock, was similarly downbeat when reporting. Their results were supported by the Oil and Gas business. But Bock warned that BASF had abandoned hope of "an upturn in demand in H2" and he forecast global GDP at just 2.3% - essentially, recession level. Equally, in Asia he warned that:

"Q2 sales decreased - as they did in Q1... (whilst) volumes in China had been flat in Q1 and Q2, a sharp contrast to previous quarterly growth. No-one can tell when business will pick up again. Customers were acting very cautiously, and continue to reduce inventories to the very minimum."

Maybe, one day, policymakers will realise it is today's changing demographics that are driving the changes underway in the global economy. Until then, they will continue to treat symptoms, not causes.

Benchmark price movements since the IeC Downturn Monitor's 29 April 2011 launch, with latest ICIS pricing comments, are below:

HDPE USA export (purple), down 26%. "Prices were notionally higher, with material in short supply"
PTA China (red), down 26%. "China's polyester demand improved this week, driven by firmer feedstock prices"
Naphtha Europe (brown), down 24%. "The market lengthened this week as demand remained lacklustre, and opportunities to move surplus stock out of Europe were reduced as the arbitrage to Asia remains closed."
Brent crude oil (blue), down 16%
Benzene NWE (green), down 1%. "Europe remains undersupplied, with many units underutilised. Low cracker rates have ensured that pygas remains limited, further curtailing supply"
S&P 500 Index (pink), up 2%