Chemicals & The Economy

The chemical industry has a long track record as a leading indicator for the global economy. Its position in the value chain means that it sees what is happening upstream in energy markets, and downstream in consumer markets.

Anyone studying Q2 results will therefore be concerned about the outlook.

This is a major shift from Q1. Then, some companies were relatively optimistic, whilst others were more cautious. This uncertainty led the blog to suggest that "Scenario planning, based on Dow's Upside view and Unilever's Downside view, could prove a very valuable exercise".

Today, there are still some companies such as Bayer and DuPont who remain optimistic about their specific market sectors. But Dow's change of heart is a clear sign of the likely problems that lie ahead: "the global macro environment is not improving at the rate previously anticipated, and we have structured our business plans accordingly".

In difficult times, there is a natural tendency to hide under the bedclothes, and hope the problems will go away. But wishful thinking is not a strategy, and it could easily lead to disaster. Thus the blog recommends Shell's comment 'moving forward in volatile times' as a motto.

As always, it stands ready to help and advise any Board or business who would value an external perspective on the challenges and opportunities that likely lie ahead.

Air Products. "Current economic uncertainty continues to impact our near-term volume growth"
AkzoNobel. "Concerns are focused on the risk of recession in Europe, delayed recovery of the US property market and the potential of a slowdown in Asia"
Arkema. "Challenging macroeconomic environment, marked by contrasted market conditions between the various geographic regions of the world and the price fluctuations of raw materials"
BASF. ""No-one can tell when business will pick up again... Customers continued to act cautiously"
BP. "Particular weakness in aromatics margins, resulting from growing capacity and subdued demand"
Bayer. "Confident for the second half of the year"
Borealis. "Weak economic sentiment in a decreasing price environment"
Brenntag. "Brenntag operates successfully even in the current challenging economic conditions"
Celanese. "Weakened economic environment in Europe and slower growth in Asia contributed to lower sales"
CEPSA. "The burgeoning economic crisis in Europe, and particularly in Spain, continues to weigh on the company's results"
Clariant. "Slowdown in global economic growth and the crisis in Europe did not materially impact the non-cyclical business units"
DSM. "Global economic outlook in H2 is 'more uncertain'"
Dow. "The global macro environment is not improving at the rate previously anticipated, and we have structured our business plans accordingly"
Dow Corning. "Oversupply and high raw material costs challenged the company's profits"
DuPont. "Agriculture, food and bioscience businesses are performing exceptionally well globally"
Evonik. "We are on course in waters that are getting rougher"
ExxonMobil. "Underlying performance weakened because of lower margins and volumes"
INEOS. "Impact of steeply declining oil prices during Q2 adversely affected May and June"
Indorama. "The last 12 months have witnessed extreme volatility that closely shadows what we experienced in H2 2008"
LG Chem. "Expects a gradual improvement in demand from China in Q3"
Lanxess. "Expects raw material and energy costs to remain volatile "
LyondellBasell. "Fundamentals look good for the rest of the year"
Methanex. "Methanol demand has remained good and the pricing environment has been relatively stable"
Mitsubishi. "Sluggish demand from overseas markets"
Olin. "Improved prices and higher bleach and hydrochloric acid volumes, more than offset lower chlorine and caustic soda volumes"
PKN Orlen. "Market expectations of falling prices because of decreasing crude oil prices"
Oxychem. "Lower exports and prices"
PPG. "Challenging business conditions in Europe in tH", and North America and Asia growth to remain inconsistent by end-use market"
PTT. "Weakening demand for intermediate and downstream derivative products"
Praxair. "N American business compensated for weakness in Europe and S America"
Reliance. "Weaker profit margins for polyester and polyester intermediates were slightly offset by margin deltas on polymer products"
SABIC. "Continuous slowdown in global economic growth, especially in Europe, China and North America, negatively impacted prices"
Shell. "We are moving forward in volatile times"
Siam Cement. "Negative effects of a global chemicals trough in Q1"
Solvay. "Business dynamics should remain healthy for our growth engines and challenging for our cycle sensitive businesses"
Sumitomo. "Feedstock prices spiked while selling prices of products fell"
TOTAL. "Operating margins also recovered in Q2 as a result of the decline in crude prices and reduced supply"
Unilever. "Deteriorating global economic conditions and a competitive environment which remains intense"
versalis. "Weak commodity demand impacted by the downturn"
Wacker. "Significantly lower prices, especially in the solar-silicon and semiconductor-wafer businesses

Today's VUCA landscape (Volatility, Uncertainty, Complexity, Ambiguity) is having a profound impact on consumers as well as companies. All of us are grappling with 3 key trends in our lives:

• Life is too busy, particularly for women juggling home and work
• Technology has become too complex for most of us to understand
• The economic outlook is far more uncertain and volatile

Successful companies are already repositioning themselves in response to these trends, as an interesting New York Times article describes. In it, leading marketing guru Marian Salzman highlights how:

"We all have this desire to simplify our lives, but we don't know how to do it. We envy the time when we had just 3 TV channels to choose from. We envy the man in the grey flannel suit who knew when work started and ended".

Thus the word 'simple' is taking on added power in consumer marketing strategies

• Coke is now selling 13 chilled drinks under the Simply brand
• Time Inc has 2m subscribers to its Real Simple magazine

This is the same insight found by consumer research company Euromonitor, and summarised in the above chart. The consumerism that drove the 1982 - 2007 economic supercycle is disappearing. Instead, simplicity is the new luxury.

In turn, of course, these trends have profound implications for chemical companies, as we discuss in our workshops with Boards and planning groups. They provide wonderful growth opportunities for those prepared to look forward into the future.

The blog's latest post for the Financial Times' 'FT Data blog' has just been published.

It highlights the ACC's new Chemicals Activity Barometer.

By guest contributor Paul Hodges

I suggested in an earlier post that chemical prices were an excellent leading indicator for the health of the global economy. The data highlighted that firms were finding it difficult to pass through crude oil related price increases. In turn, this was a warning that both the global and Chinese economies might be slowing faster than generally supposed. This caution since seems to have been amply justified.

Thus a new initiative by the American Chemistry Council (ACC) deserves watching. The ACC is the trade body for the US chemical industry, and it has developed a new Chemicals Activity Barometer which aims to provide early warning of changes in the wider US economy.

The chart above shows the latest reading of the barometer (green line), versus the official recession readings (grey column) since 1948 from the National Bureau of Economic Research (NBER). Full data for the graphs is available on the ACC website. It uses a three month moving average to avoid short-term fluctuations.

The ACC note it:
• Provides a lead of two to 14 months, with an average lead of eight months at business cycle peaks
• Leads by one to seven months, with an average lead of three months at cycle bottoms

Worryingly, the barometer has been in a downward trend since March. Historically, a decline for three consecutive months signals a slowing economy. Thus the barometer is warning that second half economic performance is likely to disappoint in terms of both the domestic economy and US exports.

The second chart shows the linkage between the barometer and industrial production (red line) over the past decade. There is clearly a very close relationship, with the barometer tending to have sharper moves, both up and down. This is clearly helpful for signalling turning points.

The bad news is that the chart confirms that the barometer (green line) is signalling a slowing US economy. It has diverged from the industrial production index (red), just as it did in 2007 before the last recession began.

Fundamentals eventually determine financial market directions. But sentiment, when supported by strong financial flows, can take them in opposite directions for considerable periods of time.

Thus the latest IeC Boom/Gloom Index continues to do its job of charting the battle that is underway:

• The Index itself (blue column) weakened in July
• Similarly, the S&P 500 (red line) remained range-bound around 1370

If this was a boxing match, the announcer would probably be telling us:

• In the blue corner, signs of slowdown in all 3 major economies - EU, China, US. Major companies such as Dow and BASF are airing their worries about the H2 outlook
• In the red corner, policymakers are talking of more stimulus action - saying they will do 'whatever it takes' to save the euro, promising to increase spending on major infrastructure projects in China, and discussing new financial options in the US

So which story is the humble chemical executive to believe? The answer is the blog's old friend, scenario planning:

• It would be foolish to ignore what is happening in front of our eyes. So contingency plans for a slow H2 are essential
• Equally, we know that policymakers can create major bursts of activity, as in 2009. So companies must also prepare for more volatility

The underlying issue is that in today's VUCA world, we all have to keep a careful eye on political developments, as well as focusing on the short-term economic picture.

Major changes are underway in China's economy. The Uncertainty they are creating is a further demonstration of the transition to a VUCA world that is now underway.

The changes reflect the impact of 2 quite different developments:

• General economic slowdown, due to the loss of Western export markets
• The loss of 400m babies, due to the 'one child policy'

Both are secular, not cyclical trends. So they cannot be 'solved' by government stimulus programmes. Of course, this doesn't mean that policymakers won't continue to try this 'quick-fix approach'. It just means, as we discuss in chapter 6 of 'Boom, Gloom and the New Normal', that their measures will only have a temporary impact.

The 'solution' to the export problem is to refocus on the domestic economy. But this will take time. Chinese incomes are one-tenth of western levels, and so domestic demand is not for Western middle-class goods. Instead it is for $100 refrigerators and affordable basic needs.

The second problem is even more complex to solve. As the chart shows, China's population is ageing fast:

• There were 571m in the 0 - 24 age group in 1990 (red column), but only 486m in 2010. By 2030, their numbers will be down 37% to 362m
• Similarly, the critically important Wealth Creator 25 - 54 age group (blue) is now declining. This will dramatically slow potential growth rates
• Meanwhile the New Old 55+ generation will grow 84%, from 246m in 2010 to 452m in 2030. They will be 32% of the population

Already, these two trends are starting to impact the wider economy and consumer demand. Bloomberg reports that China's retailers are suffering a major slowdown. Electronics, sportswear and other stores are reporting "inventory overloads, discounting and losses for some brands".

As in the West, the focus has been on selling to a younger population. Most companies have failed to devote any effort to researching the new affordable products and services that will be required by China's rapidly ageing population.

The good news, of course, is that this creates a lack of real competition. So any company that does decide to enter these markets is likely to do very well indeed. And it will have decades of assured growth ahead of it.

The blog has spent today at the Olympic Park. The athletes, atmosphere and buildings are quite amazing - everything said about the event is true.

Above is a picture of the Aquatic centre, before the heats began this morning. Left, is a picture of a Dutch Olympian, wearing their most striking uniform.

A word is also relevant on the security issue. As is well-known, the British have a genius for 'muddling through'. And bringing in the armed forces to run the security has proved a master-stroke.

It was the first time the blog has ever enjoyed going through security. The soldiers were enjoying themselves tremendously. And instead of trying to terrify everyone, they made it clear this was a much better assignment than being shot at Afghanistan.

Plus, and most deservedly, they also have access to some of the best seats in the Park when off-duty.

Truly, a day to remember. The blog will report back next weekend on its visit to the athletics final on Friday night.

Trading volumes in financial markets are very low these days. Many ordinary investors are on holiday, and others are focused on the Olympics. So it is easy for the high-frequency computers to create major volatility - and large profits for their owners.

Thus they managed to create a 1.5% fall in the S&P 500 on Thursday,and a 1.9% rise on Friday. But there was no real 'news' to drive the market. Thursday's fall was due to 'disappointment' over the lack of immediate action by the European Central Bank (ECB). But as Reuters had already noted, a number of key steps have to occur before the ECB can act:

• Spain has to formally request ECB help - something resisted till now
• Euro leaders have to allow the bailout fund buy bonds at auction
• The German Bundesbank must agree
• Germany's Constitutional Court must also agree

The first 2 items are likely to occur. Spain will find it better to 'lose face' than go bankrupt. Whilst politicians see ECB action as 'easier' than making painful decisions on spending cuts themselves. But the German position is less easy to read, although the computers were optimistic on Friday.

The Bundesbank is so far resisting the proposed deal, whilst the Constitutional Court ruling on the legality of bond-buying is not due till 12 September. Neither can be taken for granted. The price of agreement is to effectively commit Germany to unlimited costs in defence of the euro.

This volatility also has real-world impact. As the chart shows, it is allowing the 'correlation trade' to continue to operate. The computers work on algorithms, and push up the prices of all financial assets together:

• S&P 500 (blue line) moves are mirrored by WTI (green) and Brent (red)
• Thus Friday's S&P 500 rise also added $3 - $4/bbl to oil prices

In the real world, this simply makes life even worse for companies and consumers. Oil prices have been in the demand destruction zone for over 2 years now. When the reckoning finally comes, it could be very painful indeed.

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

PTA China down 25%. "Production cutbacks in Taiwan, South Korea and Thailand, which began in early June, continued in August because of negative margins"
HDPE USA export down 22%. "Global demand was easing, with many countries buying only as much material as they need
Naphtha Europe down 19%. "Demand is still increasing from the petchem sector, as the propane-naphtha price spread currently favours naphtha."
Brent crude oil down 15%
Benzene NWE unchanged. "An ongoing lack of material"
S&P 500 Index up 2%

The US jobs market remains very fragile. That seems to be the key message from last week's monthly job statistics. And, of course, if jobs are hard to get, then consumer spending and GDP will remain weak.

The chart shows the monthly jobs trend since 2008:

• The number of jobs dived to 134.4m by the end of 2008 (blue line)
• They fell further in 2009 (yellow) to 129.3m - a level last seen in 1999
• They recovered to 130.3m in 2010 (purple) and 132.2m in 2011 (green)
• Now 2012 (red) has seen the number rise to 133.3m

As the blog discussed back in February, the US has never before seen a period where job growth had not occurred over a 10 year period.

The reason for the change is the short-termism of financial markets. They want to see higher earnings every quarter. So companies continue to restucture in order to protect their share prices. But, of course, people who are unemployed, or worried about their jobs, spend less.

Thus there is a real danger of a vicious circle developing. If companies continue to cut jobs, then US consumers will spend less. And as consumption is 70% of US GDP, its growth rate will continue to suffer as well.

Everyone is looking for clues as to how the market may develop during the second half of the year.

One way is to listen to governments. But they, unfortunately, have a tendency to paint a rosy picture, as their main aim is to keep themselves in power. In addition, the rush to produce early snapshots of GDP activity often leads to the need for major data revisions at a later date.

Another way is to follow the work of the high profile analysts in the investment banks. But they are also professional optimists, as they are in the business of selling the bank's services to governments and companies. Thus very few of them forecast the downturn in Q4 2008.

A much more reliable way is to monitor trade statistics. This went out of fashion during the 1982-2007 supercycle, which saw constant growth. But today, it provides an immediate snapshot of developments. And thanks to the internet, data is available almost in real-time.

Anyone following China's trade patterns for Polyethylene (PE) and PVC thus already knew by March that its economy was slowing much faster than generally realised. As the blog warned on 6 March, PE data "provided clear evidence that a slowdown is underway".

Equally, they would have seen that demand was also slowing in those countries whose economies depend on China. Brazil is a good example. The chart above, based on data from Global Trade Information Services, confirms the turnaround in its fortunes over the past year:

• In H1 2011, net imports (green column) from NAFTA were 152kt versus 128kt in 2010 (blue)
• Imports from the Middle East, SEA and NEA were also growing
• Overall, Brazil's import/export position was almost balanced

Today, however, these trends have all reversed:

• H1 2012 imports (red) from NAFTA fell to just 95kt
• Imports from the ME, SEA and NEA were also down
• Overall, Brazil has become a major exporter, with net volumes of 146kt

This data tells us virtually all we need to know about Brazil's slowing economy. It also confirms that hopes of a major recovery in China remain wishful thinking for the moment.

A blog reader has kindly forwarded an important new study 'Golden rules for a Golden Age of Gas', produced by the International Energy Agency (IEA). It sets out what needs to be done to maintain public confidence in 'fracking' and the other techniques used to extract unconventional gas.

It is clearly a vital piece of work. US developments have already shown, as the IEA notes, that:

"Natural gas is poised to enter a golden age, but will do so only if a significant proportion of the world's vast resources of unconventional gas - shale gas, tight gas and coalbed methane - can be developed profitably and in an environmentally acceptable manner."

The good news, as they add, is that:

"The technologies and know-how exist for unconventional gas to be produced in a way that satisfactorily meets these challenges, but a continuous drive from governments and industry to improve performance is required if public confidence is to be maintained or earned."

The issue is that success is far from assured. The states of New York, New Jersey and Maryland have already put in place temporary bans on fracking. Similar actions have been taken in other parts of the world, such as France. Ignoring legitimate concerns will only lead to a sense that the industry has something to hide - silence, as we all know, indicates guilt.

The chart above, from the report, highlights some key areas of concern. All of these can, and should be addressed as a matter of urgency. As the IEA note, the main need is for companies to act responsibly and transparently. Governments also need to develop the appropriate regulatory regimes, based on sound science and high quality data.

Equally, companies and governments need to guarantee public access to the data, so that it can be properly debated and understood by the communities affected, and by the wider public. Regulatory regimes also need to be properly enforced, in order to build public confidence.

The IEA report is an important step forward in this vital area. The blog can only hope that its conclusions are widely accepted and implemented.

Almost unnoticed, an important shift is underway in propylene markets.

Propylene (C3) is the second largest olefin after ethylene, with production around 75 million tonnes in recent years. Its main sources are steam crackers and refineries - neither of which see C3 as their core product.

Thus the recent increased use of ethane as a cracker feedstock in the US/ME, and the decline in western refinery operating rates, have led to supply shortages developing. The result has been that C3 prices have become very similar to ethylene levels for the first time in history.

Now, however, a new dynamic is entering the market. As the chart shows, both China and NAFTA are starting to see major increases in propylene production:

• China is adding 17MT in 2012-16 (red column), vs 6MT in 2007-11 (blue)
• The USA is adding 3MT, after seeing no new net capacity in 2007-11
• Other regions are also continuing to add production

The key issue is that most of the new US/Chinese production is not based on traditional steam cracker and refinery sources. Instead, it is coming from propane via propane dehydrogenation (PDH), and from coal via coal/methanol to olefins technology (CTO).

This could be a potential game-changer for the industry. The first PDH plants in the 1980s were essentially 'swing producers', which operated when propylene margins were strong. More recently, they have become an essential part of the supply portfolio, ~10% of total production, due to lower output from traditional cracker/refinery sources.

These new plants mean further change is underway:

• PDH will be driven by the spread between propane and propylene prices. Since propane is already in surplus, and is expected to continue to be long, this could well lead to relatively high operating rates for the units
• This trend towards weak propane markets also has the ability to impact steam cracker production, as potentially propane could become competitive with ethane
• Meanwhile, CTO plants will be driven by China's need to create employment in the coal mining regions, and so can also be expected to run at high rates. Economics, as the blog has discussed before, is not the fundamental driver for China's petchem industry

It is, of course, early days for these developments. But it is not too early for both buyers and sellers to start considering the potential impact of these expansions. 6MT comes online this year, and 8MT in each of 2013, 2014 and 2015. Thus new supply will be well ahead of demand growth.

Key questions therefore include whether C3 prices will stay at parity to ethylene, or return to their traditional discount? Alternatively, if prices remain strong, will demand growth slow as buyers switch to cheaper alternatives where possible?

Developments in C3 markets thus mirror rising Uncertainty in the wider world.

Once upon a time, financial markets reflected supply and demand balances. Some players, the speculators, would use them to try and anticipate changes in these balances. Some players, the producers and consumers, used them to help stabilise their margins.

From time to time, the balance between the stabilisers and the speculators would be lost. Markets would then swing off temporarily in an odd direction, but would soon realign again with the fundamentals.

But not today. The chart above shows official weekly US oil and petroleum products inventory figures since 2008:

• 2008 levels (purple dash) were relatively low, causing prices to be strong till mid-year and the arrival of the financial crisis
• Since then, stocks have never been below the black line. This marks the peak inventory level at the end of 2008
• Yet prices have continued to be in the demand destruction zone, at 5% of global GDP

The problem is the simple one of 'weight of money'. Pension funds have become speculators in the markets - based on the conviction that commodities are a new asset class, alongside equities and interest rates. And they have the firepower to sustain the speculation for a long time.

If a large fund allocates 5% of its portfolio to commodities, it forces prices higher. And since 2009 their buying has created the commodity supercycle myth, as we describe in chapter 3 of Boom, Gloom and the New Normal. Equally, in this fairy-tale world, all news is 'good news'.

Even today's slowdown in China's economy can become 'good news'. No matter that it is partly caused by today's record high gasoline and diesel costs. Instead, the message goes out to 'keep buying' . Today's slow demand means the government will be forced into a major new stimulus programme, which will lead to even higher prices.

One day, of course, markets will return to their true function, of balancing supply and demand. But in the meantime, companies and consumers (whose money sponsors the pension funds) will continue to suffer from their speculative activities.

If you ever get the chance to go to an Olympic Games event, then go. The blog spent last night at the athletics finals, and saw the most amazing performances it is possible to imagine.

These athletes are at their peak of their careers. They really have sacrificed everything for these few minutes of possible success. And at the end, for most of them, the difference between winning and losing is fractional. Each event is thus completely absorbing.

What to say, for example, about the Bahamas (pictured right). A country of 350k people, their men won their first-ever Olympic gold medal - in the 4 x 400m relay. They came from behind in the final leg to beat the USA (population 315m).

Or, what to say about the US women, beating the world record in the 4 x 100m relay? Even the Jamaicans could not get close to them. Yet the margin beween first and last was only 2.10 second.

Then there is the technical difficulty of the women's hammer, where world and Olympic champions can still hurl their hammers into the netting.

Or the sheer impossibility of the men's pole vault. The co-ordination required to vault 6m (20ft), the height of a London double-decker bus, needs to be seen to be believed.

And, of course, last night, there was also the beauty of the stadium itself (pictured above, during the women's hammer medal ceremony). Plus the friendliness of the crowds and the officials. And the weather, which defied all those who say it always rains in the UK.

If you can get a ticket to the Rio Olympics in 2016, then go!

The blog is extremely concerned about recent market developments.

Nobody minds higher prices, if they are a response to strong demand and can be passed through to customers. But today's high prices have nothing to do with strong demand. On the contrary, in fact. Most consumers are actually reducing output.

Equally, the wider economic outlook continues to weaken:

• European demand is very weak in most key industries. Auto sales are already 7% below 2011 levels, and seem likely to fall further
• US demand is slowing, as monitored by the ACC's new Barometer, whilst policymakers are focused on the upcoming Presidential election
• China's demand for products such as polyethylene is below 2011 levels. Yet leadership changes underway have created a power vacuum

Financial markets, however, have once again bid up crude oil prices in the mistaken belief that demand is 'about to recover'. Yet anyone on the ground could tell them this was mistaken. All that is happening is that buyers are again rushing to cover short-term needs as crude rises.

Another reason for concern is that these moves are taking place in very thin August markets. Many executives are either on the beach, or otherwise away from their desks. They will be horrified by what they find on their return. Hence the blog's own concern.

Benchmark price movements since the IeC Downturn Monitor's 29 April 2011 launch, with latest ICIS pricing comments, are below:
PTA China down 24%. "Supply shortage was caused by three typhoons which struck China's east coast"
HDPE USA export down 22%. "Material remaining in short supply"
Naphtha Europe down 16%. "Between 500kt-700kt from NWE and the Med are set to arrive in Asia during August/September"
Brent crude oil down 10%
Benzene NWE down 3%. "The bullishness for benzene in recent months has seen styrene producers cut back operating rates due to poor economics"
S&P 500 Index up 3%

2 years ago, Italy was paying 3.82% to borrow for 10 years (red column). Spain was paying 4.11%. These rates were similar to the UK's 3.07%.

A year ago (blue column), the world was clearly changing. This led the blog to introduce the concept of the JUUGS (Japan, UK, US, Germany, Switzerland), as a 'safe haven' compared to the PIIGS (Portugal, Ireland, Italy, Greece, Spain).

Its argument was that investors were becoming much more interested in return of capital, rather than return on capital. This was due to the:

• Ageing population in the West, which needs to save more (and securely), for its retirement
• Loss of confidence in stock markets, which seem to have become a casino ruled by computerised trading

As the chart shows, these trends have continued in 2012 (green). Rates in Spain and Italy are now close to the 7% level where repayment becomes impossible. Thus they are in danger of joining the other PIIGS as candidates for formal debt restructuring.

Meanwhile, rates continue to fall in the JUUGS. They now average 1.2%, compared to 1.7% a year ago and 2% in August 2010. Even more remarkable is that investors are now paying interest to Germany and Switzerland when they lend money for a 2 year period:

• Investors pay Switzerland 0.36% when they lend
• They pay Germany 0.03%

Thus, as we argue in chapter 2 of Boom, Gloom and the New Normal, the Western world is following the Japanese model. Sadly, policymakers are pursuing exactly the samed failed policies as Japanese central bankers a decade ago.

Japan's current central bank Governor has spelt out the issue very clearly in a series of speeches:

"The implications of population aging and decline are also very profound, as they contribute to a decline in growth potential, a deterioration in the fiscal balance, and a fall in housing prices."

But it seems nobody in a position of power in the West wants to listen.

All is not well with China's auto market. On the surface, as the chart shows, sales appear to have picked up after January's poor performance:

• Q1 sales (red line) were flat versus 2011 (green)
• Q2 sales were up 12%, due to a strong May and June performance

But....

• It is unclear if these increased 'sales' are real
• China measures retail sales when cars leave the factory
• Auto inventories are now 2.2m, versus 1.3m at the start of 2012

If inventory levels were normalised to the 1.3m level, then sales are actually down 6% YTD, instead of being up 6%.

Further evidence for this analysis is the wave of price-cutting now underway. Even China's best-selling vehicle, the Buick Excelle, is being offered at a 25% discount to list price (RMB 139k, $20k). Whilst China's official National Development and Reform Commission says "facing sluggish demand and rising inventory, dealers will increase discounts and incentive offerings in the coming months."

More cities are also now joining Beijing, Shanghai, Guiyang and Guangzhou in limiting car purchases. Xian is the latest, showing that the trend is now spreading to second- and third-tier cities. The reason is the vast traffic jams, which would require enormous investment in new roads and highways to solve.

Thus China's domestic producers are instead focusing on export markets. This is likely to hit existing players hard, as China's prices are extremely low. Its exports were up 28% in H1 at 488k, with May and June each seeing >100k sales. But even this area has its difficulties.

23k cars in the fast-selling Chery and Great Wall model ranges have been recalled in Australia due to the use of asbestos in engine and exhaust gaskets. This is still common practice in China, but illegal in most Western countries.

Novozymes, the bio-innovation company, have kindly sent the blog news of their new fungus. They believe it can potentially lead the way to the development of bio-based petrochemical products.

Novozymes chosen route is to develop products based on malic acid. This occurs naturally in fruit and many vegetables. It also belongs to the group of C4 dicarboxylic acids.

This linkage is key to the development, as these can be converted to BDO (1.4-butanediol). In turn, BDO is a potential building block for plastics, polymers and resins.

The development confirms the insights from the SpecialChem brainstorm on bio-based initiatives in August 2010. It also builds on Novozymes' own partnership with Braskem on polypropylene.

As Novozymes note, "the contribution of biotechnology is still modest in the chemical industry". But the new fungus is clearly an important step forward in turning ideas into new products.

The G7 countries (Canada, France, Germany, Italy, Japan, UK, USA) account for nearly 50% of global GDP. Today, however, their populations are ageing rapidly.

As consultants AT Kearney (ATK) note in a report on consumer spending patterns:

• The G7 now has more people over the age of 55 than under 15 years
• Global births peaked at 90m in 1989, but were only 73m in 2010

By 2030, the world will therefore have an equal number of people in the New Old 55+ and under-15 cohorts.

This represents a really major shift in consumer buying patterns, as we discuss in chapter 7 of 'Boom, Gloom and the New Normal'.

Most companies have failed to realise that the New Old 55+ generation are a key growth area for the future. Too many still focus on youth markets, where numbers are declining.

Unsurprisingly, therefore, retail sales have already slowed in most of the developed world.

The ATK chart highlights the importance of the change now underway. It shows the share of income for the over-60's in 2005, and projected numbers for 2020. Most are rapidly increasing:

• Brazil goes from 10% to 15%, whilst China goes from 11% to 17%
• France goes from 25% to 32%; Germany from 27% to 30%
• Japan goes from 26.2% to 31%; Russia from 18% to 27%
• UK goes from 23% to 29%; USA from 16% to 24%

Countries such as India, Indonesia and S Africa are the exceptions. Their young populations can still support traditional consumer marketing aimed at the 25 - 54 age group.

The issue is very simple. Demographics drive demand:

• Life expectancy in the West was just 66 years as recently as 1950
• Today, it is over 80 years in many countries
• Effectively, therefore, 80 is now the new 60

Sadly, most companies continue to focus on the markets of the past, which have gone ex-growth.

But this is very good news for those who do choose to focus on the growth markets of the future. They will have grateful customers, and very little competition.

Nobody rings a bell at market tops or bottoms. Instead, one has to look for the divergences that suggest the previous trend has run its course. Today, these abound:

• Western financial market volumes are low, whilst prices are rising
• The same is true for oil market volumes, as the chart shows
• June (bottom section) saw record volumes when prices were falling
• Since then, volumes have been much weaker

Equally, recent gains have not taken prices back into the earlier 'triangle'. This is important to the 'technical traders' who follow trends in commodity markets. It implies that previous 'support' levels (helping to hold prices higher), have now become 'resistance' levels.

Essentially, this suggests those who missed the chance to sell in May are now rushing to make sure they don't miss the current opportunity.

Plus, of course, there are the fundamentals. It is hard to think of a time since 1982 when these have looked worse:

• Europe is in recession, whilst the US and China are clearly slowing
• Oil prices are in the 'demand destruction' zone at >5% of global GDP
• Political uncertainty is rising around the world
• Plus Israel is threatening to attack Iran in the next few weeks

Weak fundamentals can always get weaker, of course. If Israel does attack Iran, oil could easily head to new record levels. But already, weak demand is making it very difficult for companies to pass through today's higher prices. As one phenol trader told ICIS pricing, 'high raw material prices are killing some markets'.

Benchmark price movements since the IeC Downturn Monitor's 29 April 2011 launch, with latest ICIS pricing comments, are below:
PTA China down 24%. "Weak polyester sales prompted major Chinese makers to offer price discounts"
HDPE USA export down 20%. "Material remaining in short supply"
Naphtha Europe down 14%. "The physical condition of the market is relatively weak"
Brent crude oil down 9%
Benzene NWE down 2%. "The fundamental issue of pygas supply is unchanged amid lower refinery rates, lighter feedstock adoption and weak polymer demand"
S&P 500 Index up 4%

Trade statistics present an awkward problem for the cheerleaders in financial markets. They show what is really happening in China's economy, rather than what the analysts would like to happen.

Polyethylene is the bellwether product for the economy. And latest trade data from Global Trade Information Services suggest caution over H2 prospects. As the chart shows for the January - July period:

• Overall demand in 2012 (red column) has been flat since 2010 (blue)
• China has increased its own production by 3% over the period
• Imports are thus down 1%

On the positive side, the data does show a modest 1.7% increase in overall 2012 demand versus last year. But this raises further questions, as it is well below Q2's reported 7.6% GDP growth. Normally, PE demand grows in line with GDP.

Import patterns also continue to show contrasting trends:

• Middle East imports are up 40%
• SEA imports are up 27%
• NEA are down 32%; NAFTA down 53%; Europe down 64%

The big winners are Thailand (up 131% due to its new capacity), Iran (up 24%) and Saudi (up 23%). The main losers are the USA (down 56%); Taiwan, Germany, Benelux (all down 47%); and S Korea (down 21%).

No doubt those promoting China as the investment opportunity of a lifetime will continue to promise great things by the end of the year. But the blog will continue to keep its own money in the JUUGS for the moment.

Emerging countries such as China and Brazil are very prompt in publishing trade data. So their figures provide a timely snapshot of economic developments.

Brazil's economy is heavily dependent on China, due to its mining industry. Worryingly, July polyethylene (PE) data from Global Trade Information Services thus confirms the slowdown underway in the BRIC countries (Brazil, Russia, India, China).

Brazil both imports and exports PE. The pattern is that it exports more when its economy is weak, and vice versa. As the chart shows:

• 2012 exports (red column) are up 316% versus 2010 (blue)
• Imports are declining, except from low-cost SEA (up 388%)
• NAFTA imports are down 20%; Middle East down 6%; NEA down 87%
• Exports to the rest of Latin America have risen 29%
• Exports to Europe have fallen 50% as its economy hits recession

Unsurprisingly, Brazil's new government is becoming seriously concerned about the outlook. Equally, the trade data suggests the US will struggle to replace lost China sales in Latin America.

GDP growth is forecast at just 2% this year, down from 7.5% in 2010 and 2.7% in 2011. In response, the government has announced a R$133bn (US$66bn) infrastructure stimulus package, and plans to sell off parts of the road, rail, port, airport and waterways networks.

This would suggest it does not expect a major recovery in China in the short to medium-term. Equally, the chart confirms the American Chemistry Council's conclusion that the US will find it difficult to increase its exports, despite its shale gas cost advantage.

Slowly, consumer companies are waking up to the fact that youth markets have gone ex-growth in the developed world. Instead, the New Old 55+ generation are the main potential source of growth.

As fashion editor Vanessa Friedman notes, a new film 'About Face' typifies the new approach. It interviews supermodels - but these supermodels are aged between 43 (Christy Turlington) and 81 (China Machado).

This follows Hollywood's 'discovery' that female stars don't have to be under 30 years. Last year, after all, 63 year-old Meryl Streep won an Oscar for 'The Iron Lady'. And from a box office viewpoint, this new direction makes great sense:

• 45m over-50s went to the cinema in the US in 2010
• This was 21% of all tickets sold
• But they are actually 32% of the population

Now, Lanvin have done the unthinkable. As the photo shows, 82 year-old Jacquie 'Tajah' Murdock features in their autumn/winter campaign. This is a complete reversal. Until now, the beauty industry has usually favoured young models, often to sell products that claim 'anti-ageing' properties.

Encouragingly, companies are beginning to remember that demographics drive demand. Continuing to focus on youth markets risks bankruptcy. Far better, as we discuss in 'Boom, Gloom and the New Normal', to refocus on the fast-growing New Old 55+ generation.

The blog, and co-author John Richardson, will be delighted to advise any CEO or business manager who needs to know more about the challenges and opportunities that spring from the ageing of the Boomers.

It is hard to imagine a more difficult outlook for the rest of the year:

• Speculators have increased oil prices, funded by expectations of new central bank quantitative easing programmes
• Consumers are suffering from stagnant incomes, high levels of unemployment and fear of further declines in living standards
• Policymakers seem incapable of finding solutions to the Eurozone debt crisis, China's rapid slowdown and the US 'fiscal cliff' threat

Sadly, the chemical industry sits in the middle of all these problems.

As the chart shows, based on ThomsonReuters data, the largest chemical companies such as SABIC or BASF have market capitalisations (caps) of between $30-$80bn. This seems enormous, but is dwarfed by the $400bn of ExxonMobil. And the specialty companies are tiny by comparison, with caps of $3bn-$5bn.

So it is very difficult for companies to resist the pressure for higher feedstock costs, when oil prices rise. But when they try to pass these increases down the chain, they find they are also in an unequal fight.

Companies downstream have to deal with cash-strapped consumers, whose discretionary spending has been reduced by today's high oil prices. So they fight prices increases with all the tools at their disposal. And the auto companies, although they have similar caps, also benefit from operating in markets which are more oligopolistic than for most chemicals.

Similarly, companies in the consumer products and retail sectors have stronger market positions. Coke and Pepsi also have caps twice the size of SABIC and BASF. Whilst Procter & Gamble and Nestle, plus retailer Wal-Mart, are 3 times the size.

Thus the chemical industry is now being squeezed between the giants on either side of it. Maintaining profits and volumes is likely to become increasingly difficult as the year progresses.

Benchmark price movements since the IeC Downturn Monitor's 29 April 2011 launch, with latest ICIS pricing comments, are below:
PTA China down 24%. "Major polyester makers said that they do not think demand will improve significantly for the rest of the year because of slower economic growth in China"
HDPE USA export, down 20%. "Tightness has amplified by plant turnarounds in Latin America, including in Argentina, Brazil and Mexico"
Naphtha Europe down 11%. "Further crude oil-driven naphtha price hikes could continue to disrupt already-weak demand"
Brent crude oil down 8%
Benzene NWE up 1%. "Sources expect the market to be in a more balanced position in September following the tightness since June"
S&P 500 Index up 4%

"You cannot just sit back and expect things to happen the way they have happened in the past, especially in emerging markets."

This insight from a senior Hong Kong-based executive with a global polyethylene (PE) producer highlights the risks faced by the global industry as we transition to the New Normal. As he added during a conversation with the blog's co-author John Richardson:

"The key to success is to stay is to stay on top of developments in the economy, society and politics and constantly think how these are changing and how you need to reposition your business. You need lots of good people on the ground who can detect micro changes at the level of your customers that can become major economic and social trends."

The interview is contained in John's new ICIS Chemical Business article. This argues that planning during the Supercycle was based on the theme of Kevin Costner's 1989 movie, Field of Dreams (picture above) - 'if you build it, they will come'. Today, however, a difficult transition is underway, as we describe in Boom, Gloom and the New Normal.

The risks are rising all the time that policy makers will fail to deliver a return to the SuperCycle. The winners will instead be those companies who refocus on the new economic and social trends that are already starting to drive future growth.

To download a free copy of the article, please click here.