Chemicals & The Economy

Candide, the classic novel of the great French writer Voltaire, is a satirical description of a young man who has been taught that 'everything is for the best in the best of all possible worlds'. Voltaire's modern equivalent might well decide to set his novel in today's China, and title it China Development Bank (CDB).

As the Financial Times notes, "CDB is at the heart of China's increasingly powerful global money machine". Its chairman Chen Yuan is its most important banker, and CDB itself is its most powerful financial institution after the People's Bank of China, with assets of Rmb 6.25tn ($1tn).

As the FT's charts show above, its recent growth has been near-perfect:

• Total assets have risen smoothly every year since 2003
• Its loan portfolio is broadly-based, including all major sectors
• Its net profit has also risen smoothly, apart from a hiccup in 2008
• Return on equity is a reasonable 10%
• Best of all, its percentage of non-performing loans continues to reduce

Thus for the optimists, CDB's results over the past decade typify all that is best about the China story.

Voltaire's Candide found that the world was, after all, not the perfect place that he had imagined. Similarly, CDB now has to deal with a slowing Chinese economy, as well as a much more difficult external environment for its overseas loans.

It will be interesting to see whether CDB's experience will mirror Candide's awakening over the next few years.

The latest Global Risks report from the World Economic Forum warns that its highlighted "societal risks all have a relatively high likelihood of occurring in the next 10 years".

As the chart above shows, the top 3 risks are those also highlighted in 'Boom, Gloom and the New Normal':

• Water supply crises are the most likely event
• Food shortages feature 2nd in the list
• Mismanagement of population ageing is the 3rd key risk

The first 2 risks are closely interlinked. 60% of all fresh water is currently used for farming, according to the US Geological Survey. So a shortage of water will quickly lead to food shortages.

Similarly, the WEF warns that global ageing impacts old and young:

• Older workers fear the end of state pensions, pre-established retirement age and guaranteed access to quality healthcare.
• Younger workers fear they will have to pay for these benefits, whilst suffering from government austerity programmes

Solutions do exist, of course, as we highlight in chapter 8.

In India, for example, 40% of all food rots on its way to the consumer. Similarly, in Western Europe 40% of all fresh water supplies are lost to leakage. Both problems are clearly solvable, if companies and governments apply resources sensibly.

India's proposed reforms of the retail sector could well help to create dramatic change on the food issue, if carried through and not stalled by political opposition as last year.

Equally, more radical thinking could deliver major changes very rapidly.

Only ~1% of fresh water is actually used for drinking water, for example. The use of recycled water for other applications could therefore have a major impact. Reducing this waste would also reduce costs, and help make the ageing issues more affordable.

These challenges are thus some of the key opportunities for companies, as we transition to the New Normal.

Housing used to be the engine-room of the US economy. Rising prices allowed people to use their house as a cash machine. In turn, this drove GDP growth, as consumer spending is 70% of the US economy. But for the past 5 years, this process has gone into reverse:

• Owners now have $9.18tn in mortgage debt, versus $11.3tn in 2007
• 20% of all owners owe more than their property is worth
• Higher lending standards mean home ownership trends are reversing
• They also stop many owners refinancing at today's lower interest rates

The encouraging news is that prices seem to have stopped falling, for the moment at least. As the chart shows, based on the S&P Case Shiller 10 City Index, prices in June (red square) were similar to those in 2011 (green), 2010 (blue) and 2009 (grey).

The question now is what happens next:

• A Base Case might be that prices remain at today's levels
• An Upside Case might see them rise modestly
• A Downside Case could see them start falling again

The key factor is probably foreclosures. These have been paused due to legal issues over title. And the pause has encouraged 'buy-to-let' investors to increase their purchases. Their analysis suggests more people will need to rent, if home lending standard remain tight.

But, of course, this confidence could easily disappear, if the 'shadow inventory' of homes in foreclosure comes to market too quickly. This inventory probably equals the apparent inventory of homes being advertised by agents, and so could easily swamp potential demand.

Thus housing typifies today's VUCA environment (Volatility, Uncertainty, Complexity, Ambiguity). As Unilever CEO Pail Polman has said, 'Its very difficult for people to get a total picture'.

In these circumstances, companies cannot afford to gamble on guessing right. Scenario analysis has thus become essential as we move into Budget season.

Markets spent last week 'waiting for the Fed'. The high-frequency traders desperately need more cheap money, if they are to continue driving commodity and stock prices higher. And on Friday afternoon, they believed they got their wish.

Brent crude oil prices jumped $1.92/bbl, and WTI $1.85/bbl.

As the chart shows, the Fed's 3 previous efforts (QE1, QE2, Operation Twist) all produced major rallies in oil markets. And these higher prices had to be passed on in higher chemical prices, thus damaging end-user demand. Now, markets are anticipating QE3, and further oil price hikes.

The scale of the Fed's stimulus is immense. QE1, QE2 and Twist have so far cost $2.3tn, equal to the size of the UK economy - the 7th largest in the world. The aim has been, as the Wall Street Journal notes:

"To drive down long-term interest rates, push up stocks and other asset values and soften the value of the dollar. They thereby boost spending, investment and exports."

But the link between higher stock prices and increased demand seems wishful thinking, not reality. And some senior economists are clearly now worried, with Harvard's Martin Feldstein warning, "The Fed is at a point where another round of quantitative easing would be a mistake."

The Fed itself also seems on the defensive about the value of its actions. As the New York Times notes, back in 2010 (when QE2 launched):

"Mr. Bernanke devoted most of his remarks to establishing the need for action, largely taking for granted that the Fed had the power to improve the economy. (But) on Friday, it was the need for action that Mr. Bernanke took for granted. The question now is how much more the Fed can do."

This time may be different. Perhaps today's high oil prices will not lead to recession, as they always have in the past. But by providing the cash to drive prices still higher, it seems likely that the Fed is making the task of economic recovery more difficult, not less.

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

PTA China down 22%. "PTA supply had been tightened recently following powerful typhoons that hit China's east coastal areas"
HDPE USA export, down 20%. "Traders said there was virtually no material being offered"
Naphtha Europe down 11%. "Market remains weak, with high prices continuing to raise concerns of already-lacklustre demand being damaged further. A cargo from Vitino, Russia, has already been held for ten days on demurrage"
Brent crude oil down 10%
Benzene NWE down 1%. "Market was largely rangebound this week"
S&P 500 Index up 3%

The 25 year economic Supercycle between 1982-2007 led to a major change in companies' budget processes. They could simply assume that growth would be more or less constant. And so they were able to focus on their own specific product silos, and better understanding customer needs.

Thus by the mid-2000s, for example, it was common for companies to assume that oil prices would remain in a relatively tight range. $22/bbl was often taken as a Base Case, with $20/bbl as Downside and $25/bbl as Upside. A decade earlier, they might have taken $15/bbl as the Base, $12/bbl as Downside and $18/bbl as Upside.

Of course, discussion took place around these numbers before they were finalised for Budget purposes. But basically, the conclusion was the same. Oil prices would remain low; consumers would therefore have plenty of spare cash to spend on the products that drove petchem growth.

Today, however, we are living in a VUCA world, where Volatility, Uncertainty, Complexity and Ambiguity dominate. The idea of stable oil pricing seems to belong to a different age. Instead, companies need to consider the impact of widely different prices:

• If Israel bombs Iran, then $200/bbl could easily be seen
• If China's GDP growth slows to 5%, $50/bbl or lower would be possible
• Whilst one cannot ignore today's price of $100/bbl

The monthly Boom/Gloom Index provides further evidence of these major uncertainties. Hopes of more US Fed cash have taken the Index (blue column) higher again. And the S&P 500 Index (red line) is back at its highest point since 2008.

Does this mean all our problems are now finally behind us, and sustained growth is about to return? Or are we to remain in the 'stop-start economy' or the past 4 years? Or could the combination of the Eurozone crisis, China's slowdown and the US 'fiscal cliff' lead to something much worse?

Of course, ignoring these uncertainties might work out well, if one happened to guess right. But guessing wrong might bankrupt the business. Scenario analysis, as developed by Shell and ICI in the 1960s/1970s seems essential once more.

European olefin markets had a miserable time in Q2. As the chart shows, based on APPE data, ethylene production (red square) was just 4.7MT. This was the lowest Q2 volume since 1998.

Of course, crackers had switched severity to produce more propylene and butadiene. But even propylene volume at 3.6MT was the lowest Q2 volume since 2002. Whilst butadiene volumes of 0.5MT were back at 2008's level.

The reason was the low cracker operating rate of 80%. Only H1 2009 was lower in recent years, This was due to the combination of low refinery operating rates, slowing end-user demand and high feedstock prices.

Since 2009, we have essentially been in a stop-start cycle where:

• Prices rise because of rising oil and feedstock prices
• Buyers rush to buy forward to protect margins
• Oil prices stabilise, so buyers destock again
• And then the cycle starts once more

But each upswing is weaker than the last, as end-user demand slows still further. Consumers have very little spare cash, after paying for higher heating and transport costs. So they can only afford essential products.

Sadly, policymakers completely fail to make this critical connection. As one senior central banker told the blog recently, they believe that 'there is always demand'. But as olefin markets demonstrate, the result of their policies is actually to make today's problems worse, not better.

Over the past 20 years, the financial sector has captured an increasing share of the wealth created by the rest of the economy. At its peak before the Crisis, it accounted for 40% of all profits in the US corporate sector, allowing financiers to claim they were 'masters of the universe'.

A key reason for this growth was their success in creating the illusion that finance was too complex for most people to understand.

Prior to 1990, very few people had heard of EBITDA, quantum, VAR or the host of other acronyms that now dominate finance-speak. Instead, bankers, companies and regulators cheerfully talked about financial issues in simple terms that everyone could understand:

• Companies tracked Operating Profit for individual businesses
• Shareholders monitored net Profit after tax and interest payments
• Regulators checked to see if a bank's capital could support its lending

But gradually, it came to be believed that only 'the brightest of the best' could truly understand finance. Simple terms were replaced by jargon and complex algorithms.

The end-result of the change is shown in the graph above, from a paper by the blog's favourite regulator, Andy Haldane of the Bank of England. It shows the leverage of major global banks in 2006 (before the Crisis):

• The banks on the left of the chart had the lowest amount of capital
• The banks on the right had most capital

It also shows which banks have since gone bust, and which survived:

• Banks which have gone bust are shown in red
• Those that have survived are shown in blue

The conclusion is simple:

• No bank with a capital ratio above 8:1 went bust
• Most banks with ratios of less than 5:1 did go bust

As Haldane comments:

"Modern finance is complex, perhaps too complex. Regulation of modern finance is complex, almost certainly too complex. That configuration spells trouble. As you do not fight fire with fire, you do not fight complexity with complexity. Because complexity generates uncertainty, it requires a regulatory response grounded in simplicity, not complexity.

"Delivering that would require an about-turn from the regulatory community from the path followed for the better part of the past 50 years. If a once-in-a-lifetime crisis is not able to deliver that change, it is not clear what will."

'Masterly inactivity' was Wellington's policy in his successful European wars against Napoleon in the early 19th century. The English general was always under great pressure from the politicians to 'do something'. But Wellington knew he had to defeat Napoleon decisively, and could not risk losing men and resources in irrelevant actions.

His Waterloo victory then settled Europe's shape for the next 100 years.

200 years later, central bankers see themselves as the generals of our time. They talk about their fights with the speculators, and their battles with markets. But they have not learnt Wellington's important lesson. Of course, the politicians will always cry out for 'action'. But action can have unintended consequences, and make things worse, not better.

This is the theme of a new paper by one of the few great central bankers of recent years, William White. He is the former economic adviser at the Bank for International Settlements, the central bankers' bank.

As long-standing readers will know, he was one of the very few to foresee the Crisis in his 2007 and 2008 reports. In 2009, he also foresaw today's most difficult environment:

"Another boom-bust cycle could have negative implications, social and political, stretching beyond the sphere of economics"

Recently, both the US Federal Reserve and the European Central Bank (ECB) have announced further massive intervention in financial markets. White, as always, summarises the situation incisively:

"Over the past year, central banks in the advanced economies have continued or even expanded their purchases of government bonds and their support of liquidity in the banking system. At $18tn and counting, the aggregate assets of all central banks now stand at roughly 30% of global GDP, double the ratio of a decade ago.

"The extraordinary persistence of loose monetary policy is largely the result of insufficient action by governments in addressing structural problems. Simply put: central banks are being cornered into prolonging monetary stimulus as governments drag their feet and adjustment is delayed.... Any positive effects of such central bank efforts may be shrinking, whereas the negative side effects may be growing.... With nominal interest rates staying as low as they can go and central bank balance sheets continuing to expand, risks are surely building up."

More liquidity will not solve the US and Eurozone problems. The US requires politicians to agree on medium to long-term policies that will bring the budget back to balance. The Eurozone needs governments to agree on economic and political union to support monetary union.

Even worse, the ECB and Fed actions are likely to likely to make the situation worse, not better. As the chart shows, speculators have already pushed oil prices higher over the past weeks, since news of the proposed new central bank cash was released. These higher prices will further destroy demand and reduce potential growth rates.

Plus, as Wellington knew, the central bankers' activity has given the politicians yet another wonderful excuse for doing nothing.

The above 2 charts show US jobs and car sales on a monthly basis, side by side. They cover the years 2008 - 12, and the combination provides a clear message about demand trends:

• The jobs total began to improve in 2011 (green line)
• They rose 2m between January 2011 and last month (red square)
• Auto volumes have similarly gained over the period
• August sales were up 200k last month versus 2011

Over the past 20 months, job gains have averaged 141k/month. Auto sales this year are so far up 15% versus last year.

This is encouraging news, as clearly the numbers are heading in the right direction. But set against the unprecedented activity of the US Federal Reserve, the results are very disappointing.

It has cut nterest rates to zero, and supplied $2.3tn of liquidity into the banking system. Yet the number of jobs is still 4.7m below 2008 levels. Likely auto sales this year of 14m are similarly well below the 16m+ levels seen before the crisis.

As the blog will discuss on Thursday, it thus seems increasingly clear that central banks on their own cannot solve today's crisis.

Writing over 2000 years ago, the ancient Greek dramatists had a phrase to describe what is happening today in the global economy:

'Those whom the gods wish to destroy, they first make mad"

Central banks have spent the last 4 years, since the Crisis began, handing out free money to their friends in financial markets. But higher prices in financial markets have not helped to boost consumer spending or recovery, as they fondly hoped.

The reason is obvious. Most people do not directly invest in stock markets, or in commodity futures. But they do have to pay the higher prices that result, in terms of the cost of food, transport, heating etc.

Unfortunately, central bankers seem not to talk to ordinary people. They talk to the CEOs of the big financial firms, who are desperate to have more free cash to fund their speculative trading activities.

Thus over the past 2 weeks, the central banks have geared up to provide even more free cash. They appear not to understand that the unintended consequences of their policies make life more difficult for ordinary people.

The chemical industry is the 3rd largest industry in the world. It sits in the middle of the value chain. And so a chart like the one above raises major concerns about the likely impact of further lending increases:

• In the first lending boost to April 2011 (yellow box), companies were unable to fully pass through the higher prices for crude oil (blue line) and feedstocks like naphtha (black)
• The second yellow box shows that the price rises from the lending boost at the end of Q4 2011 were even more difficult to pass through
• And the third box shows how companies are now struggling even more with the impact of the most recent lending programme
• The most worrying sign is China's PTA market (red line). It is one of the poorest countries in the world (88th in the IMF's GDP/capita ranking, at just $5.4k). And now its oil prices are close to record levels
• PTA is used for polyester, one of the most basic products, and normally immune to price pressures. But it is clear that these successive rounds of cost increases cannot be passed through, as they simply destroy demand.

The blog will return to this critical issue in more detail on Thursday.

Benchmark price movements since the IeC Downturn Monitor's 29 April 2011 launch, with latest ICIS pricing comments, are below:
PTA China down 21%. "Supply remained tight because of continued production cutbacks in Taiwan, South Korea and Thailand on the back of negative margins"
HDPE USA export, down 16%. "Price was far too high to be workable in most places except Mexico"
Naphtha Europe down 10%. "Disconnection between a soft physical market and robust paper market persists"
Brent crude oil down 9%
Benzene NWE up 6%. "Hand-to-mouth inventory management was keeping prices high"

The blog's 6-monthly review of global financial markets highlights some interesting developments. It began 4 years ago, and was followed by the co-ordinated G-20 stimulus programme in March 2009. This ran out of steam by April 2011, leading the blog to launch its IeC Downturn Alert.

The slide above shows market performance since then. The period covers the €1tn ($1.4tn) LTRO programme from the European Central Bank, and the US Federal Reserve's Operation Twist, as well as more recent announcements of further market support:

• The 4 BRIC countries (Brazil, Russia, India, China) are worst performers
• Russia (lilac) is down 28%; China (blue) down 27%
• Brazil (pink) is down 12%; India (orange ) down 7%

• Japan, UK and Germany are also all negative
• Japan (purple) is down 10%; UK (red) down 5%; Germany (green) down 4%
• Only the US stock market (dark blue) is positive, up 5%

• The big winner has been the US 30 year bond (dark green), up 36%

Three conclusions stand out from this.

One is that the export-development model of the BRIC countries is under great pressure. They took a seeming 'short-cut' to GDP growth by focusing on exports at the expense of domestic demand. Now the ageing of the Western BabyBoomers means that demand is disappearing, probably forever.

The second is that the unprecedented stimulus programmes in the West have not worked. As the blog will discuss tomorrow, the balance sheets of the major central banks are now are unprecedented levels. But they cannot create demand when people don't want to buy.

One final conclusion is that people do want to save, with a 'safe' government. The JUUGS (Japan, UK, US, Germany, Switzerland) continue to be the destination of choice for investors. They now clearly prioritise return of investment versus return on investment.

Western politicians have failed to take responsibility for managing the Crisis. And so, as the blog noted last week, policy is instead being made by unelected central bankers - principally Ben Bernanke at the US Federal Reserve, and Mario Draghi at the European Central Bank.

They are clearly well-meaning, and in normal times might do little harm. The problem, however, is that their analysis ignores one super-critical issue, the ageing of the Western population. 272m of them, 29%, are now in the New Old 55+ age group. This means that GDP growth will be much slower, just as in Japan over the past decade:

• The kids have grown up and left home, so people don't need to keep buying bigger houses or new cars
• They have to save more to finance their extra decade of life expectancy

Growth might not be quite so slow, if companies woke up to the opportunity staring them in the face. But they persist in targeting the youth market, which has gone ex-growth. And they instead assume the New Old need only walking frames and sanitary equipment.

The chart shows the key dimensions of the issue by country:

• The green circle is the relative size of their economy versus the US
• The vertical axis shows GDP/capita in each country
• The horizontal axis shows the median age

Almost all can be described as 'Rich but Ageing'. Their GDP/capita is relatively high, often ~$40k. But most now have a median age around 40 years, with Japan and Germany near 45 years.

Politicians and company Boards need to wake up this changed demographic reality, as we note in 'Boom, Gloom and the New Normal'. Yesterday's policies are useless in today's environment.

Blog readers are often very successful people. So the blog thought you might like to know that the London house above is now on sale.

A bargain at just £300m ($480m), the Financial Times reports it has 45 bedrooms on 7 floors and overlooks Hyde Park. Covering the area of a soccer pitch, it naturally includes a swimming pool, an industrial-size kitchen for entertaining, and underground parking. The decor apparently contains gold leaf woth £ms.

Its sale highlights the boom at the top end of the housing market. Home prices have been falling in most parts of the West since the Crisis began. But not for the super-rich. The asset bubbles created by the major central banks have been good news for them. Top-end London prices have risen 49% since the first stimulus programme in March 2009.

Blog readers are advised not to delay their purchase, now more stimulus plans are underway. An agent who specialises in the market suggests "You are going to have to wait a long, long time for something like this to come on the market again."

It has been obvious for most of this year that China's economy is in trouble. As the blog wrote in the Financial Times in March:

"PTA is thus warning that China's economy could be slowing faster than generally realised".

Yet it is hard for the government to move beyond short-term responses:

• The new Politburo leadership is still not yet decided. Speculation over the health of expected new president Xi Jinping only adds to the sense of a power vacuum
• Food inflation is moving higher. At 3.4% in August, it increases the risk of social unrest, as China's predominantly poor population spend much of their income on food
• House prices remain far too high, at 14x average incomes in the Tier 1 cities. Yet house market volumes are rising again, as people expect current restrictions to be reduced

The problem is that China needs to move beyond central control of the economy. The likely new leaders know this, and supported the World Bank's 2030 analysis of the issue back at the Party Conference in March.

But this would mean less power for the People's Liberation Army and the State Owned Enterprises. In turn, it would mean reducing opportunities for major wealth creation within the political elite. As Italian political savant Nicolo Machiavelli wrote 500 years ago in The Prince:

"It must be remembered that there is nothing more difficult to plan, more doubtful of success, nor more dangerous to manage than a new system. For the initiator has the enmity of all who would profit by the preservation of the old institution and merely lukewarm defenders in those who gain by the new ones."

Unsurprisingly, the government is now moving to reassure these powerful sectors. As the chart shows (red square), last month's lending was a new high for August. This money will flow straight to them. Only 15% of bank lending goes to those who really need it in the smaller companies.

So far, therefore, the leadership transition is playing out as expected back in July, when the blog suggested that

"The outgoing leadership seems to have chosen to do enough in the way of new lending to keep the show on the road, until the new leaders are selected in H2, (when they will) then bow out gracefully."

What happens then, remains anyone's guess.

It was a very good week for traders in oil markets. Guaranteed profits are rare enough these days, even for them. But the combination of Mario Draghi at the European Central Bank, and then Ben Bernanke at the US Federal Reserve, meant they could put the champagne on ice as soon as they entered the office on Monday morning.

As the chart shows, oil prices fulifilled their wildest dreams. They not only rose steadily during the week. But they got a nice little jump on Thursday evening, once the Fed's QE3 move was confirmed. Even the pre-weekend profit-taking still left prices $1/bbl higher on the week.

Of course, this is a zero-sum game. For every winner, there is a loser. Sadly, it is blog readers who will be the losers. Oil prices are now even further into the demand destruction zone. Thus today's higher prices will lead to lower volume in Q4. And on a personal basis, we will all be hit by higher prices for transport fuel and heating.

Benchmark price movements since the IeC Downturn Monitor's 29 April 2011 launch, with latest ICIS pricing comments, are below:
PTA China down 19%. "Some of the major polyester makers are mulling production cutbacks in the coming weeks because of their insufficient feedstock inventories and squeezed margins"
HDPE USA export, down 16%. "Sources said they expected availability to improve by the end of the month if sales into the domestic market do not remain strong"
Naphtha Europe down 9%. "Outlook for the European naphtha market remains bleak, with crude oil-driven price hikes emphasising concerns of demand being disrupted further"
Brent crude oil down 8%
Benzene NWE up 12%. "Sources largely agree that the continued uptrend has been driven by short covering"

Mario Draghi, new head of the European Central Bank (ECB), is extremely good at doing deals. He learnt his trade at Goldman Sachs, and then polished his skills whilst running the Bank of Italy. But unfortunately, deal-making skills are not enough to rescue the European economy.

Earlier this month Draghi persuaded the ECB Board to begin Outright Monetary Purchases (OMT) of bonds from the weaker economies, such as the PIIGS (Portugal, Italy, Ireland, Greece, Spain). The news, of course, delighted financial markets. But Draghi's deal-making magic cannot create the economic and fiscal union required to support monetary union.

Thus the real economy continues to stumble along. The auto market is the largest single market for chemicals, and data released Tuesday continued 2012's depressing performance:

• July sales (red square) were down 8% versus 2011(green line)
• Germany was down 5%, as its export-orientated economy slowed

• August sales were down 9%, with Germany down 5% again
• Overall, sales so far in 2012 were down 7%

The key issue is that Europe's consumers have begun to distinguish between 'needs' and 'wants'. And Europe's ageing population simply does not need to buy so many cars as in the past. So growth will be slower, just as it has been in Japan over the past 2 decades.

This reality will dawn on policymakers one day. But until then, well-meaning central bankers such as Draghi and Bernanke will continue to try and pull rabbits out of hats.

Deutsche Bank's annual long-term asset return study is always worth reading. It was one of the first to make the link between an ageing Western population and the end of the 1982-2007 economic supercycle. This year's study is titled 'A Journey into the Unknown'. It highlights the enormous uncertainties that surround the global economy.

Their chart above is also a sobering reminder of the depth of current problems. It shows the performance of the major Western economies since the 2007/8 peak, in inflation adjusted terms:

• Over half of the economies have still to recover their earlier peak
• Only Australia, Canada and Switzerland are above it by >2%
• The US, despite $tns of stimulus, is only 1.8% above its peak

This is completely contrary to most historical experience. Normally, a deep recession is followed by a very sharp recovery.

But financial crises produce a different result. As the blog noted back in December 2008, these last longer, and will normally produce deflationary results. Thus Deutsche Bank is not optimistic that recovery is just around the corner.

They warn that policies have produced "a lethal cocktail, and one that has helped contribute towards shorter business cycles and weaker growth".

The latest weekly report from the American Chemistry Council (ACC) includes a worrying picture of falling operating rates around the world. As their chart above shows, these fell quite sharply in August by 0.4% to 84.8%. By comparison, rates in August 2011 were 87.7%.

The ACC also note that the slowdown seems to be widespread:

• NAFTA production fell 0.5%, with the US down 0.3%, Canada down 2%
• Latin America was down 0.3%, with Brazil slowing fast
• W Europe was down 2.1%, with Germany down 4.6%
• CEE was down 5.4%, with Russia down 11.7%

On the positive side:
• MENA was up 4.3%, with its advantaged feedstock position
• Asia was slowing, but China was still up 9.7%

The ACC also report that global production rates were up 2.6% versus 2011. This highlights the major over-capacity that is developing in some regions.

The problem is that companies had assumed there would be a quick and strong recovery from the deep downturn in 2008/9. But this increase in demand has not occured, and so operating rates are falling as the new capacity comes online.

The blog continues to hear very depressing news from its contacts in the market about the state of China's economy. The most depressing report is that GDP growth may actually have stalled in recent weeks. And the latest figures for electricity consumption add to the general sense of gloom.

These are one of the more reliable sets of economic data in China (along with bank lending). And as the chart shows, monthly consumption (green line) has been slowing for some time:

• This time last year it was rising at ~10%
• But it was half this level at ~4.5% in Q2
• In August it rose just 3.6%

Equally, the comments of the State Electricity Regulatory Commission are not encouraging.

It suggested that 'the country's slowdown may continue', and added that 'at present, the global economy is gloomy and exports are not performing well'. In addition, it said chemicals, construction, metals and non-ferrous metals all saw falls in electricity demand. Whilst consumption also fell in 6 regions - Hebei, Liaoning, Jilin, Heilonjang, Ningxia and Henan.

This slowdown parallels the general trend of monthly lending (red column), as discussed last week. And there remain few signs that the government feels in a position to undertake any major new stimulus packages. It could well be that, as the blog suggested last December, China's Minsky Moment may now be underway.

A major new report from BBC News suggests that "China's economic model is in danger" due to its rapidly ageing population (Please click here to see the video).

It reaches exactly the same conclusions as in our Boom, Gloom and the New Normal ebook. Chapter 6, published in November 2011 was titled 'The Risks to China and India Growth'.

Now, what was often regarded as unthinkable is on its way to becoming mainstream. As the BBC website warns:

"Professor Cai Fang, a Chinese labour economist, estimates that the rapid decrease of the labour force will lower China's annual growth rate by 1.5 percentage points from now to 2015, and it will decrease a further percentage point during the period from 2016-2020.

"An economic slowdown could prompt challenges to the party's legitimacy."

The BBC is rightly recognised as an authoritative and independent voice on economic issues. Their website contains enormous detail on the challenges now facing China.

Any executive whose business depends on China really owes it to themselves to view the BBC video above, and to study the detailed analysis on their website.

The US Federal Reserve and the European Central Bank have adopted new and aggressive monetary measures to try and boost US employment and stabilise peripheral Eurozone bond markets. Unfortunately, their actions are more likely to increase the chances of a deeper global downturn than to create economic growth.

Their previous liquidity injections, undertaken in the spirit of doing "whatever it takes" to achieve these goals, have already helped to drive up the price of oil. Investors became concerned about currency risk for both the US$ and the euro, and about inflation risks.

Investors instead see crude oil markets as a potential 'store of value'. Some now even believe oil markets should be seen as part of a broader commodities-based asset class, rivalling equities and fixed interest.

Oil markets have proved unable to absorb these one-sided flows of money. Those value investors who attempted to realign the market with the fundamentals of supply and demand were swept away.

Thus today, as the chart shows, the cost of oil has reached a level which has historically always led to recession. More central bank liquidity injections can only make the situation worse.

This critical issue seems to have been generally ignored. Today, the blog is therefore publishing its first Research Note. The 4 page format allows more in-depth analysis than in a normal blog post. Please click here to download a free copy.

Benchmark price movements since the IeC Downturn Monitor's 29 April 2011 launch, with latest ICIS pricing comments, are below:
PTA China down 17%. "Prices fell on 18-21 September after reaching a four-month high on 17 September, losing 5% in four days."
Naphtha Europe down 15%. "Demand remains poor and supply is long"
HDPE USA export, down 13%. "Prices gained strength on higher feedstock costs and continuing supply tightness"
Brent crude oil down 11%
Benzene NWE up 4%. "Sharp drops for crude and energy futures saw some price erosion as the week progressed"
S&P 500 Index up 7%