Chemicals & The Economy

Tesco is the world's 3rd largest retailer, operating in most major markets. A new analysis by its CEO, Philip Clarke, confirms that a generational change is underway in Western shopping patterns. Writing in the Financial Times, he notes:

• 'Britons are economising in ways I have never seen in my 30 years in grocery retailing'
• People are 'often not "going" shopping at all'

These changes have major importance for the wider economy and the chemical industry.

Firstly, they confirm that people simply have less money to spend than during the SuperCycle. As Clarke adds, middle-class shoppers are now regularly buying Value products for the first time in their lives. No longer are these 'the preserve of poorer consumers'. Instead, 'the age of austerity has changed the mindset of consumers'.

Second, Clarke notes that 'shoppers are less inclined to travel to out-of-town stores'. Instead, they prioritise convenience alongside lower price, and are increasingly 'going online to check prices' and ordering via smartphones for local collection or delivery.

Clarke's analysis confirms our conclusions in chapter 5 of 'Boom, Gloom and the New Normal'. As the chart above suggests, consumers are deserting the 'middle ground' in increasing numbers:

• Of course, luxury markets will still attract the attention of genuinely rich people. But as Burberry's profit warning shows, their numbers are much smaller than generally thought
• Instead, people are now learning to prioritise 'needs' over 'wants'. As the Western population ages, and moves from wages to pensions, people will have less and less money to spend

Equally, Tesco's research shows the negative impact of high oil prices on the consumer. Clarke warns that 'the dramatic rise in the cost of fuel has eaten into household budgets and hit the confidence of motorists'.

This volatility will also help to change future demand patterns, as people become much more wary of sudden shocks to their income.

Spain is in the eye of the storm in the Eurozone crisis. Its economy is the 12th largest in the world, with GDP of $1.4tn. If it crashes out of the euro, then we will all feel the impact. And worryingly, the pace of events seems to be speeding up, even whilst the politicians continue in the slow lane.

The key issue is that governments cannot agree on a road-map to achieving political and economic union. Monetary union, in the form of the common currency, was never meant to exist in a vacuum, as the blog discussed in July. Thus today, we are in the worst of all possible worlds, where the euro exists - but without the political and economic backing required to sustain it.

Doing nothing is therefore not an option. The blog was in Spain last week, and it is clear that its monetary crisis is now becoming a political crisis.

Almost unbelievably, it even risks breaking up the centuries-old arrangements between Castille and Aragon that are the basis of the modern Spanish state. Last week, for example, Catalonia's regional government announced new elections for November, as a prelude to a referendum on independence.

Catalonia, with Barcelona as its capital, is Spain's richest region. Thus its political crisis is in turn creating an economic crisis. And the underlying reasons for this are shown in the chart above. Demographics drive demand and the ageing of Spain's BabyBoomers (those born between 1946-70) means its economy has now gone ex-growth:

• The Boomers powered growth as they joined the 25-54 age group (blue column)
• This is recognised as the main wealth creating period
• But today, they are moving into the 55+ age group (green)
• Already, Spain's median age is 41 years, with 28% in this cohort

Thus it is wishful thinking to imagine that Spain's vast debts can ever be repaid. Even worse, as most Spaniards recognise, the sad fact is that much of this debt went to build housing, motorways and airports that will never even be used. It is no surprise that this toxic combination is starting to have major political implications.

In the SuperCycle, polyethylene (PE) demand growth was closely linked to economic growth. Our research for the 2008 Feedstocks for Profit study showed, for example, a 1: 1 ratio between global growth in GDP and PE demand between 2002-7. But since the Crisis began, the linkage has become much more complex.

China's market presents the most dramatic evidence of the change underway. We are now two-thirds through 2012, and the chart above (based on trade data from Global Trade Information Services) presents a most worrying picture of the lack of demand growth for PE:

• Overall demand in 2012 (red column) is up just 1% versus 2010 (blue)
• China's production is also only up 1%
• Imports are up just 4%, despite slow production growth

This suggests that either China's GDP growth is very much slower than the published data showing >7% GDP growth, or that the traditional link between PE and GDP is no longer valid. Neither explanation is good news for producers.

Similar bad news confronts producers in NEA, NAFTA and Europe. China's market is driven by political and social factors, not economics, and these are leading to a major decline in demand for their product:

• NEA exports are down 28%, with NAFTA down 49%, Europe down 54%
• The gap is being filled by the Middle East (up 42%) and SEA (up 32%)

But even their growth will now be threatened as China brings on more coal-to-olefins plants. 4 of these are already up and running. And as fellow-blogger John Richardson has noted, another 10m - 15m tonnes is currently being planned. If China's growth remains at today's rates, China's import demand could well hit zero. If this happens, where will all the excess product go?

Since 2009, analysts have found it more and more difficult to explain oil price movements. They would like to believe these are driven by the fundamentals of supply and demand. But this is clearly not the case. Inventories all around the world are comfortable. Equally, supply continues to expand whilst demand growth is weak.

They thus try to explain them by reference to special circumstances:

• From 2009, it was the idea of insatiable Chinese demand
• Then it was the risk of major Libyan supply disruption
• Recently, it has been the threat that Israel will bomb Iran

The first two have already been revealed as 'toothless wonders'. China's demand growth is very slow. Equally, the allies ensured Libyan supply was not seriously interrupted during the overthrow of the Gadaffi regime.

Now, the Iran risk has been removed, at least until after the US election. Speaking last week at the UN, premier Netanyahu accepted that its nuclear ambitions were not yet irreversible. And he agreed to allow more time for economic sanctions to work.

Thus there is only one possible cause left to explain today's high price levels, namely the impact of the central banks' liquidity programmes. As the chart shows, these took financial market prices higher each time they were launched, due to the one-way financial flows they created. Oil prices:

• Last year were a record annual level of $111/bbl
• Have been at record levels this year in euro terms at €95/bbl
• For transport fuel are now close to record levels in China

High oil prices, above 5% of global GDP today, inevitably lead to recession, as the blog discussed last week.

It may therefore be significant that prices have struggled to move higher recently, despite the launch of QE3 by the US Fed and the ECB's new liquidity promise. The downward revision in US Q2 GDP, to just 1.3%, is an ominous sign.

'Don't fight the Fed' is normally good advice for speculators in financial markets. But real investors know that, in the end, the fundamentals of supply and demand will have a more lasting impact.

Benchmark price movements since the IeC Downturn Monitor's 29 April 2011 launch, with latest ICIS pricing comments, are below:
PTA China, red, down 20%. "Prices declined because of weak buying interest, lower PTA futures and bearish market outlook"
HDPE USA export, purple, down 12%. "Prices were expected to fall in October, as domestic demand weakens and the US faces more competition from Asian producers in the Latin American market"
Naphtha Europe, brown, down 13%. "Despite the refinery maintenance season and unplanned outages, supply continues to outweigh demand"
Brent crude oil, blue, down 11%
Benzene NWE, green, down 3%. "A key driver of the downward movement on benzene has been a drop in oil prices"
S&P 500 Index (pink) up 6%

Here we go again' seems to be the reaction of financial markets to the US Federal Reserve's latest push to expand liquidity. So far, policymakers have tried 4 times to return the economy to the world of the Supercycle between 1982-2007. As the chart shows:

• Major stimulus programmes were launched by the G-20 in March 2009
• These failed, and so the US Fed began its QE2 liquidity programme
• This failed, and so the Fed launched Operation Twist
• That failed, and so now we have QE3

The winners have been those who took the liquidity offered, and used it to speculate on a short-term basis in financial markets. Thus the US S&P 500 Index (red line) has risen with the wave of liquidity, and fallen every time it weakened.

The IeC Boom/Gloom Index (blue column) tracks wider sentiment readings. It rose strongly with the stimulus programmes after March 2009. But it has struggled since then. One problem, of course, is that the Fed's money is not reaching the real economy.

But the real problem is more fundamental. As the Harvard Business Review notes:

"We need to ask if a significant portion of MBA thinking is based on a faulty assumption that global GDP will keep growing in perpetuity. Perhaps the growth we experienced in recent decades was based on a few extraordinary conditions."

This question needs not only to be asked of MBA students. Many policy makers, investors and executives have fallen into the same trap:

• Growth was constant in the Supercycle, when they began their careers
• But now the BabyBoomers are ageing, and this fabulous growth engine is now going into reverse

This should not be a major problem. And anyway, it is one we have to accept. It is clearly impossible to suddenly create a whole new generation of wealthy 30-somethings.

But sadly, most policy makers (like MBAs) seem never to have learnt that demographics drive demand. Instead, we still await the arrival of people who understand that the idea of growth in perpetuity is simply wishful thinking.

It would be nice to believe that there are billions of middle-class people in emerging countries. And even nicer to imagine they are just waiting for the chance to buy expensive Western goods. Sadly, the truth is more prosaic. 96% of China's population earn less than $7600/year. Their daily wage would be an hourly wage in the West.

But this wishful thinking shouldn't blind companies to the real opportunity that these people represent. As we describe in 'Boom, Gloom and the New Normal', one lasting result of the 1982-2007 Supercycle is that it lifted them out of poverty (normally classed as <$2/day):

• 60% of China's population earned less than $2/day in 1991
• Today, only 6% earn less than this

One of the great opportunities of the next few decades is to help these people slowly transition from bicycle to motorbike and then to a small car. Tata pioneered this approach with their Nano car in India, which sells for ~$3k, and may still succeed. We highlight the learning from their efforts as a Case Study in chapter 7.

Now the Wall Street Journal reports that Nissan, the major Japanese company linked with Renault, are to target the same opportunity. The blog would put a lot of money on them succeeding. They have the benefit of 8 years experience in the low-cost market with the Dacia to guide them. And their revival of the Datsun brand is a clear sign of their intent.

Any company selling into the auto market should get on a flight to Tokyo today to talk to them. The key lesson from the Nano experience is that partnership between suppliers and customer is critical to success. And this could be a very big success indeed.

It is tempting to think that oil price volatility is a zero-sum game. For every 'winner', one would expect there to be a 'loser'. But when it comes to downstream industries like chemicals, the answer is more complicated, as Richard Bartlett, BP's commercial director for aromatics in EMEA, discussed at Novapet's customer event recently in relation to paraxylene.

Building on Richard's insight, the chart above shows weekly Brent oil prices (blue line) on the left-hand scale, and US polyethylene export prices (red) on the right hand scale from January 2011:

• Oil prices rose 32% to end-April 2011; then fell 18% to year-end; rose 19% to March 2012; fell 25% to July; and have since risen 24%
• This is a lot of volatility for consumers to manage
• HDPE prices also rose 33% to end-April; then fell 28%; rose 29%; fell 24%; and then rose 25%

This major volatility was clearly difficult to pass down the value chain. As prices rose, buyers were forced to rush into the market to protect their margins. Many companies set their prices on a 6 month or annual basis, and cannot raise them if oil prices rise suddenly.

This would be bad enough. But oil prices in 2011 were at a record $111/bbl, meaning that the working capital required to hold inventory was very high. CFOs were understandably worried about tying up their cash in this way. Banks are not keen to lend. And there is also the memory of 2008's price crash, which took some companies close to bankruptcy.

Thus high prices were followed by major declines, as consumers destocked down the value chain. H2 2011 saw them fall 28%, versus an 18% fall in Brent. This was no doubt due to year-end needs to minimise working capital, as well as general nervousness. In turn, this then led to panic buying in Q1 2012, with prices up 29% as Brent prices rose 19%.

However fatigue from this volatility has seen Brent and HDPE mirror each other since then: down ~25% to July, and then up ~25% again. It will be interesting to see if any Brent rise/fall in Q4 continues this trend. Or will CFOs again have to cut back for year-end reasons?

Whatever the next phase brings, producers and consumers have been the clear losers from all this volatility. Operating rates have see-sawed around for no reason - adding major cost for everyone. There has never been any shortage to push prices higher on a fundamental basis.

The only winners have been the speculators and high-frequency computer traders, funded by central bank liquidity. They have made fortunes.

95% of Indian households do not own a car. And as the chart above shows, motor cycles remain the key market for manufacturers. 2011-12 annual figures have now been published, and they show:

• 70% of sales were motorbikes (light blue), versus 66% in 2010-11
• Car sales (purple) were steady at 14%
• Overall, bike sales jumped 14% to 13.4m
• Car sales were up just 4% to 2.6m

The reason for the gain in bike sales is India's slowing economy, coupled with the high price of gasoline. It is a very poor country, ranking 140th in the world in terms of GDP/capita at just $1389/year last year. Car sales in August were down 4% at 185k as a result.

This is why Nissan's move to develop a car that sells for $3k is potentially so important. Indians do not like riding around with the whole family sitting on a motor-bike. It is dangerous, uncomfortable and can often mean they get both dirty and wet.

The company that creates a car they can afford will do very well indeed. After all, if 10% of bike owners were to swtich from a bike, then the car market would expand by 50%. That is the size of the opportunity.

October is usually one of the 4 strongest months for demand, alongside January, March and May. This year it should be particularly strong, as many say September's demand was the weakest they can remember.

The reason it is normally strong is that companies shoukd be racing to fulfil orders for the Christmas season. Factories often shutdown for the second half of December, and so CFOs don't like to hold stock in November, as this will boost their year-end working capital.

But at the end of October's first week, it is clear from ICIS pricing reports that there is no rush to buy, anywhere in the world. China has been celebrating its mid-autumn festival, but inventories seem more than comfortable. One well-informed observer reports:

" Weakness originates from many sources. The external environment is weak, thus exports are weak especially in the appliance sector.. And business is soft because of very high inventories of finished goods (cars, appliances etc.)."

In Europe, it seems more or less certain that the economy is moving into recession. So companies are also living 'hand-to-mouth'. This can cause price spikes, as we have seen in benzene recently, when inventories are too low to meet even a low level of demand. But this is not real strength.

Similarly, in the US, more and more of the blog's friends are worrying about the 'fiscal cliff' at year-end. Most still assume that Congress will resolve the problem. But the politicians' behaviour over the past 12-18 months does not inspire full confidence that they will put the country's needs first.

Equally, Friday's US employment figures showed employment at only 133.5m, versus 138m in January 2008. We have never before, since records began in 1939, seen a period where the number of jobs had not recovered to new highs after 4 years. And people who are out of work, or worried about losing their jobs, don't spend unless it is essential.

The chart shows benchmark price movements since the IeC Downturn Monitor's 29 April 2011 launch, with latest ICIS pricing comments below:
PTA China, red, down 20%. Market holiday
HDPE USA export, purple, down 12%. "Prices are expected by many to drop through October as domestic demand may weaken and US producers face more competition from Asian producers in the Latin American markets"
Naphtha Europe, brown, down 12%. "While refinery maintenance has rendered the market balanced to tight, an oversupply is expected to build during H2 October"
Brent crude oil, blue, down 11%
Benzene NWE, green, down 3%. "Downward movement this month was somewhat tempered by ongoing supply restrictions for H1 October"
S&P 500 Index (pink) up 7%

There are many ways to lead a company to disaster. But one of the most reliable is to follow conventional wisdom. The reason is that this is almost always backward-looking, and tells us little about likely future developments.

The blog instead aims to help its readers to be successful and stay in business. So for the past 5 years, it has produced its own Budget Outlook at this time of year. The aim has been to challenge conventional wisdom, where this seems likely to encourage companies to take a wrong turn:

• The blog's 2007 Outlook 'Budgeting for a Downturn', and its 2008 'Budgeting for Survival', meant it was one of the few to forecast the 2008 Crisis.
• 2009's 'Budgeting for a New Normal' was then more positive than the consensus, suggesting "2010 should be a better year for the chemical industry, as demand grows in line with a recovery in global GDP".
• The 2010 Outlook was titled 'Budgeting for Uncertainty'. This introduced the concept of Scenario planning, to help deal with "today's increasingly uncertain New Normal environment."

Next week, as usual, the blog will publish its new Budget Outlook.

But first, as always, it is helpful to look back at last year's forecast. This was titled 'Budgeting for Austerity' and focused on what it saw as the challenges and the opportunities for the 2012-14 Budget period. It suggested:

• Oil prices were at levels that would lead to recession. Western governments were making things worse by cutting spending and raising taxes - a point now accepted by the IMF. Emerging economies were doing the same by raising interest rates to combat inflation
• Equally, the banking system remained under severe strain in Europe, China and the USA
• The risks of social unrest were also rising; geo-political threats remained very real, especially in the Middle East
• Policy makers were failing to demonstrate real leadership in the face of the challenges ahead

As a result, the blog saw 'individuals suffering from squeezed incomes and job insecurity', which would have negative implications for demand growth

Today, the blog is happy to stand by all these judgements. Equally, though, it argued that:

"The greatest opportunities come at the time of greatest challenges. Two vast, and virtually unserved markets are now opening up. And they will continue to grow, no matter what happens in financial markets.

"The chemical industry is key to ensuring that the needs of these two growth markets are met. These are the great opportunities of the New Normal".

These 2 opportunities formed, of course, the great theme of the second half of 'Boom, Gloom and the New Normal', when it was published this year. Most encouragingly, the blog is now working with a number of major companies at Board level to investigate them in more detail.

It would welcome the chance to work with other far-sighted business managers, who are also distrustful of consensus forecasts, and keen to ensure the future prosperity of their business.

Next month's World Aromatics conference is a must-attend event for anyone involved with the industry.

It features an impressive line-up of major players, including Saudi Aramco, the world's largest oil company, as well as Dow, Shell and the International Energy Agency. Jointly organised with ICIS, it takes place on 13 - 14 November:

Saudi Aramco aim to become 'the world's leading petrochemical company'. In Berlin, Ted Randall - Global Business Manager - will for the first time set out their plans for the aromatics business.

Dow are already a major player in the market, and are now finalising the $20bn Sadara petchem complex with Aramco in Saudi Arabia. Craig Barry - Global Business Director - will update on their view of the market.

Shell, of course, have also been a major player for decades. Stephen Kinder - New Business Development Manager - will focus on the C6 and C8 value chains. He will outline their views on how companies can best position their products for future growth.

The International Energy Agency are the world's most authoritative energy agency. Capella Festa - Senior Energy Analyst - will present their insight on energy trends, with a particular focus on how these will impact aromatics.

Please click here to see the full Conference agenda and registration details.

This year's European Petrochemical Association in Berlin was notable for its realism. The blog gave an interview to ICIS news which was headlined 'Major recession ahead, warns leading consultant'. This overview seemed to capture the overall mood of the event.

3 key issues were also the focus of intense discussion:

US shale gas. Will all these projects go ahead? And if they do, what will be the impact on global olefin markets? The blog's view is that demand forecasts will be key - China is also expanding rapidly, and it is not clear that all the new capacity will be able to find a home, even though its feedstock will be cheap.

Benzene and aromatics availability. The Downturn Monitor has been flagging up a new development in aromatics markets in recent weeks. Benzene (green line) has gone very tight, even though derivative demand is poor. This is because changes in refining are reducing feedstock availability. Security of supply is now a key issue for the future.

Market volatility and demand uncertainty. Companies are finding it desperately difficult to forecast crude oil prices, now these are no longer based on the fundamentals of supply and demand. Consumers often set their prices for 6 or even 12 months ahead, and cannot cope with 25%+ swings, up and down. Equally, the changes in inventory caused by this volatility mean there is very little visibility into real levels of demand.

Sadly, there are no easy answers to these questions. They are part of the VUCA world in which we are all now living, as we discuss in 'Boom, Gloom and the New Normal'.

The chart shows benchmark price movements since the IeC Downturn Monitor's 29 April 2011 launch, with latest ICIS pricing comments below:
PTA China, red, down 18%. "Despite large scale production cutbacks in China and stronger PTA futures, Chinese domestic PTA market showed weakness this week"
HDPE USA export, purple, down 12%. "US prices are not working in many parts of the globe"
Naphtha Europe, brown, down 12%. "The market remains tight as a result of refinery turnarounds, but an oversupply is still expected to build later this month"
Brent crude oil, blue, down 9%
Benzene NWE, green, down 2%. "Players remained focused on the availability issues that have plagued the market this year"
S&P 500 Index (pink) up 5%

Mark Twain, the famous US writer, put it well when he warned that:

"It isn't what you don't know that gets you into trouble. It's what you think you know for sure."

This has certainly been the case with auto sales in China. In 2010, leading analysts JD Power expected that "the pace of growth may slow in 2011 after the nation withdrew tax breaks and rural subsidies". But they still forecast growth of "about 10% a year during the next 4 years."

2 years later, the chart above highlights the level of over-optimism:

• 2011 sales (green line) saw zero growth versus 2010
• 2012 sales to September (red square) are up just 6%
• Even this growth is probably an over-estimate, as China counts sales at the point when cars leave the factory
• Normalised inventory levels would suggest sales could actually be down 6%

Of course, some still believe that everything will suddenly return to 'normal' when the new leadership is finally appointed. But China remains a very poor country, with 96% of the population earning less than $7600/year.

Thus the blog believes future growth will be focused on people trading up from motorbikes to Nissan's $3k Datsun model. Until such cars are available, it continues to expect sustained growth to be hard to achieve.

Current farming techniques haven't changed much over thousands of years. Yet the people who eat the food that comes from farms no longer live next door to them. So the food has to be transported ever-greater distances - sometimes thousands of kilometres - to reach the market.

A new business model is badly needed to overcome the environmental and cost issues caused by the current model. One such model is vertical farming, which, as the Wall Street Journal notes:

"Is based on one simple principle: Instead of trucking food from farms into cities, grow it as close to home as possible - in urban greenhouses that stretch upward instead of sprawling outward....The immediate benefits will be easy to see. There won't be as many delivery trucks guzzling fuel and belching out exhaust, and city dwellers will get easier access to fresh, healthy food."

Early development of the concept has taken place over the past decade in the USA, where a variety of different buildings (including a former meat-packing facility in Chicago) are now in use. It is also now spreading world-wide.

One of the most advanced versions is in Sweden, where farmers are experimenting with a 12-storey farm in Linkoping, as shown in the chart:

• It will plant out on the ground floor, and then move the plants during their growing cycle from the top to the bottom floor for harvesting
• Plantagon, the company behind the project, also plans to lease out office space in the building, to help increase profitability

Of course, it is still early days for the concept, and its economics are not yet close to those of conventional farming.

But as we describe in Chapter 11 of Boom, Gloom and the New Normal, companies such as Bayer MaterialScience have already developed EcoBuilding projects as part of their climate protection strategy. Adding an agricultural element to such activities may well make good sense for the future.

As companies finalise Budgets for 2013-15, many will be thinking long and hard about the implications of the IMF's new economic forecast:

"The recovery continues, but it has weakened. In advanced countries, growth is now too low to make a substantial dent in unemployment. And in major emerging market economies, growth that had been strong earlier has also decreased."

This is a sad reflection on the failure of the policies followed since March 2009.

The reason for the disappointment is simple. As any business executive knows, demographics drive demand. But central banks and governments, with the exception of the Bank of Japan, continue to ignore this vital fact.

This is why the blog has co-authored 'Boom, Gloom and the New Normal'. Its aim is two-fold:

• To provide a robust and well-researched alternative view of likely future growth prospects
• To support Boards and business managers in charting a new course to success and profitability

The key issue is that 297m people in the West will be in the New Old 55+ generation by 2015. They will be 31% of the population. Thus growth will inevitably be very much slower than in the 1982-2007 Supercycle years.

The reason is simple:

• When people are young, they need to buy new things
• And the Western BabyBoomers had lots of money to spend
• But now the kids have left home, and they don't need many new things
• Instead, they mainly buy replacement products, and only when these wear out

Equally, the economies of the developing world now have to refocus on domestic demand, and away from exports to the West. Their populations are very poor by comparison with the West, so they cannot replace the lost spending there. These New Poor have money to spend for the first time in their lives, but their purchases also have to be both essential and affordable.

Thus the blog suggests that companies should budget for a continued L-shaped recovery. It first suggested this back in December 2008. Sadly, events since then have only confirmed its analysis:

• Originally it was widely assumed we would see a quick V-shaped recovery
• Then a U-shape was expected, as recovery seemed delayed
• Next a W-shape was forecast, as new stimulus would finally lead to recovery
• But in reality, there has not been a sustained recovery
• Instead, we have seen volatile markets, as stimulus ebbs and flows

Clearly central banks and governments still believe they will eventually return the world to the SuperCycle. But as the great scientist Einstein wisely remarked, a good definition of lunacy is to repeat the same action, and expect different results.

Far-sighted companies will therefore ignore the temptation to believe that the next stimulus programme will be different. Instead, they will focus on what they can do to insulate their business from the turbulence around them, by focusing on the key issues that they can control.

The good news is that almost nobody is producing goods and services for the New Old 55+ generation in the West. And only a few, like Nissan, are starting to manufacture affordable goods for the billions in the New Poor generation in emerging economies. Therefore competitive pressures in these two vast and growing sectors are very low.

These are the two great business opportunities of our lifetimes. The companies that now use the 2013-15 period to access these, will be building the foundations for decades of future success.

The blog is awarding itself and fellow-blogger John Richardson a pat on the back this morning. The reason is that investment bank Goldman Sachs, the largest player in commodity markets, has completely reversed its analysis of oil markets. They now accept our view that there is no fundamental reason for oil prices to be at today's high level.

The blog discussed this issue at length in its January 2011 White Paper, Budgeting for Uncertainty, and has maintained its view ever since. This has sometimes been a lonely position, as Goldman's voice is very strong in the markets. However, on Thursday, Goldman revealed they had changed their mind:

"The U.S. shale oil boom, which saw the country's oil production rising to multi-decade highs, caught many industry watchers and specialists by surprise and has dramatically reshaped the global oil flows over the past few years"

By coincidence, the blog has this week published another article on the subject in ICIS Chemical Business, which includes the sentence:

"In oil markets, there have been no major shortages of product on the scale of the 1979 OPEC embargo, or similar, to cause prices to rise. And production has actually been rising. US output, for example, has reversed years of decline, and is now back at 1996 levels. Similarly, inventories in the US and elsewhere have often been at near-record levels."

The blogs are delighted that that their readers have been forewarned of the real position all along. They cannot change the course of events. But at least, as with the collapse of Bear Stearns, the 2008-9 recession and September 2008 financial collapse, China's slowdown and other major issues, they can keep readers ahead of the game.

The impact of sustained high oil prices is becoming very clear in global auto markets. Car sales are facing major headwinds with gasoline and diesel prices at, or near, record levels in many countries. The chart shows combined sales in the 3 major markets - China, US, Europe - to September:

• Overall, sales (red square) are up just 4% versus 2011 (green line)
• China's sales are slowing, up just 6%
• Without China's 900k inventory build, total sales would be up only 1%

US sales continue to see best growth, up 15%, driven by replacement buying. Lack of public transport means cars are essential in many parts of the US, and slow sales of new cars since 2008 mean used car prices are relatively strong. The number of cars under 4 years old has dropped to 49m from 68m in 2008, and the average car is now a record 11.1 years old.

European sales are awful, at a near 20-year low, and getting worse. They have now fallen for 12 consecutive months, and are down 8% versus 2011. Sales in the austerity-hit countries are disastrous. There is no other word to describe them:

• Sales in Spain, the world's 12th largest economy, were down 37% in September
• Sales in Italy, a G7 member, were down 26%

Contagion from the slowdown is now spreading. Sales in France, also in the G7, were down 18%. Even Germany is now weakening fast, with sales down 11%.

Cars are now the single biggest market for the chemicals industry, after the collapse of housing markets. The American Chemistry Council estimates that each new US car is worth $3636 of chemical and plastic sales, making the US market worth $53bn this year. Sales outside the US are similarly valuable.

Today's slowdown will therefore have a major impact on the global industry as it continues.

US housing markets have been a disaster for many homeowners. Overall, they have lost $6tn since the collapse began in 2006. Nationally, prices are still down 32% versus their peak, according to the Case Shiller Index.

Temporarily, however, the market is continuing to stabilise. Banks have slowed the rate of foreclosure, and are wary of running into more trouble with regulators, after the 'robo-signing' problems of the past 18 months. But stabilisation is not the same as recovery:

• 11m Americans still owe more than their house is worth
• There are around 3.3m homes in 'shadow inventory'
• These are either in the foreclosure process, or have missed payments for 3 months
• One in every 248 housing units had a foreclosure notice in Q3

On the more positive side, housing starts has begun to improve, as the chart shows. They jumped to 872k in September, with building permits also rising to 894k. These are easily the strongest numbers since the crisis began.

But the buyers are mostly not ordinary Americans seeking to buy a new home. Instead, the money is coming from investors seeking to rent out property to those now unable to buy. Many are private investors, buying locally. But private equity funds have already raised $7.2bn.

The driver, as Pimco (the world's biggest bond fund managers) note, is that at least another 4m Americans will need to move into the rented sector, as foreclosures continue.

Whisper it quietly, so as not to disturb the world's central bankers as they rest. But the impact of their latest round of quantitative easing programmes (yellow highlight, QE3) may already be slowing. As the chart shows, these had an immediate impact on financial markets from their launch in June:

• The benchmark S&P 500 index is up 12%
• Brent crude oil prices are up 22%

'Don't fight the Fed' has once again proved a profitable theme for traders.

But incomes haven't risen 22% to balance higher crude prices. So, as always, consumers have instead been cutting back on other purchases. As the Wall Street Journal notes, in discussing the lacklustre start to the Q3 US company reporting season:

"The drumbeat of weaker revenue is particularly troubling to investors looking for a read on the health of the global economy because it reflects underlying demand. Companies have a lot of levers to pull to improve profits: They can sell assets, buy back stock or cut costs. But it is hard to improve sales unless consumers and companies spend more of their money.

"The news on that front hasn't been good. U.S. multinationals selling everything from soda to computer chips to industrial gear are reporting that demand remains uncertain, highlighting the precarious state of the global economy and suggesting a recovery will be slower to take hold than had been hoped."

Yet again, therefore, the chemical industry has performed its role as a leading indicator of the global economy, as the blog warned back in August. The chart emphasises just how difficult companies have found it to raise product prices since Brent began its surge.

This latest round of QE may well prove the straw that finally breaks the proverbial camel's back. Consumers simply have no more spare cash to absorb higher prices.

The chart shows benchmark price movements since the IeC Downturn Monitor's 29 April 2011 launch, with latest ICIS pricing comments below:
PTA China, red, down 17%. "Domestic as well as regional PTA producers continued to cap their production at a reduced rate in view of the persistently squeezed margins"
HDPE USA export, purple, down 16%. "Prices fell, under pressure from lower feedstock ethylene prices as well as falling global prices"
Naphtha Europe, brown, down 13%. "Oversupply is now starting to emerge as demand remains lacklustre"
Brent crude oil, blue, down 10%
Benzene NWE, green, up 8%. "The gains have been driven by export demand from Europe to the US and the lack of pygas as crackers prefer to utilise light feedstocks"

The blog was interviewed by ICIS' Will Beacham on its budget outlook this week. Key points from our discussion were:

On the short-term outlook
"Let's just say that things are going to be pretty flat. The fourth quarter and first quarter of 2013 are looking pretty flat and that doesn't give much grounds for optimism. Ethylene rates worldwide are around the 80% level and, to be honest, I think we'll be lucky to hold onto those until the end of the year."

On the probability of an L-shaped economic recovery
"A year ago we could still be hopeful that the oil price was going to fall and that would encourage consumption. We could also be hopeful that central bank interventions would lead to a more sustainable kind of recovery. Sadly a year on, oil is at very high levels, heading for a second straight year of record average prices, and stimulus packages simply haven't achieved their objectives.

"Population demographics drive economic growth, and the ageing population in the west means lower demand there. Older people mostly have the stuff they need and if they want to replace a sofa they can delay a year or two, unlike a young family buying things for the first time. Meanwhile, emerging-region populations will consume more, but not enough to compensate because of their relatively low incomes."

Two major opportunities for the future:
"Companies can still emerge as winners, despite the ongoing economic malaise, if they focus on creating products which will appeal to older western consumers and the nascent emerging markets:

"For example, Japanese car-maker Nissan is re-launching the Datsun brand as a $3,000 (€2,310) car. Every chemical company selling to the car industry ought to get on a plane to Tokyo and talk to them because that is going to be a raging success."

Dong nothing is not a good option
"Unfortunately, however, it seems likely that if people wait for the central banks, then they could be waiting until they go bankrupt."

The next few decades will see very much slower economic growth in most countries. This will have critical implications for business strategy, as the blog summarises in a new Research Note. Encouragingly, the Financial Tmes has devoted a column to its argument, focusing on the implications for the UK.

The Research challenges the current consensus view that growth is inevitably constant as long as the policy mix is correct:

• It highlights how the Western BabyBoom led to an extra 33m babies being born between 1946-70, equal to Canada's current population
• Using US and UK government data, it then shows how this led to a growth SuperCycle as these Boomers came into their peak consumption period between 25-54 years
• However, as the chart shows, since 2001 the Boomers have been moving into the 55+ age group, when household spending starts to fall away quite rapidly
• Essentially, the Boomers no longer need to buy so many new products, but instead require only replacement items, which can be deferred if necessary
• It also makes a link with Japan, where the Governor of the Bank of Japan is very concerned that the world is sleepwalking into the same issues that have impacted its economy over the past 2 decades

Tomorrow, the blog will highlight the key implications of these changes for Company Boards and senior executives.

As promised, the blog looks today at the business implications of population ageing and slower economic growth. The chart shows official US household expenditure data, by category. The overall message is clear: spending peaks by the age of 55 years, and then falls away quite sharply as people age.

This matters because household consumption is between 60-70% of GDP in most Western countries. Thus US consumers alone are 16% of the global economy. Western consumers in total are 40% of global GDP, equalling the entire GDP of the emerging economies. It is obviously impossible for these countries to replace the spending that is now being lost.

Most executives moved up the corporate ladder during the economic SuperCycle. They will now have to unlearn much of what they have learnt about critical success factors. 'If you build it, they will come' is no longer a viable strategic mindset. Over-optimistic market assessments will no longer be rescued by constant growth, and the arrival of 'pent-up demand':

• Executives will find themselves buffeted by markets which exhibit ongoing and high levels of volatility, uncertainty, complexity and ambiguity, as the economy transitions to the new normal. In addition, they may well have to cope with continuing waves of unhelpful, though well-meaning, interventions by policy makers: their recent role in raising oil prices is just one example.

• Executives will therefore need to learn new tools with which to sustain growth. Business model innovation will be essential, in order to meet the needs of those market sectors with future growth potential. One example of these is the opportunity to develop new products and services to meet the needs of the New Old 55+ generation.

• Technical innovation will also be essential, as the successful products of the future are likely to be based on 'needs', rather than 'wants'. Affordability, rather than premium pricing, will be key, as markets re-segment themselves into a large 'value' sector and a small 'luxury' segment, with little middle ground in between. This will be quite unlike the SuperCycle.

The Research Note summarises the rationale for the launch of our New Normal strategy workshops for company Boards and senior executives. These have now been held on 4 continents, highlighting the global implications of ageing for future business success.

What happens if prices stay unaffordable for so long, that the consumer eventually stops buying? Younger readers may not remember such a period, as it last happened in the early 1980s, before the SuperCycle began. But it looks as though they may be close to finding out.

As ever, benzene is the key indicator for this critical change of direction. The chart above mirrors that earlier this month for polyethylene. It shows weekly Brent oil prices (blue line) on the left-hand scale, and NWE benzene prices (red) on the right hand scale from January 2011:

• Oil prices rose 32% to end-April 2011; then fell 18% to year-end; rose 19% to March 2012; fell 25% to July; then rose 24% to peak at $115/bbl in September
• Benzene prices rose 20% in 6 weeks in early 2011, but couldn't hold these gains
• They then fell 40% by November, before jumping 52% in early 2012
• Since then, they have ranged between $1168/$1470, with a peak jump of 21%

The reason for this relative stability was lower operating rates on refineries and naphtha-based crackers - the main source of production. Benzene is essentially now a by-product from these plants. Gasoline and diesel demand has been hit by high prices, whilst naphtha crackers have also been at low rates.

So benzene buyers had to chase supply and pay higer prices through 2012, even though their own downstream markets were weakening. And, of course, the last thing that supports a weak market is a strong price. So last week, the inevitable happened. Following new record high US benzene prices, ICIS news reported:

"Some styrene producers may look to sell benzene to capitalise on recent record high benzene prices, in the midst of poor demand for styrene".

And this comes, of course, in October, one of the strongest months of the year for production - just before the US Thanksgiving holiday and Christmas. Clearly, today's high prices have indeed destroyed demand, just as has always happened before with oil prices at today's levels.

Worryingly, therefore, benzene may well be acting as a leading indicator for other products, as we move into the seasonally quieter part of Q4.

The chart shows benchmark price movements since the IeC Downturn Monitor's 29 April 2011 launch, with latest ICIS pricing comments below:
PTA China, down 18%. "Overall operating rate of polyester fibre plants was at around 66%"
HDPE USA export, down 16%. " Global demand remained weak"
Naphtha Europe, down 15%. "Oversupply is still expected to build during the coming weeks"
Brent crude oil, down 13%
Benzene NWE, up 5%. "Quiet through most of the week as a result of poor derivative demand."
S&P 500, up 4%