Chemicals & The Economy

The blog's quarterly survey of chemical industry results shows the downward trend continued in Q3. Some companies remain untouched by the mainstream problems, but they are now clearly in the minority:

• Bayer remain optimistic, and DuPont hopeful that problems are merely temporary
• But Dow now talk of a 'new reality' which sounds very close to the blog's own 'new normal'
• Asian and ME companies are also showing rising concern over developments in China

Recent weeks have given no sign of an upturn before year-end, especially as most companies increase their focus on cash management. Thus whilst we can all hope DuPont's analysis will prove correct, the blog fears that companies need to prepare for at least an extended downturn in 2013.

When the IMF starts warning of a 1 in 6 chance of recession, then risks are clearly rising:

Akzo Nobel. "We cannot expect quick recovery of the European economy"
Arkema. "Soft demand observed in certain market segments, the challenging situation of the European economy, and the volatility of raw materials are likely to continue during Q4 and to result in the cautious management by customers of their inventories at year-end"
BASF. "In the past quarter, the outlook for the world economy has once again not improved and the uncertainty on the international capital markets continues"
BP. "Continued weakness in margins globally"
Bayer. "Sales of the high-tech materials business moved ahead...due to higher volumes overall"
CP Chems. "Global utilisation 97% in Q3....lower ethane and propane feedstock prices"
Celanese. "We are not comfortable that Europe is at the bottom and beginning to turn around"
Clariant. "The low growth environment in advanced economies and dampened domestic demand have affected the economic activities in export-oriented emerging markets like India and China"
Croda. "Market remaining weak, particularly in Europe"
DSM. "Effects of the global economic downturn"
Dow. "We recognise that these difficult conditions may have extended staying power, as the new reality is that we are operating in a slow-growth and volatile world"
Dow Corning. "Oversupply and high raw material costs challenged the company's profits"
DuPont. "We look for this market to bottom in the first half of next year"
Eastman. "Global economic environment remains challenging as we enter the seasonally slower fourth-quarter"
Evonik. "Global economic framework is challenging and demand has weakened since the summer"
ExxonMobil. "Lower margins and unfavourable exchange rate effects"
Georgia Gulf. "Low-cost natural gas in North America will remain globally advantaged as a source of energy"
Huntsman. "Non-pigments businesses saw an increase in earnings"
INEOS. "Markets have continued to be subdued with industry sentiment remaining cautious"
LG Chem. "Stable supply raw materials and cost-saving of products despite a slowdown of global economy"
Lanxess. "Weakening demand in the tyre and automotive industries"
LyondellBasell. "Strong olefins and polyolefins demand in the Americas"
Mitsubishi. "Weaker demand in China"
Marubeni. "Weak market conditions for petrochemical products"
Nova. "Reduction in margins for its Olefins/Polyolefins business unit"
OMV. "Subdued economic environment weighs on prices"
Occidental. "Lower prices "across most product lines"
PKN Orlen. "Extensive plant shutdowns and challenging markets"
PPG. "Aggressive focus on cost reduction."
Petkim. "Markets hit by the renewed economic downturn"
PetroChina. "Prolonged weakness of the domestic petrochemicals market"
Praxair. "Sales rose in all regions other than Europe, which suffered from weak macroeconomic conditions
Reliance. "Weakness in global economies and the resultant margin environment"
Repsol. "Wider refining margins"
SABIC. "Lower product pricing, was not offset by higher production and sales volumes"
Shell. "Chemicals earnings decreased due to rising feedstock prices in Europe, the impact of Hurricane Isaac on operations in the Gulf of Mexico as well as the global economic slowdown"
Sherwin Williams. "Selling price increases in the previous twelve months are gaining traction against the higher raw material costs"
Sinopec. "Weak demand and firmer production costs"
Solvay. "Fragile macroeconomic environment reduces visibility across markets and industries"
TOTAL. "Weak demand in Europe and a slowdown in China"
Unilever. "Continued high levels of competitive intensity, depressed economies and increasing global imbalances and uncertainty"
Versalis. "Continuing margin weakness against the backdrop of weak commodity demand"
Wacker. "The extent to which the world economy will slow remains uncertain"
Westlake. "Strong demand for ethylene derivatives and low feedstock costs"

Its never easy interpreting China's statistics. Partly this is due to the sheer impossibility of producing accurate numbers in an emerging economy. It is also made difficult by the fact that as the incoming premier Li Keqiang noted some years ago, its GDP statistics are "man-made and therefore unreliable".

This doesn't mean, however, that China's announced 7.4% GDP growth in Q3 is necessarily wrong. But it does need to be considered alongside other evidence from statistics that Li has called reliable. As shown in the chart above, these suggest the picture is more complex than first meets the eye:

• Electricity consumption (green line) grew just 3.5% versus 2011, and only 2.9% in September
• Until last year, it was growing at higher levels than GDP
• Major user demand actually fell 0.1%, and industrial use (70% of total demand) rose only 1%

• Bank lending (red column) has been rising, up 15% this year versus 2011
• Q3 lending was up 24%, maintaining the pick-up since Q2
• This seems to have been focused on the State-Owned Enterprises

The electricity data certainly seems in line with reports on the ground of slow growth in the private sector. It is also supported by the very slow growth seen in polyethylene demand. Normally this should equal GDP, but in 2012 it has been up just 2% versus 2011.

It therefore seems likely that the growth in lending has a political focus, ahead of next month's Party Congress to appoint new leaders. Loans into the real estate sector were up 29% on Q2, whilst Rmb 7tn ($1.12tn) of loans have been approved since May to support local government infrastructure spending. This is ~15% of total annual GDP.

But this lending will have done nothing to support the announced policy transition towards increasing personal consumption. This is supposed to be the key focus of the 12th Five Year Plan which runs to 2015. But consumption's share of GDP actually fell to 4.2% by end-Q3 versus 6.4% in Q1 - the lowest since Q3 2009.

As a commentator in China Daily noted, "fundamental change is easier than done". And he warned "the new leaders will have to make tough choices quickly if they are to alter the direction of the country for the better".

The blog's friends at the American Chemistry Council used a very relevant quotation recently from Alexander Graham Bell, who invented the telephone and numerous other modern wonders:

"Sometimes we stare so long at a door that is closing that we seek too late the one that is open."

It is a theme taken up recently by Bill Gross, who runs Pimco, the world's largest bond fund. And it is confirmed by this month's IeC Boom/Gloom Index, above:

• The Index itself (blue column) which measures sentiment in financial markets, has been going nowhere since early this year
• Similarly the US S&P 500 Index (red line) has also gone nowhere since April. It was at 1408 at the end of March, and 1412 at the end of October

This probably tells us something tells us very important about the ineffectiveness of the US Federal Reserve's latest QE3 programme of quantitative easing.

It, like its predecessors, is explicitly aimed at increasing asset prices. The idea is that investors will feel wealthier, and will spend more. This will then encourage companies to invest to supply this new demand, causing the economy to rebound.

Nice theory, shame about the lack of results. As Gross points out:

"Surely by now, if the Bernanke model was as advertised, we would be seeing a pickup in investment as a percentage of GDP and a willingness to start saving?"

Instead, capital spending has been falling for the entire 3 years of the Fed's QE programmes. And as Gross concludes:

"Over the past three years, our net national savings rate has been negative, and lower than it has ever been in modern history. The last time this occurred was in the Great Depression.....We are in a "New Normal" world where the negative effects of private sector deleveraging are only being weakly addressed by monetary and fiscal authorities (whilst) ...fiscal policy is in the hands of a plutocracy more concerned about immediate profits as opposed to long-term vitality."

Policy makers remain focused on the door that is closing. Companies need to avert their gaze, and focus instead on the New Normal opportunities that are developing around them.

This is a big week for politics. Today is the US Presidential election, which could have major implications for US-China trade, as Mitt Romney has said he will brand China a 'currency manipulator' on his first day in office. It is also the start of China's Party Congress. The line-up of new officials will tell us a lot about whether the economic reforms outlined in the 12th Economic Plan will be carried through, or whether China will continue with its current unbalanced policies.

For the moment, however, we can stay in the 'old normal' and analyse the above chart, based on trade data from the invaluable Global Trade Information Services for China's polyethylene (PE) market. It shows:

• Overall demand has risen just 4% since 2010, and only 2.4% in 2012
• PE demand is normally equal to GDP, which was reported at 7.4% in Q3
• This highlights the unbalanced nature of current economic policies

• China's production is actually down 2.4% in 2012, due to low refining rates
• As in the West, today's record oil prices are destroying oil product demand
• This has provided temporary relief for imports, up 7% versus 2010

• Middle East and SEA producers continue to benefit, up 44% and 32% versus 2010
• But NAFTA is still down 44% and EU imports are down 43%

During the Supercycle, planners could forecast demand with just a spreadsheet and a set of growth numbers. Today, the world is already becoming far more complicated, as political and social issues begin to crowd out economics. China's PE market is providing a valuable insight for us into how this New Normal will likely develop.

Hands-up those who remember the G-20? Well done, Mexican readers, you get full points. But other readers seem doubtful. This weekend the world's Finance Ministers were meeting in Mexico City, as the country concludes its G-20 presidency. But you wouldn't know it from the rest of the world's media coverage.

How different from April 2009, when the world's leaders met in a blaze of publicity to 'save the global economy'. Then they vowed to do 'whatever it takes', just as Mario Draghi repeated recently on behalf of the European Central Bank. This time, however, neither Draghi nor US Treasury Secretary Geithner attended. Nor did China.

Unfortunately, the leaders tried to solve the wrong problem in 2009. They assumed the financial crisis was a liquidity crisis. So they flooded the world with cash, as the 4 orange arrows show on the chart above. This pushed up asset and commodity prices very sharply. But the crisis was not a cash-flow issue. It was a solvency issue. The debts built up prior to 2007 will never be repaid.

The blog's great concern back in April 2009 was the lack of a Plan B. After all, it was just possible that the blog and others might be right about the solvency issue. Governments should therefore have prepared a back-up plan, just in case. But they preferred to believe their friends in the financial community, who assured them it was now back to 'business as usual'.

So now we are 4 years into the Crisis. And it is becoming clearer day by day that the problems have not been solved. In fact, the G-20's 'solutions' have made things worse, not better. Adding more debt and pushing up commodity prices has simply destroyed demand. Most worryingly, there is still no Plan B. And so now key players just stay at home when the G-20 meets.

The chart shows benchmark price movements since the IeC Downturn Monitor's 29 April 2011 launch, with latest ICIS pricing comments below:
HDPE USA export, purple, down 20%. "Producers attempted to push some excess material into the export market, but export demand remained weak"
PTA China, red, down 18%. "Negative margins and limited supply because of continued production cutbacks"
Naphtha Europe, brown, down 15%. "Outbound arbitrages remain closed, requirements for naphtha limited, and refineries #are# coming back online following the maintenance period"
Brent crude oil, blue, down 13%
Benzene NWE, green, up 4%. "Continued restrictions on pygas, as crackers use lighter feedstocks amid bullishness for oil prices"
S&P 500 stock market index, pink, up 4%

The above chart may well become a collectors' piece in time. It appears in a fascinating article in the latest Harvard Business Review, which focuses on why stock market analysts in the USA (U), Europe (E), Asia (A) and Latin America (L) issue 'buy' recommendations on a company.

It represents the end of the economic SuperCycle era, with analysts valuing just 2 main factors:

• Projected industry growth - the 'story'
• The quality of top management - the 'characters'

These are the only factors which rate 'high' or 'very high' for almost all analysts.

And, of course, this approach made perfect sense during the SuperCycle. 'If you build it, they will come', was the theme of the period. So there was no need to analyse strategy or ability to execute. Equally, the economy was always growing, so balance sheet strength was irrelevant. Much better instead to load up on debt, to boost equity returns.

As the chart shows, most analysts still ignore these key factors. Yet they have begun to tell a diiferent 'story'. It is focused on the idea of a quick return to the SuperCycle, based on a belief:

• In Asia, that China's demand will come roaring back
• In the US, that shale gas will restore manufacturing growth
• In Latin America, that Brazil's growth can substitute for lost China exports
• In Europe, that Eurozone problems are just a short-term issue

In reality, however, the ageing of the BabyBoomers means the 'story' is already history. The Boomers' demand drove the SuperCycle when they were young. Now, however, we are going back to a world where a company's strategy, its ability to implement and the strength of its balance sheet will separate the sheep from the goats.

A rising tide lifts all boats. But as Warren Buffett warned, 'it is only when the tide goes out, that you see who has been swimming naked'. Analysts are a resilient bunch of people. A growing number are realising that the rules for success are changing. But in the meantime, the chart stands as a memory of an already disappearing era.

The US auto market is reaching a critical fork in the road. The consensus view believes that full recovery is well underway. They see the slowdown in October's sales as purely being weather-related, due to the arrival of hurricane Sandy.

Clearly this must have had an impact. But as the chart above shows, it may also be significant that October's sales (red square) dipped back to the 1.1m level:

• Between September 2008 - January 2012, there were just 3 months when sales were above 1.1m/month. This had been the minimum level each month pre-2008
• As a result, relatively few owners have been trading in their vehicles for a new car and used cars have now become relatively expensive
• Equally, the average age of the auto fleet has risen to a record 11.1 years, making it essential for many to replace ageing and broken-down vehicles

Against this background, it is no great surprise that some buyers have been replacing old cars with new ones, especially as financing has become easier to obtain.

But does this mean that we are about to return to the days of 15m-17m cars being sold every year, as the optimists would have us believe? This seems unlikely, as auto sales are now becoming a 'replacement market'.

There are fewer young people entering the market, and cars last much longer these days. So the US population is most unlikely to need SuperCycle levels of new cars again.

Instead of hoping for a return to the past, companies should instead focus pro-actively on the new opportunities ahead. The need to increase fuel economy, and a demand for cheaper and more affordable vehicles are likely to be the major growth areas for the future.

The UK housing market has led a charmed life in recent years. Unlike the US, Spain, Ireland and many other Western countries, prices have not collapsed. Instead, near zero interest rates, and the high proportion of mortgages on variable rates, meant that UK homeowners have seen their monthly payments reduce dramatically.

There is just one potential cloud on the horizon, captured in the chart above from the Financial Times. This is that most borrowers in many parts of the country are not making any repayments of capital. For example:

• In London, 52.6% of loans are to borrowers in this position
• Similarly in the southwest and southeast, the figures are 51.2% and 52.4%
• Even in the north, the figure is 32.4%

Overall, the Financial Services Authority, the main regulator, calculates that over 40% of the UK's home loans are interest only. Even more worrying, it believes 75% of purchases made at the top of the boom till 2007 were in this category.

Not to worry, say the optimists. People can always sell their house when the mortgage comes to an end, and pay the bill that way. Or they can take out another loan.

The boring blog worries that this may not be possible. After all, the reason that most mortgages became interest-only was that repayment became too expensive, as house prices boomed between 1991-2007. Instead, lenders and borrowers chose to assume that prices would always rise, and that sellers would always be able to find a willing buyer at their asking price.

What happens if these assumptions prove wrong? What happens, for example, now that most younger buyers are simply unable to afford the repayments on the large amounts required to buy a home? Or if increasing numbers of the UK's ageing population decide to downsize their home as they find climbing the stairs more difficult?

The work of the great Hyman Minsky, whose work features in chapter 2 of 'Boom, Gloom and the New Normal', explains the risks. Just as in US subprime, the classic conditions for a 'Minsky moment' are now starting to appear in the UK housing market.

The use of leverage is reducing, and by 2014 borrowers will have to prove they can repay the loan from other resources. Already, several major lenders such as Nationwide have stopped offering interest only loans to new borrowers. Whilst new buyers already need much higher deposits than in the boom years.

House prices outside London have been slipping for some time. London prices may now follow the same path, as the financial services industry contracts and large bonuses become a thing of the past. Once the illusion of constantly rising prices is shattered, then the Minsky Moment will have arrived.

The next few years may therefore prove a lot more difficult than the recent past.

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

It features speakers from leading companies including Dow, Saudi Aramco and Shell, as well as from the International Energy Agency. In addition, there will be a special session on the impact of today's record oil price levels. Plus the blog will discuss how companies can manage their businesses in today's increasingly volatile, uncertain, complex and ambiguous world.

In addition, of course, it provides an excellent opportunity to network with colleagues. Please click here to see the latest delegate list.

The US spent $6bn on its presidential and congressional elections this year. Apart from expressing the will of the people, it may also prove valuable if it helps to highlight the danger of allowing wishful thinking to override factual evidence on the ground.

One example of this failing was last Monday's forecast by the highly-respected US political commentator Peggy Noonan that "I think its this: a Romney win". Noonan is one of the blog's favourite political commentators. But she made the mistake of ignoring the data analysis undertaken by statistician Nate Silver - who correctly forecast the margin of Obama's win, and every single one of the results in the 50 states.

Unfortunately, a similar gap has opened up in the conduct of economic policy. Most central bankers now assume that constant growth is normal. And so like Noonan, they ignore any statistical evidence suggesting they are wrong, even from a central bank with real experience of the issue, the Bank of Japan. It has just produced another detailed paper explaining how ageing populations reduce economic growth.

The result is that wishful thinking now dominates central bank policy, as the blog will discuss today in a presentation*, at our Berlin conference. The chart above highlights the problem. It shows how prices for Brent (red line), WTI (green) and the US S&P 500 Index (blue) have become highly correlated since their liquidity programmes began in October 2008:

• Historically, higher oil prices were seen as bad for the economy
• The S&P 500 would therefore fall when oil rose, and vice versa
• Now however, fundamentals of supply/demand are irrelevant
• Instead, asset prices are all moving together in correlation

The main reason for this is the mistaken but understandable fear of pension funds that these programmes will lead to higher inflation and a lower value for the US$. They therefore see oil as a 'store of value', and so their cash overwhelms the smaller flows of physical oil markets.

In turn, this means that no single market now knows what it is supposed to be pricing. Oil markets now account for 5% of global GDP, which has always led to recession in the past. And yet there is absolutely no fundamental reason for today's high prices. Inventories remain high, supply is expanding rapidly, and demand is falling.

When Peggy Noonan had to face up to her mistake on Wednesday morning, it was only her personal pride that was hurt. Unfortunately for all of us, the central banks' myopia is creating far more dangerous and longer-lasting consequences for the global economy.

* Please click here to download the presentation

Cotton prices, as the chart shows, have returned to the 50c-70c/lb range that has dominated since 1982. This proves, once again, that 'reversion to the mean' is usually the best investment strategy. Sadly, however, it is the people who did not believe the hype around higher prices who will have to pick up the pieces, now the traders have made their money and left the stage.

The critical impact will be on polyester markets. Polyester traditionally competes with cotton in apparel markets, with manufacturers changing their blends in response to pricing differentials. So one immediate outcome of cotton's fall is that PTA volumes may well come under pressure. And this problem is likely to be long-lasting, as Bloomberg reports that stocks in China (the largest consumer) are already sufficient to cover 6 years of import requirements.

This would be bad enough news for the PTA industry. But high cotton prices have also helped to stimulate a major wave of new Chinese investment in PTA. As ICIS pricing reported recently:

"China has so far added a total of 6.6MT of new PTA capacity this year, and will add at least another 2MT capacity by the end of the year. The country's total PTA capacity is expected to reach 28.7MT by end-2012. Meanwhile, downstream polyester capacity is expected to expand by 5.1MT to 37.5MT in 2012, creating extra consumption for PTA of only around 4.4m tonnes/year.

"Market participants pointed to oversupply as the key factor that has resulted in the long-lasting and wide profit losses across the PTA and polyester supply chain. The situation will not improve until demand improves soundly and supply reduces after industrial restructuring, they said."

The outcome is an example, on a grand scale, of the problems that can be caused by wishful thinking. The real sufferers will be the existing PTA producers, whose accurate reading of the market has been made irrelevant by the actions of policymakers and new producers.

When the economy is running well, most people tend to get on with their lives. That was the case during the 1982-2007 SuperCycle, when growth was almost constant. But today's greater economic uncertainties translate into a growing role for Political and Social factors, as the triangle above describes:

• In the West, politics is becoming much more important. What will happen over the 'fiscal cliff' in the US, or the Eurozone? Nobody knows, but the decisions will not be made on solely economic factors
• The Middle East has some of the youngest populations in the world. This social factor is a key driver for the Arab Spring, as young people go on the streets to demand jobs
• In China, economics has never been the main factor. The Communist Party has instead carefully balanced social and political factors since Deng's 1992 Southern tour, and the new leadership will continue this policy

This makes forecasting a lot more difficult. No longer can companies simply decide that polyethylene demand, for example, will be 1x or 1.2x GDP, and then simply use a GDP forecast from the IMF to finalise a forecast. As fellow-blogger John Richardson notes, the removal of economics as the key driver is the equivalent of removing the suspension from a car.

Not only will the journey become much more bumpy, but the end-result will be much more uncertain. As the IMF themselves now warn:

"There is a 1 in 6 chance of global growth falling below 2%, which would be consistent with a recession in advanced economies and low growth in emerging market and developing economies. Ultimately, however, the forecast rests on critical policy action in the euro area and the United States, and it is very difficult to estimate the probability that this action will occur."

The chart shows benchmark price movements since the IeC Downturn Monitor's 29 April 2011 launch, with latest ICIS pricing comments below:

HDPE USA export, purple, down 20%. "Producers were unwilling to lower prices to make material more competitive with global pricing"
PTA China, red, down 18%. "The spread between PTA spot prices and PX costs narrowed to below $60/tonne since early October, which is too low to cover variable costs of $120-150/tonne for most PTA producers"
Naphtha Europe, brown, down 15%. "Oversupply now building in the European naphtha market"
Brent crude oil, blue, down 13%
Benzene NWE, green, up 2%. "Tighter availability of feedstock pyrolysis gasoline (pygas)."
S&P 500 stock market index, pink, up 1%

Our World Aromatics Conference in Berlin, now in its 11th year, provided valuable insight into changing market developments, thanks to our array of top-level speakers:

Ted Randall, Global Business Manager for Saudi Aramco, highlighted how their drive to reduce gasoline imports into Saudi Arabia would mean a major expansion in benzene and PX capacity, as refining expanded.
Craig Barry, Global Business Director for Dow, forecast continuing volatility in benzene markets, due to its status as a co-product. Refiners and cracker operators prioritised their major volume products, often creating an imbalance in its supply/demand.
Capella Festa, Senior Energy Analyst with the International Energy Agency, provided an insider's view of their newly-released World Energy Outlook, which was a major news story in the world's media this week.
Stephen Kinder, New Business Development Manager with Shell, argued that chemicals had a vital role to play in reducing CO2 emissions in buildings. He also explained the growing inter-connectedness of water, food and energy markets.
Carlos Molina, Key Account Manager with CEPSA, described how integration was increasingly essential for survival, as polyester markets faced major over-capacity challenges.

The blog focused on how businesses could prosper in the transition to the New Normal world. This involved refocusing on the two major growth sectors for the future:

• The New Old 55+ generation in the West
• The New Poor billions emerging from poverty in emerging economies

It worried that many companies were still failing to recognise that demand patterns were undergoing fundamental shifts due to changing demographics. For more detail, please click here to read Truong Mellor's ICIS News report.

The blog today tips its hat to Borealis CEO Mark Garrett, who becomes the first major company boss to publicly accept that Europe is following Japan into a prolonged period of economic slowdown. He told ICIS news:

"I believe Europe has entered a 10-year stagnation period, just like the Japanese have suffered, and we can't expect [Mario] Draghi at the European Central Bank to fly in like Superman and rescue all of the politicians who aren't prepared to make any fiscal or structural changes to the economy. The impact of each additional monetary measure is that each time Mario Draghi prints more money, the bang for his buck goes down, so until we get to a situation where we're prepared to make the fiscal and structural changes, that will continue".

This is very similar to the argument of our new book, 'Boom, Gloom and the New Normal'.

The book goes on to argue that the world is seeing an L-shaped economic recovery, due to the ageing of the Western BabyBoomers. Stimulus programmes such as those introduced by the European Central Bank and the US Federal Reserve actually make the economy worse, not better, because they drive up asset prices for oil and other commodities.

Instead, as the slide above from the blog's recent Berlin conference presentation argues:

• The only growth sector in the Western population is the New Old 55+ generation. They already have most of what they need, and so spend less as they only purchase replacement products
• Emerging economies now have to restructure away from exports towards their domestic markets. Their growth will also be much slower, as incomes are 10% of those in the West
• The 2 great growth markets of the next 20 years will therefore be the New Old 55+ in the West, and the billions who have escaped from absolute poverty in emerging economies

Companies need to urgently review their strategies to develop products and service that will be attractive to these new markets. Those who wait for central bank stimulus to work are likely to find themselves waiting until they are bankrupt.

The chart shows benchmark price movements since the IeC Downturn Monitor's 29 April 2011 launch, with latest ICIS pricing comments below:
HDPE USA export, down 22%. "Global demand is weak"
PTA China, down 18%. "Buying interest from downstream textile factories remains weak, as most of them prefer to buy on a need-to basis, given the poor macroeconomic environment and tightening cash flow nearing the end of the year"
Naphtha Europe, down 17%. "Buying is being conducted on a hand-to-mouth basis and lower naphtha prices will not boost demand"
Brent crude oil, down 13%
Benzene NWE, up 1%. "Softer derivative demand from key end-use sectors"
S&P 500 stock market index, flat

There are two great myths in the modern world. One, as discussed yesterday, is that central banks can restore growth to SuperCycle levels. The other is that China's economy will grow consistenly at high rates for the next decade. Both are wishful thinking, not robust strategies.

The chart above highlights the problems with the second myth. China's GDP data is routinely manipulated to ensure local Communist Party leaders meet their targets. Instead, the blog focuses on two much more reliable economic indicators:

• Electricity consumption (green line) is up 4.9% this year versus 2011
• Bank lending (red column) fell 14% in October

New premier-designate Li Keqiang has said electricity consumption (like bank lending) is one of only 3 'real' indicators, with the GDP figure being 'man-made and therefore unreliable'. It grew 14% last year as the impact of the 2008-10 stimulus programmes peaked, and was forecast to rise 10% this year by the government. This target cannot now be met.

Similarly, the jump in bank lending between May - September was clearly due to pre-Congress jockeying for power. Local Party bosses and the powerful State Owned Enterprises were given $1.1tn of loans for their pet projects. But October's lending has slipped again.

Also worrying was the lack of any sign in the leadership speeches that Xi and Li intend to press on with the policy changes proposed by the World Bank and notionally agreed at last March's Party Conference. Instead, as David Pilling noted in the Financial Times:

"Protests against environmental degradation, local corruption and illegal land grabs have reached such a level that the internal security budget now outstrips that allocated to national defence."

China's new leadership faces a very difficult few years. Even the official GDP growth target was reduced to only 7% per annum in President Hu's Congress speech. The real number is likely, as this year, to be a lot lower.

Autos are easily the largest global demand sector for chemicals, now housing has declined. Developments in the world's 4 major markets (China, US, EU, Japan) are thus critical to the future outlook, as they account for nearly 75% of total sales. As the chart shows:

• Volumes have increased this year (red square) by 7% versus 2011 (green line)
• The main driver has been the US and Japan
• US sales are up 1.4 million due to replacement buying
• Japan's sales are up 1 million, recovering after 2011's earthquake
• China was up just 600k (6%) and the EU down 800k (7%)

Without Japan's one-off recovery, sales would only be up 4%. The long-promised complete recovery in consumer confidence has clearly not yet occurred. Worryingly, the outlook is also not encouraging.

Bloomberg suggests this year's US growth has partly been boosted via cheap loans for those with low credit scores. It says Q2 loans were up 6% versus 2011, with risky buyers accounting for 44% of the total. And it adds that more solid growth would require a recovery in non-managerial wage growth, which at 1.1% is the lowest since records began in 1965.

Equally, EU sales are unlikely to recover (if at all) for many years due to its rapidly ageing population. Older people simply do not need new cars, especially as they retire from jobs or find themselves made unemployed by austerity programmes.

China's ageing population faces similar constraints, whilst its fuel prices remain near record highs. Increasing attacks on corruption are also putting Audi's sales of its black A6 model under threat. Half of its sales are made in China, as it is the car of choice for most Party officials.

"Energy efficiency is the cheapest way to meet our energy needs" according to the International Energy Agency. It also has much shorter payback periods than increased use of renewables, according to Capella Festa of the IEA when speaking at our conference last week. Even modest efforts would cut fuel bills by 20%, and add $18tn to global growth by 2035.

Her chart above summarises the potential gains. On current plans, 2/3rds of them will still have been missed by 2035. This is an almost criminal waste of resources, and not just a stupid way to behave in a time of economic hardship and fears about climate change.

Chemical companies could easily be at the forefront of promoting products and services to overcome current apathy. They already have hands-on experience of achieving major savings themselves on their production units. Plus they have a wide range of existing products for key areas such as buildings, power generation, transport and industry.

Less than 40% of the possible savings have yet to be made. And yet as the IEA note, the economic argument is well developed and robust. With the world heading into an L-shaped recovery, efforts to promote energy efficiency should surely be radically increased.

The blog is in S Africa next week as the guest of AECI, where on Tuesday it is also scheduled to be interviewed on CNBC's 'Beyond Markets' about New Normal developments.

It is particularly pleased that the visit coincides with the achievement of a major milestone by one of our key Case Studies in 'Boom, Gloom and the New Normal'. PATH's creation of a virtual vaccine company, discussed in chapter 7, proves that amazing things can happen when companies refocus on long-term societal value rather than short-term shareholder gain:

• 10 years ago, the Bill and Melinda Gates Foundation donated $50m to kick-start the development of a meningitis vaccine to protect 450m people in sub-Saharan Africa
• Meningitis A has been endemic there for 100 years, killing 25000 people as recently as 1996-7. It kills 10% of those affected within 2 days; 25% suffer permanent damage including hearing loss, mental retardation and learning disability
• The Gates money helped to fund PATH/WHO's work with the Serum Institute of India, Synco BioPartners in The Netherlands, and the US FDA Center for Biologics Evaluation and Research

The aim was to develop an affordable vaccine, selling at $0.50c per dose to eradicate this entirely avoidable disease.

Bill Gates is a truly visionary philanthropist, as the blog has discussed with regard to renewable energy. He refuses to support the cynical recycling of old technologies under the banner of being 'cheap and cheerful'. Instead, he invested in PATH's proposal to undertake ground-breaking technical research supported by the development of an entirely new business model.

Now PATH have just announced they successfully vaccinated their 100 millionth person this month. In addition, their pace of vaccination can now increase as they have gained approval to transport the vaccine outside a refrigerator for up to 4 days. This is especially important in countries such as Benin where cold storage is often non-existent.

The new vaccine does not only save lives. Preventing meningitis is a major catalyst for economic growth, as the disease destroys families and their savings. A single case of treatment costs $90, equivalent to 3-4 months of the family's disposable income. The cost of staying alive is thus often to plunge them all back into poverty.

Now this risk of disaster is being removed, providing greater economic and physical security for the 450 million people affected. The blog is delighted to send its congratulations to all those involved in this wonderful achievement.

The battle between the major central banks and the fundamentals of supply/demand is starting resemble the battlefields of the 1st World War. The generals running the campaign believe (with the exception of the Bank of Japan) that today's crisis is simply due to a lack of liquidity. They ignore the impact of demographics and the ageing of the Western BabyBoomers.

Their chosen weapon has therefore been the supply of large amounts of cash to financial markets. Their aim has been to increase asset values, in the belief that this will increase consumer confidence. Unfortunately as in 1914-18, it is the ordinary soldiers - in this case, consumers - who suffer from their mistake:

• Most consumers have relatively low incomes and have to buy real things
• Higher asset prices mean their cost of gasoline, diesel, cotton, coffee etc rises
• The cost of these increases means consumers have no discretionary cash left

As the chart shows, the central banks are also getting less bang for the $tns that they are spending to support asset prices. The latest round of QE3 since the summer has reversed the fall in crude oil prices. But it has only taken it back into a new triangle formation.

The chart, along with common sense, is telling us that higher prices in financial markets do nothing for consumer confidence. In fact, the reverse is true as most consumers do not own stocks, and so they end up worse-off financially than before.

Thus the chemical industry, dependent as it is on consumer spending, takes the pain. Data from the American Chemistry Council shows:

• US operating rates (OR%) ware just 76.6% in October, down from 77.6% in 2011 despite the continuing boost from shale gas
• Worldwide, September's OR% was only 84.8%, versus 87.3% in 2011 and the 91.2% long-term average.

The chart shows benchmark price movements since the IeC Downturn Monitor's 29 April 2011 launch, with latest ICIS pricing comments below:

HDPE USA export, purple, down 22%. "Global demand remained weak, with China still uninterested in buying"
PTA China, red, down 17%. "Downstream textile factories are sitting on high product inventories"
Naphtha Europe, brown, down 16%. "Refining margins are heading deeper into negative territory as already-lacklustre demand declines further"
Brent crude oil, blue, down 11%
Benzene NWE, green, up 6%. "Spot activity in Europe remained relatively thin"
S&P 500 stock market index, pink, up 3%

It is not easy to discover what is really happening in China's government. There were no opinion polls before the new leaders were appointed, and certainly no public policy debates. But the blog's careful reading of Chinese and foreign media does suggest that some important changes may be underway. The evidence for this rather bold statement is as follows:

• Former president Jiang Zemin has been personally involved in the leadership transition
• The 86 year-old was Deng Xiaoping's successor, and responsible for continuing his reforms from 1989-2003
• His heirs, President Hu and premier Wen, have talked often about the need for more economic reform and fighting corruption
• But they have achieved little, as the recent Bo Xilai affair demonstrated
• Jiang thus felt forced to re-emerge on the political scene, to deliver one more effort at reform

Reform is definitely long overdue, as the chart from March's key Party Conference report demonstrates. The reason is that China now faces the 'middle income trap'. It needs to change its policies quite drastically, if the growth of the past 20 years is to continue:

• Since 1950, 10 major countries have tried to escape the trap
• Only Japan (light green) and S Korea (dark green) have succeeded
• The other 8 have seen their GDP/capita plateau around US$10k

As the World Bank (co-author of the report) warns:

"Over the past half-century, many countries have entered middle-income status, but very few have made the additional leap to become high-income economies. Rather, several faced sudden, sharp decelerations in growth and have been unsuccessful in addressing the root structural cause of the slowdown."

The issue is simple. The advantages which create high initial growth - low-cost labour and easy technology adoption - disappear at middle income levels. If a country fails to adapt to this paradigm shift, their economy stagnates as rising wages make their labour-intensive exports less competitive.

It was presumably this realisation that led Jiang to make his return. The blog will look at the results of his activity in more detail tomorrow.

As promised, the blog today looks at the impact of former President Jiang Zemin's return to active politics during the recent leadership transition. Its monitoring of expert commentary inside and outside China suggests he has achieved 4 major changes:

• Corruption. Countries cannot progress if corruption dominates daily life. Thus it seems critically important that Wang Qishan has been given explicit responsibility for running the anti-graft agency. Equally important may be that previous head, Ma Wen, did not even make the new Politburo's Standing Committee. Wang is the Party's 'Mr Fixit' and was responsible for resolving the Sars bird flu crisis in 2003 and the success of the Beijing Olympics
• Economic reform. Premier-designate Li Keqiang has lost no time in bringing the World Bank's China 2030 report back to centre stage. Nothing had happened since March under Hu and Wen, but immediately after his appointment was confirmed, Li made his priority very clear: "At present reform has encountered a 'fortress area' and a 'deep water area,'" where there are counter-currents that can push back progress. We must overcome difficulties and get rid of all institutional obstacles."
• Zhang Gaoli. Zhang is a technocrat who seems to have a strong interest in economic reform. He was in charge of Shenzeng when it became the effective capital of private enterprise in China. He then took this learning and applied it in Tianjin, where he became known for his 'hands-on approach' and his motto "results count more than words"
• Yu Zhengsheng. His promotion comes after being in charge of Shanghai, where he demonstrated strong interest in promoting the private sector and the need for economic reform, warning: "China has achieved great economic success, but many severe problems have arisen, especially widening income gaps and strained human relations. So the issues awaiting solution are how to produce a harmonious environment"

In addition, the size of the Standing Committee, China's most important body, was reduced from 9 to 7 people to improve implementation ability. This move presumably also helped to keep some of Hu's faction off the Committee, by removing available places.

Achieving these changes is only the first step, of course. The hard part is now underway, of trying to reverse the entrenched position of the State Owned Enterprises (SOEs) and tackle endemic corruption. This latter policy may well slow growth in the 'luxury market'. As the People's Daily notes 'a considerable number of people buy luxury products as gifts or bribe, which also makes luxury goods a tool for spreading corruption in China'.

Equally, Western companies need to remember that Jiang is clearly not looking for 'business as usual' policies. The new leadership have already scaled down their growth target to just 7% per annum from the 10% average seen in Hu's time. The official China Daily summed up new President's Xi's challenge well when commenting "Xi is ready, but it won't be easy."

Their priority is also no longer going to be 'middle class' products for the 4% of China's population who earn $20/day or more. It will be cheap and reliable products, such as $50 refrigerators, for the 70% who now earn between $2 - $10/day.

Europe's political leaders were deadlocked last weekend over plans for the EU's new Budget. A new north-south gap opened up, where the major contributors to the Budget (Germany, UK, Netherlands) demanded €30bn ($39bn) in cuts. This was, of course, badly received by those in the south (Italy, Spain, France) who would like more support.

This creates yet more uncertainty over the economy, to add to the existing issues regarding the future of the Eurozone. Equally worrying is the fact that amongst the leaders, as Lithuania's president noted, "the divergence in opinions was so large there was nothing to argue about."

Meanwhile, Europe's olefin business - the building block for the entire region's industry - continues to struggle. As the chart shows, based on APPE data, Q3 saw no recovery in operating rates, which remained at 80% in line with H1's rate (red square).

These are clearly recession levels of operation. The only silver lining continues to be that refineries are also suffering, and their low operating rates mean there is no surplus naphtha production to push down olefin margins. Equally, the increased use of ethane feed in the US due to shale gas provides good support for co-product propylene and butadiene.

Overall therefore, European margins and profitability remain much stronger than could otherwise be expected. But as the old saying goes 'if something is too good to be true, it usually is'. Europe's leaders are running out of time to begin solving the challenges they face.