Chemicals & The Economy

The financial magazine MoneyWeek have produced a new video in their Investment Tutorial series, looking at the impact of today's 'demographic cliff' on the economy.

Editor-in-Chief Merryn Somerset Webb suggests this is "One of the key bits of information that you need, to understand what's going on in the West today" and adds:

"It doesn't matter how much monetary stimulus you put in, how much fiscal stimulus you put in, you can't turn back the demographic tide.

"What do we do about it? That's a tricky one. But recognising it, recognising the change, is surely the first step towards being able to deal with it!"

Please click here to see the full video.

New Year is a traditional moment for price increases. And last week didn't disappoint, with Brent crude oil jumping $3/bbl. Whilst financial markets soared globally on hopes that the US 'fiscal cliff' deal might be a sign that policymakers will finally provide leadership to tackle the continuing economic crisis. The only problem is that we have seen similar New Year optimism before:

• 2012 saw Brent up $6/bbl and financial markets strong
• Brent also rose $2/bbl in 2011; $8/bbl in 2010; and $4/bbl even in 2009
• The US S&P 500 Index also rose at the same time each year

Still, good news is good news. And as the chart shows, the blog's latest IeC Boom/Gloom Index (blue column) confirmed the general improvement in sentiment. It rose back into Boom territory, close to August levels. Whilst the Austerity reading (red line) slipped back to September levels.

The key, of course, is whether this optimism turns into sustained improvement in the economic fundamentals. Here, the signs are not so immediately encouraging. As The Guardian newspaper noted, most of us "can't get a grip on the trillions involved in the fiscal cliff deal".

It therefore removed 8 zeroes from each of the relevant numbers in the US budget talks, and instead presented them in the form of a family budget:

Family income (eg US tax revenue): $21700
Family spending (Federal Budget): $38200
New credit card debt (New debt): $16500
Existing credit card debt (National Debt): $142710
Budget cuts so far (fiscal cliff deal): $38.50c

Thus the 'fiscal cliff' deal will lead to $38,500,000,000 of budget savings, versus the currently planned increase in debt of $1,650,000,000,000. This may not be quite enough to sustain optimism for very long, unless more meaningful changes start to be discussed.

The chart shows benchmark price movements since the IeC Downturn Monitor's 29 April 2011 launch, and latest ICIS pricing comments below:
HDPE USA export, down 20%. "Producers are avoiding traders and brokers and are moving material directly overseas themselves"
PTA China, down 11%. "Polyester industry in China has so far been healthy, driven by firmer upstream prices and upbeat China economy"
Naphtha Europe, down 15%. "Petchem demand is poor, with rival feedstock propane trading at a significant discount to naphtha"
Brent crude oil, down 11%
Benzene NWE, up 14%. "Market still felt a little like it was in holiday mode"
S&P 500 stock market index, up 8%

Half of China's population lived in abject poverty as recently as 1979, with incomes less than $2/day. Since then, economic policy has largely focused on reducing this number. As the chart shows, only 7% are still in this position (brown column). Instead, 70% now earn $2 - $10/day (green), and 19% have incomes up to $20/day (blue).

The major part of this move took place under Deng Xiaoping and Jiang Zemin's leadership. But then priorities changed from 2002 under Hu Jintao. For the past decade, the leadership instead focused on creating a so-called 'middle class' of people with incomes above $20/day (purple). But even today, these represent only 4% of the population. Equally, an income of $20/day ($7600/year) would not be considered middle class in any western country.

Now, China's new leadership is returning to earlier priorities. As China's Academy of Social Sciences reports "a completely new policy approach is emerging. Its about giving farmers a bigger share from land deals, it's about changing local governments' reliance on revenues from land, and it's ultimately about a fairer system of sharing China's economic growth."

This new policy has major implications for companies operating in the Chinese market. Of course there will still be people able to afford a luxury car and lifestyle. But this will be a niche market, and unlikely to grow too quickly. Instead, as state newspaper Xinhua notes:

"The most outstanding problem in our country's social and economic system is still the separation of rural and urban China; and the most serious factor hindering China from building up a comprehensive well-off society is the excessively big gap between urban and rural development".

This gap is shown in income levels between rural and urban workers. Each sector contains about half of China's population, but latest data shows urban incomes are 3 times those of rural areas. Disposable income averages $4k/year in the towns, versus just $1450 elsewhere.

The new leadership is bound to find it difficult to implement such major changes. But the fact it is setting out its proposed direction so soon after its appointment, suggests it is serious in its aims. As the blog suggested in the Financial Times last March, affordability may well take over from luxury as the main focus for China's economy over the next decade.

December saw continued strong volume in US auto markets, with sales (red line) at pre-Crisis levels for the month. The key driver is the need to replace ageing vehicles, but manufacturers were also generous with rebates and credit offers to help clear inventory:

• Overall, 2012 sales were up 13% versus 2011 at 14.5m
• At the same time, the average age of the US fleet hit a new record 11.1 years
• GM offered $9k rebates on some models to cut pick-up supply by 20k

This is therefore quite a different market from the 1995-2007 supercycle, when sales averaged 16m/year, and hit 17.3m at their 2000 peak.

Today, manufacturers are benefiting from the low sales seen between 2009-11, as this means the used vehicle market is much smaller than normal. Only 10.4m autos were sold in 2009, for example, so there are relatively few vehicles now available to used-car buyers. In turn, this means prices are relatively strong.

So for an average American, the attraction of a new car is much higher than normal. Manufacturers have also spotted this trend, and eased their credit conditions to ensure buyers can borrow the money required. Buyers thus effectively have a choice between a relatively high-priced used car, or an attractively priced and financed new car.

How long this trend will last is a critical question, of course. The blog will analyse this in more detail, as soon as the relevant data becomes available.

Crude oil prices remained at a record level for the second year running in 2012. As the chart shows, Brent prices averaged $112/bbl versus $111/bbl in 2011 (blue line). By comparison, 2008 averaged $97/bbl, or $102 if adjusted for inflation (red):

• 2008 still holds the record for the highest-ever daily price at $144/bbl on 3 July
• It also holds the record for the 2 highest quarters - $127/bbl in Q2; $120/bbl in Q3

But until 2011, we had never seen prices sustained at over $100/bbl for a full year. And we have certainly never had to suffer them at this level for 2 years in a row.

Equally, as the pink columns show, every period of oil prices above $50/bbl on an inflation adjusted basis has led to recession. So either 'this time is different'. Or, recession is waiting around the corner. It would be a brave company who ignored this risk, and simply assumed that high oil prices no longer matter to the global economy.

2013 is the year that the Western world reaches the 'demographic cliff'. Its BabyBoomers (born between 1946-70) are the largest and wealthiest generation that the world has ever known. Now they are ageing rapidly. They have less money to spend as they move towards retirement. And they mainly buy replacement products, not new ones, as they already own most of what they need.

The average Boomer joined the Wealth Creator 25 -54 age group in 1983, powering a 25 year economic SuperCycle from 1983 - 2007. But today, in 2013, the average Boomer enters the New Old 55+ age group.

Companies and governments have been very slow to recognise the arrival of this demographic cliff. But it is not too late. In this 3 minute interview the blog discusses the Outlook for 2013, and highlights the new opportunities that will enable companies to sustain growth for decades to come.

Please click here to view the interview.

China, like the USA, had a leadership transition in November. And, of course, this led to led to some effective 'massaging' of the economy in the preceding months. As the blog noted in November, it was no coincidence that bank lending jumped $1.1tn between May-October, to ensure local communist party chiefs got the projects they wanted for their city or region.

Similarly, as the chart shows, this lending helped to support consumer spending. Auto sales (red line), finished the year up 7%, after zero growth in 2011. This was a quite striking improvement, as they had actually been down 3% in Q1.

But that was before the leadership transition, and this is now. Of course, financial markets have assumed that the improvement will become permanent. Equally, it seems that the further you live from China, the more optimistic you become that a new boom is underway.

However, back in China, the mood is more realistic. The pre-Congress boom has already led to increased inflation. Food prices, so important for most people, were up 4.2% in December, and overall inflation is expected to rise above 3% this month. Lending has already slowed quite dramatically, and was down 17% in Q4 versus 2011.

One telling statistic is that total sales of passenger cars and commercial vehicles were up 4% in 2012, but still totalled only 19.3m. By comparison, motorcycle sales were 23.65 million, but down 15%. This highlights how recent policies have favoured the needs of the relatively few 'middle class' Chinese, at the expense of the large numbers of poorer people.

Now the head of China's car manufacturing association forecasts 5% auto sales growth again this year. Of course, January will be relatively strong, as the Lunar New Year holiday is in February. But he expects the government to "take further measures to slow vehicle sales", in line with their published policy of redirecting growth from the middle classes to the rural poor.

Nobody ever said that financial and chemical were meant to be easy to understand. But current developments are clearly far more complex than normal. We have grown used to manipulation by policymakers, via their various quantitative easing (QE) programmes. But today, we also have completely opposite views in the markets themselves:

• Benzene prices (green line) collapsed $100/t last week, on concern over lack of demand
• Polyethylene prices (purple) jumped $50/t, as producers held out for price increases
• Naphtha prices (brown) fell $50/t, again due to lack of demand
• PTA prices (red) rose $20/t on optimism over a recovery in China

What conclusion are we meant to draw from these quite opposite movements in major markets?

A New Year is a traditional time for price increases. But alongside this process, some players have clearly decided that recovery must finally be just around the corner. They are thus prepared to be encouraged by any sign that the stimulus programmes are having an impact. Equally, though, others are now coming to the opposite conclusion, that these programmes have simply been a waste of time and money.

The effect on the markets is to establish a series of cross currents. It is rather like being at the seaside, and watching the tide as it turns. Water rushes one way, and then another in a seemingly random manner.

As with the tide, eventually the real direction will become clear. But for the moment, the risk levels have become much higher than usual. Even though the blog has a clear view of where it thinks we are headed, it would therefore not want to trade today. It would be too easy to be knocked over by a big wave, that happened to arrive from an unexpected direction.

The chart shows benchmark price movements since 2011, and latest ICIS pricing comments below:
Naphtha Europe, black, down 19%. "Petchem requirements remain muted, and the market is still considered very long"
HDPE USA export, purple, down 17%. "Producers continue to attempt to push through a 5 c/lb increase for January"
PTA China, red, down 10%. "Given comfortable raw material inventories, textile factories and traders slowed down their purchases and are adopting a wait-and-see stance until raw material prices stabilise."
Brent crude oil, blue, down 11%
Benzene NWE, green, up 5%. "Consumers are unclear on end-user demand"
S&P 500 stock market index, pink, up 8%

Crude oil and the major commodity markets have been a "fool's paradise" in the past 4 years, created by the arrival of the central banks' massive liquidity programmes. Pension funds rushed to buy, in the belief they would be a "store of value". Hedge funds followed them as a momentum play, encouraged by analyst reports of supply shortages and soaring demand in emerging markets.

But nothing lasts forever. Financial players have sustained oil prices at record levels for the past 2 years. But high prices destroy demand, and so buyers of futures contracts have largely lost money over the past 18 months. Plus, of course, there have never been any real shortages in the market to justify today's high prices. So finally, they are leaving the markets to the physical players once more.

Repricing is therefore becoming almost inevitable as we move through 2013. The reason is that since 2009 the speculators have taken over the markets, and have no longer just provided liquidity. So no single financial market has really known what it was meant to be pricing. But now, signs of strain in oil markets are becoming very visible.

Saudi Arabia has already had to cut production by 1 million bpd due to lack of demand. But others do not have this luxury, and instead have to sell in order to pay their bills. So a downward spiral seems to be developing:

• US natural gas prices (purple) have dropped to the equivalent of $30/bbl
• Power stations thus continue to prioritise gas over fuel oil
• This puts pressure on WTI (green), which remains $20/bbl below Brent
• In turn, Western Canada Select (blue), is under real pressure at $60/bbl

And all the time, supply is rising under the influence of sustained high prices. US output is now at 7mbd, the highest level since 1993.

Only Brent (red) is now uniquely strong at $110/bbl, due to its key role in Russian finances as the price-setting mechanism for European gas and oil markets. Pre-2009, it would have been $1/bbl below WTI. With the US now in surplus, and the European economy in recession, Brent should now be trading well below WTI.

Of course, some naive analysts now argue that high capital investment costs have to be repaid, and will keep prices high. But anyone with manufacturing industry experience knows that once the capital is spent, the only cost that matters is the variable cost of production. And even that can be irrelevant if the producer needs to pay a major bill - then, the field will simply run for cash flow.

Repricing is thus now a real risk in the market. And once Brent prices begin to crack, then buyers will disappear. In turn, all the owners of oil and oil products currently being hoarded in Rotterdam and elsewhere will become distressed sellers. Already, for example, Europe is 600kt long on naphtha according to ICIS pricing reports.

There is a lot of product sitting in tanks around the world that will have to be sold in a hurry, if a panic starts. Anyone without a contingency plan to handle this scenario, now needs to develop one with extreme urgency.

Chlorine and caustic soda production are a key indicator of economic growth. They have been produced in large volumes for over a century, and have a extremely wide range of uses from pharmaceutical and aluminium production to detergents and disinfection. The blog's mid-year review of European data from Eurochlor showed worrying signs of a slowdown, with chlorine production down 3% versus 2011 levels.

Full-year data shows that producers continued to act responsibly to avoid a repeat of the problems seen in early 2009:

• Total 2012 chlorine production was down 1.9%, following a 0.6% fall in 2011
• Operating rates remained low at an H2 average of 75.7%
• Even so, caustic soda stocks ended at 241KT versus 233KT in 2011

The key to success in H1 had been strong sales of PVC and caustic soda into export markets. This position continued in H2 on PVC, with net exports up 4% versus 2011 to October, based on data from Global Trade Information Services. But net caustic soda exports were down 23% to the end of October. And worryingly, the two largest country markets both slowed. PVC sales to Turkey were down 26% (100KT), and caustic sales to the US down 17% (30KT).

Update. On Friday, Ineos ChlorVinyls announded it was closing 3 PVC plants, and one chloralkali cellroom. CEO Chris Tane blamed the closures on "current and expected economic conditions impacting demand across Europe,"

Its now 4 years since the blog published its first New Year Outlook in ICB. Then it was in a small minority when advising CEOs "to prepare for a marathon not a sprint" in dealing with the financial crisis. And very few accepted its suggestion that it was "unlikely that governments will quickly find a 'magic bullet' to quickly correct the causes of today's problems".

Today, of course, these views have now become mainstream.

However, there is still a widespread failure to link today's ongoing economic turmoil to the major demographic changes now underway. This has two serious results:

• Policymakers, though well-meaning, are pursuing policies which make the underlying situation worse, not better - by unintentionally causing oil prices to remain at record levels, for example
• Companies have been slow to appreciate the new sources of growth that are developing. Thus even today, very few have begun to produce products and services for the New Old 55+ generation - although these now number around 300 million in the West alone

The result is shown in the chart above from the American Chemistry Council. Global operating rates were just 85.8% in November, down from 86.4% in November 2011. They are well below the long-term average of 91.2%, and the trend is now downwards again.

A New Year is often a time for new directions. The blog's 2013 New Year Outlook thus provides a high-level analysis of the major opportunities that now exist to sustain profitable growth over the next decades. It argues that "technical and business model innovation are now essential, if companies are to profit from the two major growth markets now starting to dominate Western and emerging economies".

Please click here to download a free copy of the Outlook.

Autos are now the largest single global market for chemical and polymer sales, after the slowdown in US and European housing. Each US auto is worth $3636 to the industry, according to American Chemistry Council data. Thus the US market was worth a record $52.7bn in 2012, with auto sales totalling nearly 14.5m.

Overall, as the chart shows:

• China remained the largest market, with sales up 7% at 14.7m
• The US was in 2nd place, with sales up 13%
• EU sales collapsed 8%, down to 12m

Combined sales in these 3 main regions were up 4% versus 2011 at 41.2m. They also accounted for 58% of total global sales of 71.2m (based on first estimates from industry analysts Polk).

The chart also highlights the continuing volatility in regional sales. It is hard to believe today, but the EU was the largest market in 2009, due to government stimulus measures. Yet in 2012, European sales were back at 1995 levels. Of the major markets, only the UK showed growth (up 5%). Germany was down 3%, Spain down 13%, France down 14%, and Italy down 20%.

This volatility makes forecasting very difficult. We are a long way from the steady growth seen until 2007, where any modest drop in one year would be followed by a quick recovery. Today, there is little sign of 'pent-up demand' returning quickly. Instead, Polk forecast 2013 volumes up just 2.5%, due to the continuing slowdown in the EU, and only modest growth in the US and China.

What do you do if your core customers disappear? Go bankrupt, or find new ones? That's the issue facing many companies as the West heads over the 'demographic cliff'.

As the Financial Times reports, iconic motorbike manufacturer Harley Davidson has faced this problem and found new ways to sustain profitable growth:

• US Boomers were a strong market for motorbikes when they were younger
• But the following generation was 9 million smaller
• Many bike manufacturers gave up producing bikes as a result

But today, as the picture shows, Harley Davidson is still selling its bikes. It has developed new models designed for ageing Boomers. This New Old 55+ generation is much fitter and has much longer life expectancy than any previous generation. There are also a lot of them, as the Boomers are the largest generation that has ever lived, as well as the wealthiest.

The average age of a US motorcycle rider is now 49 years as a result. The secret of success is that Harley's bikes have been redesigned to meet the needs of an older customer. They thus feature heated seats and handlebars. Some models also have a gear shift that can be moved with the foot, so the riding position is less hard on the knees.

Most companies will face this kind of win-lose choice in coming years. The constant growth of the Boomer SuperCycle from 1983-2007 has come to an end. But with around 30% of the Western population now in the New Old 55+ generation, there are plenty of new opportunities for those with flexibility and vision.

The risk of global recession continues to rise, with the World Bank last week warning that "the real-side recovery is weak and business sector confidence is low". Spain, the world's 12th largest economy, provides a good example of how the problems are spreading.

Financial markets have temporarily decided that it has 'turned the corner', due to support from the European Central Bank. But in the real economy, things are getting worse, not better. As the chart shows from Spain's El Confidencial, freight transport is in a "profound crisis". Truck movements are a key indicator of economic health:

• They have fallen 33% since the pre-crisis peak (in terms of millions of kilometres driven)
• Q3 saw a 7.7% fall, which has continued into November

Even worse is data from the relatively rich Catalonian region, where the Red Cross says 28% of children now suffer from child poverty. Yet budget cutbacks means only 9% of schoolchildren get free school meals. Many of the rest go hungry.

Consumer products giant Unilever tells the same story. Its European head, Jan Zijderveld, warned back in August that "poverty is returning to Europe" and highlighted how they were successfully introducing business models from "Indonesia (where) we sell single packs shampoo for 2 to 3 cents and still make good money".

Benchmark price movements since the IeC Downturn Monitor's 2011 launch, and latest ICIS pricing comments are below:
Naphtha Europe, down 16%. "The current surplus is being sold at heavy discounts, and is being replaced by new volumes originating from Russia, as well as product from local refineries."
HDPE USA export, down 14%. "Tight supplies helped boost prices in some cases"
PTA China, down 11%. "China's polyester sales shrank further during the week and the sales-to-output ratio of Chinese polyester yarn producers waned to 30-50%, compared with last week's 50-80% and 80-120% seen in early January"
Brent crude oil, down 11%
Benzene NWE, up 10%. "Growing buying interest among suppliers ahead of a bullish February helped push current month values up as the week progressed"
S&P 500 stock market index, up 9%

Ms Kay Sun is a 32 year-old administrative assistant in Shanghai, earning $29k/year (Rmb180k). Last month, like many 30-somethings around the world, she put down a deposit on an apartment. But the cost of Ms Sun's ordinary one-bed apartment was in a different league. It was priced at $460,000 (Rmb2.85m). And as the Wall Street Journal reports, her purchase is considered 'normal' in today's China.

China's urban property market only opened up in 1998. Before then, the state owned everything, and told you where to live. Even today, peasants in the rural areas build their homes on state-owned land. So families have never known a property crash. They are comfortable chasing prices higher because they believe "the government would never allow prices to fall".

This was certainly true of the past 10 years. The government allowed rampant speculation to drive house prices through the roof to compensate for modest incomes, as it tried to create a 'middle class China'. But today's apartment prices are now well beyond the reach of most ordinary Chinese, with average per capita urban incomes just $4k in 2012.

Thus the new leadership may have different priorities as official newspaper China Daily notes:

"Recent reports of the monetary authorities and the Chinese Academy of Social Sciences both say high housing prices have already seriously affected ordinary people's livelihood and undermined their capability to buy a house. The excessively high proportion of income that ordinary people have to set aside to buy a house forces them to drastically cut their consumption in other fields, which is not good for the overall economy...

"If the new leadership shows zero tolerance toward speculation and expedites efforts to implement sweeping reforms in the housing market, such as adopting harsher credit and taxation policies, to deflate the price bubble, then the market will jump back on the track of reasonable and healthy development."

Bursting the bubble will have potentially nasty affects in the short-term. But as Ma Jiantang, China's Statistics head, noted on Friday, a shift in policy "to narrow the rich-poor gap" is now essential for the country's longer-term stability.

Some trends play out tactically in days or weeks. Others move more slowly over months and years. These tend to get ignored in the modern world of twitter and 24-hour news cycles. But then, as with the sub-prime collapse in 2008, the future suddenly meets the present.

We can see the same pattern underway with the Cycle of Deflation (above). Every year or so, events move it forward towards its eventual end-point. Thus "suddenly", as it were, today's talk is all about competitive devaluations and the risk of 'beggar-my-neighbour' policies.

The reason is that Japan has now woken up to the impact of the US Federal Reserve's policy of 'quantitative easing' (QE) on its export business. As Barrons, the US investment magazine notes, the US "dollar is now down 17% against a broad range of currencies". Plus, of course, as the blog has noted before, QE has also helped to drive global oil prices to record levels - helping to add to the US's shale gas cost advantage.

The yen peaked against the US$ at ¥79 : $1 in November, and has lost value for 11 weeks since then. Clearly traders "suddenly" realised that the new Abe government would seek a major devaluation to support Japan's major exporting companies. Now the deputy economy minister has confirmed the policy, suggesting an initial target of ¥100 : $1, and adding that he would be comfortable if it fell to ¥110 : $1.

This would be a 39% decline from the peak. And, of course, "suddenly" other major governments have now become worried. The head of the German Bundesbank has warned Japan's approach is "heading into dangerous territory", whilst China has warned of "currency wars". In turn, the governor of the Bank of England warned that it is "hard to be optimistic about how easy it will be to manage the resulting tensions".

As the blog first noted 4 years ago when highlighting this insight from Comstock Partners, the only long-term solution is for policy makers to accept that 'capacity needs to be closed as fast as possible to avoid the menace of deflation'. Today, there still seems little willingness to bow to reality, and aim to rebalance supply in line with future demand.

Yet most companies still prefer to ignore the potential for protectionism and tariffs to move up on polcymakers' agendas. They thus risk "suddenly" waking up one morning to confont the massive problems these will cause for their business.

• Yet demographics mean that all the major economies have gone ex-growth. Large and increasing numbers of people are now at the age when they only need to buy replacement items. And they also have less money to spend because they are approaching retirement
• Refusing to accept this obvious fact is like trying to make water run uphill. Central banks and governments have had to massively increase debt levels to fund their stimulus programmes and/or tax cuts. Thus the US Federal Reserve now has $3tn debt compared to $900bn in 2008

The chart shows how markets have moved since the June 2008 peak:

• China has been the biggest "winner". PTA prices (red line) have benefited from two major rounds of stimulus (November 2008-December 2010, May-October 2012). But "winning" has meant creating a 'wealth effect' by boosting home prices to record levels versus earnings. As the US subprime boom showed, such credit bubbles are fun at first but unpleasant afterwards
• US financial markets have also done well. The S&P 500 index (brown) is back at the 1500 level which capped previous advances in 2000 and 2007. Oil prices have also boomed as the Fed's efforts to reduce the value of the US$ led pension funds to see oil as a 'store of value'. But high oil prices end up destroying demand and negating the stimulus impact

Sadly, policy makers' efforts are doomed to fail in the end. As the Boston Consulting Group reported recently, each new dollar of debt created today adds just 18 cents of extra GDP growth. By comparison, a new dollar of debt added 59 cents of new GDP growth in the 1960s, when populations were younger and consuming more.

In addition, the need to repay the borrowed money creates even greater headwinds for the wider economy. Comments on key product markets by senior ICIS pricing editors highlight the poor state of demand in the major economies:

• In China, Becky Zhang notes "Given the weak polyester demand, a number of Chinese polyester makers have planned plant shutdowns in January and February to relieve inventory pressure. A total of 4.6m tonne/year polyester capacity will be offline during the holiday. Operating rates on polyester staple fell sharply by 10% to 56% capacity"
• In the US, Michelle Klump reports "Higher ethylene prices are based on tight supply caused by several planned and unplanned cracker outages after "a weak fourth quarter (for PE demand)"
• In Europe, Linda Naylor confirms "It is clear to all that increases are due to high feedstock costs and production cutbacks rather than any fundamental strength in the PE market"

What happens next is anyone's guess. Will this be the time that policy markers decide to recognise reality, and give up on the myth of being able to create 'non-inflationary constant expansion" in the global economy? Or will they, as in Q2 2012, try yet another even-larger round of co-ordinated stimulus and tax cuts?

Benchmark price movements since the IeC Downturn Monitor's 29 April 2011 launch, and latest ICIS pricing comments are below:
Naphtha Europe, dark brown, down 14%. "Much of the recent surplus has been offloaded as a result of an open arbitrage to Asia"
PTA China, red, down 12%. "Majority of textile factories in China are to be closed from early February to end-February"
HDPE USA export, purple, down 11%. "Continued to firm as tight supplies helped boost prices"
Brent crude oil, blue, down 10%
Benzene NWE, green, up 8%. "Lukewarm derivative demand and global price volatility keep activity subdued"
S&P 500 stock market index, brown, up 10%

One of the great myths of recent years has been that China - whose population mainly earns less than $10/day - has somehow become 'middle class'.

It is certainly true that some of China's 1.3bn population have done well since the economy reopened to the world after Mao.

And equally true that the house price bubble created the illusion of wealth in the major cities, even though incomes remain relatively low on a global scale.

But Apple's problems with its iPhone sales highlight how reality is starting to puncture the myth:

• The iPhone 4 was launched in September 2010 at a price of $750
• In January 2010, analysts Morgan Stanley had forecast a "potential for Apple to sell 4-5 million units annually (in) an attractive addressable market of 50 million consumers"
• In July 2011, Apple said its China stores "have more than 40,000 visitors per day - four times average traffic in the US stores"
• But last week it emerged the iPhone is now in only 6th place in China's smartphone market

The reason is affordability. As Bloomberg comment, "the lack of low-cost products limits the iPhone-maker in emerging markets". Apple's market share was apparently down to 15% in Q3 2012 "as it struggled to lure consumers earning an average of $577/month".

Apple's problem highlights the dilemma facing a vast number of companies, as they slowly realise their business strategy for China has been misguided. There never were 50m 'middle class' consumers in China. Instead, as the blog has noted several times, there were 50 million who earned more than $20/day ($7600/year). This is not quite the same thing.

The real market in China is for low-cost products. Thus Apple is being outsold by local competitors offering smartphones that cost less than $100. And these phones have features required in China - such as separate SIM facilities for business and personal use - but not available with the iPhone. Apple will thus find it difficult to recover from its mistake, even though it is now apparently planning to launch a model costing between $99 - $149 later this year.

As former CEO John Sculley notes "Apple needs to adapt to where the growth is. It's got to learn how to sell products that are priced for the price point that the emerging middle class in Asia, for example, can afford."

The US auto market seems to be at the start of a 3rd period of major change since 1950. As the chart above shows, sales have still not recovered to 1995-2007 levels. Equally, the key drivers behind the earlier two phases of development seem to be unwinding:

• Post-war boom. Annual sales rose steadily until the mid-1980s. Demand increased as the US refocused on peace-time needs and its BabyBoomers (born 1946-64) began to reach car-buying age. In addition, the move to the suburbs, combined with the rise in the number of working women, led to 2-car households becoming the norm
• Added-value sales growth. Market saturation then developed from the mid-1980s. Auto manufacturers responded by increasing average prices via the introduction of value-added features. Thus Ward's Auto estimated in 2010 that the basic cost of a car had risen by ~$1k since the mid-1980s and safety costs by ~$3k, whilst "other content" costs had risen by $6k

Today, however, the Boomers are reaching retirement age, with 350k turning 65 every month for the next 18 years. So their need for new cars will reduce along with their ability to afford them. In addition, as the Pew Institute report there is "a growing preference for an urban lifestyle and amenities among Boomers and young adults".

Major manufacturers such as Daimler are already adapting to this new trend. Its Mercedes' Car2go car-sharing service allows US city-dwellers to rent 2-seater Smart cars by the minute, with one-way rentals, and also provide free parking. Whilst leading car rental firm Avis recently paid $491m to buy the car-sharing company Zipcar.

The key to success, as Mercedes have found, is to be market-focused rather than product-led. Thus the Transportation Sustainability Research Center at the University of California, Berkeley, suggest the key trend for the future may well be "the need for cheap, convenient mobility".

Are you worried about the future direction of interest rates, and what they may mean for your pension, your family and your company?

Then the chart above, showing 300 years of UK government bond yields, may just be helpful. It will probably also surprise you, as it contradicts the opinions of most 'expert commentators'. These mostly argue that western government bond yields are in a massive 'bubble' and are sure to soon increase, perhaps dramatically.

The chart is thus a demonstration of the wisdom of the British statesman Winston Churchill, who argued that "The farther back you can look, the farther forward you are likely to see".

It is based on official Bank of England data, and shows the yields paid on government debt (known as Consols) since 1703. This includes two world wars and several European wars, as well as major booms and depressions. Through it all, yields have averaged just 4.49%, very close to current levels - which average 4.61% since 2000.

Interestingly, for those who follow the blog's argument about the importance of demographics for financial markets, there was just one 50-year period when the averages moved higher. This was between 1950-99 (red highlight). Rates then shot up across the western world, as demand increased with the arrival of the BabyBoomer generation. The peak was seen in 1970-90 with rates averaging 11.1%, more than twice the historical level.

Today, of course, this surge in demand is being replaced by a decline. Deflation, not inflation, is now the key risk for the economy. More than a third of the western population is now over 50-years old, when spending reduces quite sharply as people begin to prepare for retirement.

The 'experts' are thus likely to be completely wrong in their forecast, unless the risk of default increases. Their mistake is to assume their personal experience since the 1970s represents 'normal'. They thus ignore Churchill's great insight on the value of a historical perspective.

Update. New FT video. The Financial Times has produced an excellent new video today (Friday). Norma Cohen, demography correspondent, uses the above chart to ask the question "What is Normal?". Please click here to view the interview.