The best view is always from the top of the mountain.
As the chart shows, this is where we are today - for the 4th time since the H2 2008 crisis. And just as at the previous 3 peaks, nobody seems to be noticing that demand is again weakening fast. Instead, policymakers and investors are being swept along on a wave of euphoria that assumes full recovery is finally now underway. This is the same mistake they made in March 2009 and then Q2 2010, when assuming there would either be:
• A V-shaped recovery. Markets were initally completely confident that the G-20 stimulus programme would restore constant growth
• A W-shaped recovery. When this stalled, they were sure QE2 would ensure full recovery
Since then, they have continued to make exactly the same mistake of refusing to accept that demographics drive demand:
• The ageing global population means that demand will increasingly be focused on replacement products, not new ones
• And as people reach pension age, demand will only be for affordable 'needs' - not the expensive 'wants' that drove SuperCycle growth when they were younger
The blog's launch of its Downturn Monitor on 29 April 2011 successfully coincided with the absolute peak of the post-crash rally. The aim was to warn as clearly as possible that markets were now reaching their most dangerous phase.
This is the moment when a strong and long-lasting trend changes direction. Serious amounts of money can now be lost from this point, if people continue to instead believe that the subsequent weakness is only temporary.
The issue is simple. As the blog discussed last week, many people have continued to assume that the economic SuperCycle of constant growth from 1983-2007 was 'normal'. Policymakers have encouraged this belief with their latest Twist and QE3 stimulus programmes, and the $1.1tn Chinese lending programme in advance of November's Party Congress.
Yet today, all the physical products in the Downturn Monitor portfolio remain well below their 2008 peak. Only financial products such as the S&P 500 Index have made new highs. Even more worryingly, chemical markets in general are now acting as a leading indicator to warn that underlying demand in the real economy is again weakening:
• January was very weak. New data from the American Chemistry Council showed global operating rates at just 86.3%, versus 87% in 2012 and the long-term average of 90.8%
• Similarly China reported last week that its main manufacturing Index is now back at October levels - just 0.1% above the border of expansion/decline
So everything now depends on March demand. It, like January, is normally one of the 4 strongest months in the year (along with May and October). So with Easter on the 29th, Western factories should now be working overtime. Yet there are few signs of this happening.
Instead, and confirming the underlying change in direction, political problems are rising:
• Italy failed to elect the centre-left coalition that all the experts had predicted
• Equally, the end of the US presidential election cycle has removed the economic support provided for housing and auto markets during this period
• Instead, the US seems back in political gridlock with budget cuts now taking place.
In 6 months time, therefore, the blog would not be surprised to find all the 'experts' lining up to claim, as in 2007-8, that 'nobody could have foreseen the downturn coming'. Today, as then, the blog seems to be a lonely voice, focused on what is really hapening in the real world.
Companies now need to urgently develop a contingency plan to cover a Scenario where demand fails to return for the rest of H1. In turn, they should also assume that crude oil prices will begin to return to their historical levels, below $30/bbl.
Clearly this Scenario will be very difficult to manage. We can only hope that policymakers will not continue to make the adjustment process more difficult, by refusing to accept that demographics, not stimulus programmes, drive demand.
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 17%. "Demand from the gasoline sector has weakened and petrochemical requirements for naphtha remain limited"
PTA China, red, down 13%. "Steep declines in China's PTA futures on concerns over global macro-economy and a slow recovery of downstream polyester demand"
HDPE USA export, purple, down 10%. "Latin America seeing cheaper material being offered from the Middle East"
Brent crude oil, blue, down 10%
Benzene NWE, green, up 2%. "Producer margins in Europe have come under pressure and many have elected to scale back production"
S&P 500 stock market index, brown, up 11%