Last week saw more evidence that recent weakness in chemical markets mirrors developments in the global economy. Of course, given the bullish mood amongst investors, these signs were still treated as being ‘surprises’. This is perhaps inevitable when trading is dominated by the computers owned by the high-frequency traders, rather than people.
Computers can be very useful, but they are not good at making trading decisions that require common sense, and so financial markets have missed 2 key factors:
• High oil prices have always led to recessions, because they reduce discretionary spending
• Ageing societies – such as those in the West – have lower growth because household consumption dominates GDP, and older people spend less as they retire
Thus investors were clearly shocked by Friday’s news that the US created just 88k jobs in March, and that a further 500k people left the workforce. Yet as the chart shows, labour market participation peaked back in Q1 2000, when the oldest BabyBoomers began to enter the New Old 55+ generation. Today’s rate is already back at 1979’s level.
Meanwhile, chemical markets now seem to be moving into phase 2 of their decline, with prices coming under pressure as volume weakens. Prices for naphtha (the basic chemical feedstock) fell nearly 5% last week ($42/t), even though this should be peak demand season for petchems and gasoline markets.
We can all hope that demand will suddenly return. But common sense suggests we may now have a bumpy road ahead, as financial markets begin the painful process of adjusting to developments in the real world where most of us live and work.
Benchmark price movements since the IeC Downturn Monitor’s April 2011 launch, and latest ICIS pricing comments are below:
Naphtha Europe, black, down 23%. “Petrochemical demand continues to be weak”
PTA China, down 22%. “Slow domestic/export consumption in the textile and apparel industry”
Brent crude oil, down 14%
HDPE USA export, down 13%. “Latin America is uninterested in US material, traders said, adding that Asian material is being sold there”
Benzene NWE, down 2%. “Sentiment for April is overwhelmingly bearish, with lengthening availability and slow downstream offtake keeping the outlook for the coming month subdued.”
S&P 500 stock market index, up 14%