As executives return to their desks this week, they face some difficult judgement calls. As the chart shows, markets have been worryingly quiet over the summer. Most products in the IeC benchmark portfolio are unchanged. Only Brent crude oil and naphtha have moved higher - due to Syria concerns - whilst benzene has moved lower. But even these are relatively minor movements.
This highlights the key question, namely ‘What has happened to the promised increase in demand?’
Policymakers have now been promising a return to SuperCycle growth levels for 5 years, since the crisis began in September 2008. They have spent $33tn in stimulus over the period, equal to nearly half global GDP. And in May, the US Federal Reserve suggested they would now start to ‘taper’ their support, as they were confident the economy was strengthening.
The dilemma is well summarised by ICIS’ Linda Naylor, an expert assessor of European polymer markets for many years. As she wrote on Friday:
“Polyethylene and polypropylene buyers are concerned the current upward price momentum, that suggests big hikes in September, could lead to a crash in subsequent months, and they are keeping a close eye on stock.”
- Equally worrying is that the two main regional growth engines of the past 5 years have both continued to slow. India in fact appears to be edging closer to crisis, with the rupee at an all-time low against the US$. Euphoria over its prospects has been replaced by fear that its economy may continue to weaken as the politicians focus on next year’s election.
- China, meanwhile, seems set to move in a new economic direction, with a November date now set for the critical 3rd plenum economic policy session. It is difficult to understate the potential importance of this meeting, as China Daily notes: “China needs thorough reform, if not a revolution, in many key fields”.
- Nor do Western growth levels inspire much confidence. US consumer spending, 70% of the economy, was up a very modest 0.1% in July. Reported Q2 Eurozone growth of 0.3% was equally uninspiring. Even the normally optimistic European Commission highlighted ”the tentative signs of growth remain fragile“.
So what are executives to do, when faced with the need to provide budget sales numbers for 2014? Are they to propose increased volumes, and accept policymakers’ optimism at face value? This could be a career-limiting move if demand fails to grow. There are few things worse than having to defend weak performance versus budget in front of management every month.
Equally, what are senior executives to do about their proposed new investments, many of which are now coming close to final sanction? They are caught in the middle – most investors are still in a wildly optimistic mood, and so expect companies to ‘go for growth’. But investors can also change their minds, and quickly forget that they pushed for expansion if profits starts to weaken.
The chart shows latest benchmark price movements since January with ICIS pricing comments below:
Benzene Europe, green, down 14%. ”US now driving the global market direction, this means that material is likely to flow into the region”
PTA China, red, down 8%. “Textile producers held back on making purchases in the previous week because of volatilities in feedstock prices”
Naphtha Europe, black, up 2%. “Bullish sentiment has been tempered by unexceptional US gasoline blending demand and a closed Asian arbitrage window”
Brent crude oil, blue, up 2%.
US$: yen, orange, up 12%
S&P 500 stock market index, purple, up 11%