The above chart from the excellent American Chemistry Council (ACC) weekly report may look a bit baffling at first. But it is worth attention, as it highlights the current state of the industry in real time:
- It shows US chemical shipments on the vertical axis, and change in inventory on the horizontal axis
- Both are shown on a 3 month moving average (3MMA), to allow easy identification of turning points
- It starts in the top half of the graph labelled Expansion in December 2007 (12-07)
- Shipments then reduce and inventories build to take it into Contraction by December 2008 (12-08)
- Next, inventories gradually reduce and shipments rise, taking it back to Expansion by December 2009 (12-09)
- The Expansion peak was in 2010 (12-10), and the line moved back into Contraction by December 2011 (12-11)
- Since then it hovered between Expansion and Contraction, with a short period in Expansion in 2012 (12-12)
As the ACC comment on the latest data, showing January/February 2014 moving back into Contraction mode (1-14)
“The most recent data indicate that for the industry as a whole (excluding pharmaceuticals) inventories posted a 1.9% Y/Y gain on a 3MMA basis. Inventories continued to outpace shipments (with a 1.6% Y/Y deterioration on a 3MMA basis) in this comparison. The gap (shipment growth over inventories growth) narrowed from -4.5 percentage points in January to -3.5 percentage points in February suggesting that the balance is moving away from normal. This is in the wrong direction but is far from its widest (at -21.2 percentage points) deficit gap in January 2009.”
Now, of course, this could simply be the effect of the unusually cold weather in the US, as was originally claimed by the US Federal Reserve. But the failure of the line to maintain a strongly positive position in the Expansion section since the end of 2011 is a worrying sign.
During this period, we have seen unprecedented stimulus efforts by policymakers, with interest rates at historic lows. Yet last week’s US employment report showed employment was still 2 million people lower than at the pre-Crisis peak in November 2007. Employment has never before failed to recover over a 6-year period after a downturn, since records began in 1939.
As the Wall Street Journal commented on the detail of the employment report, the number of those working part-time but wanting full-time jobs also rose by 224k to 7.4m, adding:
“The manufacturing sector, for instance, shed 1,000 positions as it struggles to gain traction as firms work through high inventories, weather-related slowdowns and a weak global backdrop.”
Seasonally, we are now moving past the strongest months of the year. Easter next week will clearly slow demand in much of the West. Hopefully, there will then be some recovery in May before the holiday period and seasonally weaker H2.
It thus looks increasingly likely that Dow CEO Andrew Liveris was right to warn back in 2012 that the chemical industry cycle would peak by 2015-16.
Against this background, it becomes increasingly hard to understand why companies are still planning to bring major new capacity online from 2017 onwards. The new capacity, coinciding with an overall market downturn, could well have a disastrous impact on operating rates and profits.