Chemicals & The Economytag:www.icis.com,2008:/blogs/chemicals-and-the-economy//882008-07-18T07:38:30ZMovable Type 4.1-enUS, Iran to meet - crude drops $20/bbltag:www.icis.com,2008:/blogs/chemicals-and-the-economy//88.345232008-07-18T04:07:58Z2008-07-18T07:38:30ZI suggested at the weekend that the Iran issue had the potential to move oil prices by $50/bbl either way. Since then, prices have fallen $20/bbl to $130/bbl, on news that the USA and Iran will meet tomorrow for the...Paul Hodges
to move oil prices by $50/bbl either way. Since then, prices have fallen $20/bbl to $130/bbl, on news that the USA and Iran will meet tomorrow for the first time in nearly 30 years. If they reach agreement on the nuclear issue, oil prices will almost certainly fall further, as the threat to exports via the Strait of Hormuz is removed. Alternatively, if diplomacy fails, any bombing by Israel of Iran could easily cause prices to soar to $200/bbl.
Maintaining price hedges against both outcomes therefore seems the right strategy for chemical companies, given this uncertainty. If prices do fall further, working capital will take a major hit, as stocks are revalued downwards. Current price initiatives will probably also collapse. Equally, if bombing does take place, and oil prices jump in response, it is most unlikely that these higher costs will be quickly recovered in product prices.]]>
Bank of England warns on inflationtag:www.icis.com,2008:/blogs/chemicals-and-the-economy//88.345062008-07-17T15:38:01Z2008-07-18T04:05:34Z Andrew Sentance of the Bank of England has issued a very clear analysis of current oil and commodity price movements. It rejects the view that these have been primarily caused by speculators. Instead, it points to increasing demand, and...Paul Hodges
Andrew Sentance of the Bank of England has issued a very clear analysis of current oil and commodity price movements. It rejects the view that these have been primarily caused by speculators. Instead, it points to increasing demand, and lack of supply, as the main causes of today's higher prices. The slide above sums up his case, showing recent increases in non-OECD oil demand in light blue, the OECD increase in dark blue, and supply increases in purple.
The diamond shape (◊) shows total demand, which has run well ahead of supply until this year. And today's supply/demand balance, is only due to the demand destruction caused by higher oil prices in OECD countries. Non-OECD demand continues at similar levels to 2005-7, due to subsidies. Sentance analyses the situation as follows:
• Investment in non-OECD countries tends to be in capital goods and new building work, 'which require large amounts of materials and energy'.
• Consumers in non-OECD countries spend more of their income on physical products, whereas OECD consumers purchase more services.
• The fall in energy prices between 1986-2003 discouraged producers from 'investing strongly in new capacity', or in developing alternatives.
Sentance concludes that it is essential to bring inflation back under control. He says central banks must now raise interest rates to 'squeeze spending and incomes', even though this will have adverse 'consequences for economic growth and employment in the short term'. Those preparing 2009 Budgets might want to include this Scenario in their planning.]]>
US drivers cut back - a littletag:www.icis.com,2008:/blogs/chemicals-and-the-economy//88.344512008-07-17T07:05:19Z2008-07-17T07:09:50ZYesterday's US government data on gasoline consumption gives the clearest picture yet of what is happening to US demand. The data compares the 4 weeks covering the July 4 Independence Day weekend, with the same period last year. And it...Paul Hodges
US government data on gasoline consumption gives the clearest picture yet of what is happening to US demand. The data compares the 4 weeks covering the July 4 Independence Day weekend, with the same period last year. And it shows gasoline demand was down just 2.1%, even though oil prices have doubled since last year. Demand still averaged 9.3 mbd, about equal to Saudi Arabia's total oil exports. This tends to confirm the argument that US demand is relatively inelastic, in the absence of a major economic recession.]]>
US$4.8 trilliontag:www.icis.com,2008:/blogs/chemicals-and-the-economy//88.343142008-07-15T12:40:44Z2008-07-15T12:46:52ZLast September, I wrote to the Financial Times on the subject of the US sub-prime disaster. At a time when many banking commentators were trying to minimise the problems, I suggested that 'a "buyer of last resort", such as the...Paul Hodges
Financial Times on the subject of the US sub-prime disaster. At a time when many banking commentators were trying to minimise the problems, I suggested that 'a "buyer of last resort", such as the Federal government, would probably need to emerge if this situation is to be stabilised'.
Yesterday, 10 months later, the government took a major step in this direction with its emergency measures to support Fannie Mae and Freddie Mac. Between them, these two lenders guarantee 47% of all US mortgages, worth $4.8 trillion. That sum is equivalent to 10% of global GDP, or more than the combined size of the French and UK economies.
This lending is supported by just $70bn in core capital. And according to Barrons, the leading US investment magazine, their total borrowings are leveraged 68-to-1. With US house prices already down 16%, its no wonder Bill Poole, a Fed Governor till last March, has said they may already be 'technically insolvent'.
At the moment, Congress is still balking at the size of the bailout underway. But I think Poole was right to say yesterday that Fannie and Freddie will be 'de facto nationalised'. They really are 'too big to fail'. But this process will take a long time, probably till after November's elections. In the meantime, chemical demand will suffer as US housing remains weak, and financial markets fragile. ]]>
Oil prices - the Iran factortag:www.icis.com,2008:/blogs/chemicals-and-the-economy//88.339772008-07-13T09:49:39Z2008-07-13T06:27:50ZOil price movements are now dominated by the Iranian nuclear issue. Last month, they jumped $10/bbl to $146/bbl as news leaked of Israel's training exercise against Iran's nuclear sites. I've since talked to someone who was on holiday in Southern...Paul HodgesOil price movements are now dominated by the Iranian nuclear issue.
Last month, they jumped $10/bbl to $146/bbl as news leaked of Israel's training exercise against Iran's nuclear sites. I've since talked to someone who was on holiday in Southern Greece at the time, and he says it was an amazing sight - the sky was apparently filled with planes.
Early last week, prices fell $10/bbl as news agencies headlined Iran's leader saying 'There won't be war'. But his actual comments made it clear that he wasn't backing down. Rather, he was arguing that the US/Israel were bluffing, and calling the threat of an attack a 'joke'.
And then prices rose $10/bbl again. First, Iran fired missiles which it claimed could reach Israel. Then the Jerusalem Post carried reports from the Iraqi Defense Ministry that the Israeli air force had been using US bases in Iraq in further training exercises.
Nothing is certain in life, except death and taxes. But it is hard to see markets becoming less volatile until either an attack takes place, or a peaceful solution is confirmed. And with oil now around $150/bbl, two quite different outcomes seem possible:
• In the event of an Israeli attack, prices might well rise $50/bbl to reach $200/bbl, at least temporarily
• But if diplomacy works, they could easily fall $50/bbl to $100/bbl
Both would cause problems from a chemical industry viewpoint. If prices do hit $200/bbl, it will be impossible to pass them on downstream. If they fall back, then working capital (stocks etc) will take a massive short-term hit. Prudent CFOs and business managers might well wish to consider hedging their purchases and sales against these possibilities. ]]>
Travel tipstag:www.icis.com,2008:/blogs/chemicals-and-the-economy//88.339712008-07-12T09:38:54Z2008-07-12T09:53:45ZBusiness travel occupies a lot of time for many people in the chemical industry. So I thought I might pass on details of 2 websites that I find particularly useful when travelling: • www.skyscanner.net does a very job of comparison...Paul Hodges
www.skyscanner.net does a very job of comparison shopping on airline fares.
• www.weatheronline.co.uk provides excellent local weather forecasts around the world.
Please add a comment below, if you'd like to pass on details of any sites that you find helpful when travelling.]]>
Dow buys Rohm & Haastag:www.icis.com,2008:/blogs/chemicals-and-the-economy//88.339042008-07-11T06:01:49Z2008-07-17T08:38:21Z Dow's potential interest in Rohm & Haas had been much rumoured since December, when it announced the petchem/polymer JV with Kuwait's PIC. That deal has yet to close, but further evidence of the growing link with Kuwait comes with...Paul Hodges
Dow's potential interest in Rohm & Haas had been much rumoured since December, when it announced the petchem/polymer JV with Kuwait's PIC. That deal has yet to close, but further evidence of the growing link with Kuwait comes with the news that the Kuwait Investment Authority will invest $1bn as part of Dow's financing for yesterday's $18.8bn purchase of R&H.]]>
BASF as a determined counter-bidder. Dow's analyst presentation, issued following the R&H announcement, therefore takes on added interest as to the rationale for the deal. It provides two insights which have wider implications for the global industry:
• It suggests that the chemical industry of the future will have 2 components. As shown in the above chart, Dow believes a 'Basics' business, growing in line with GDP, now requires feedstock integration - in Dow's case via the PIC JV. Similarly a 'Performance' business now requires a 'solution-orientation' if it is to grow at above GDP rates.
• The 2nd insight comes in a later slide, where Dow gives its view of the timing for the next chemicals cycle. This agrees with the view expressed here last month, as it suggests the 'next industry trough' will be in 2010/11, and that the 'next industry peak' will not occur until 2015.
'Game-changing' is a much over-used word. But Dow's CEO, Andrew Liveris, is certainly right to use it in relation to his deals with PIC and now R&H. Neither are without risk. But those companies currently without either upstream integration, or a strong solution-orientation downstream, must worry that Dow's analysis might prove correct. If it is, then there will be few places for them to hide during the coming downturn. ]]>
Paris fashions - 70% reductionstag:www.icis.com,2008:/blogs/chemicals-and-the-economy//88.337692008-07-09T15:22:33Z2008-07-09T17:28:47ZI'm rather surprised my fellow blogger Barbara has missed this story. Still, it shows us commercial types have a life, too. Bloomberg reports that the economic downturn has caused major cuts in the prices of 'shoes, bags and dresses' during...Paul HodgesI'm rather surprised my fellow blogger Barbara has missed this story. Still, it shows us commercial types have a life, too.
Bloomberg reports that the economic downturn has caused major cuts in the prices of 'shoes, bags and dresses' during the current Paris fashion sales. France's biggest department stores, Au Printemps and Galeries Lafayette are offering discounts of 50% to attract shoppers. Whilst smaller stores including Jonak and Maje have cut prices by 70%.
The reason, of course, is the slowing economy, and declining consumer confidence. But as the photo shows, the Grand Sale has brought the shoppers back after a very weak June. Bargains apparently include dress heels with silver straps selling for €49, down from €149.99. I'm not sure what they are, but it sounds like a bargain.]]>
European refining margins 'at 4 year low'tag:www.icis.com,2008:/blogs/chemicals-and-the-economy//88.336112008-07-08T10:44:52Z2008-07-08T10:57:14ZEuropean refining margins are falling, as the US's need for gasoline imports reduces. Margins have reached a 4 year low of minus $6.21/bbl, according to Bloomberg. And the problem is likely to get worse, as the US moves towards greater...Paul Hodges
minus $6.21/bbl, according to Bloomberg. And the problem is likely to get worse, as the US moves towards greater self-sufficiency in gasoline via refinery expansions and increased biofuels usage.
This trend could have important implications for European petchem producers, who are currently suffering from an inability to pass through today's high naphtha prices. ]]>
The 'difficult task of damage control'tag:www.icis.com,2008:/blogs/chemicals-and-the-economy//88.335942008-07-08T08:20:18Z2008-07-13T06:45:17ZThe central bankers' bank (the Bank for International Settlements) is not very impressed with its members' efforts over the past year. Readers may remember that the BIS Report last year explicitly warned of the problems that were about to occur...Paul Hodges
Report last year explicitly warned of the problems that were about to occur in world financial markets. This year's Report expresses its disappointment about what central banks did in response:]]>
Last year, it warned of a possible rise in global inflation. This year, it calls inflation 'a clear and present threat'. And the BIS worries that 'real policy rates in most countries are very low'.
• Last July, it worried that the US slowdown would prove greater than expected. This year, it forecasts 'a deeper and more protracted global downturn than the consensus view seems to expect'.
• Last July, it worried about exchange rate volatility and that the US$ might fall further than then expected. This year it notes that 'volatility picked up sharply, and was associated with a faster rate of decline of the US$'.
• Last July, it pointed out that asset markets were 'priced to perfection' and any shock might have unwelcome consequences. This year, it notes that markets have suffered from 'widespread financial stress'.
The BIS does not pull its punches about what needs to be done now. It regards inflation as the major threat to the global economy, and is prepared to temporarily sacrifice growth in order to bring it back under control. The BIS therefore calls for 'a global bias towards monetary tightening'.
It also advocates holding interest rates high until 'the global economy slows sharply and inflationary pressures recede'. Equally, it wants governments to prioritise measures to 'deal with losses and debt overhang problems as a high priority', rather than adding to current problems via 'expansionary fiscal policies'.
The BIS concludes that the world now faces 'the difficult task of damage control'. If ithe BIS analysis is right, and its track record speaks for itself, then the world faces a stark choice. On the one hand, the BIS is proposing a period of much higher interest rates, even at the risk of a short-term 'hard landing'. On the other, there is the prospect of a continuation of present central bank policies, which may result in an extended period of rising inflation and slower growth.
CFO's would be prudent to include both of these possibie scenarios in their preparations for the 2009 Budget cycle.]]>
The blog's first birthdaytag:www.icis.com,2008:/blogs/chemicals-and-the-economy//88.334432008-07-05T08:37:38Z2008-07-08T09:30:07Z Its now a year since the blog started. Since then, 213 postings have appeared. It is now read in 72 countries and 620 cities (shown above). Most encouragingly, readership continues to steadily increase. Since January, it has risen a...Paul Hodges
Its now a year since the blog started. Since then, 213 postings have appeared. It is now read in 72 countries and 620 cities (shown above). Most encouragingly, readership continues to steadily increase. Since January, it has risen a further 301%.
The blog's aim is to identify 'the influences that may shape the chemical industry over the next 12 - 18 months', and to 'develop useful insights into the key factors that will drive the industry's future performance' . So a first birthday is a suitable moment to assess its success:]]>
Oil and feedstock prices. Exactly a year ago today, the blog warned that '$100/bbl is not impossible, if current geo-political concerns continue. And today's tightly balanced market could persist to 2010'. At the time, this was very much a minority view, with oil looking weak at $70/bbl, but it has been proved right by events. Crude hit $100/bbl on 2 January (how long ago that seems!), and by 5 March the blog was warning that 'we appear to be back to the difficult times of 1973/4 and 1979/80'.
On 16 April, in noting that Russian supply is 'peaking', the blog suggested $125/bbl was likely, and warned that 'it will be very hard to pass this price on to customers'. It added that 'End-user demand will also suffer, as Western consumers are forced to spend more on fuel and energy costs'. Since then, the situation has worsened, with the blog noting on 30 April that OPEC's President was suggesting 'oil prices could hit $200/bbl'.
The credit crunch. In another early posting on 11 July, the blog worried that a sub-prime induced downturn in the US housing market could impact chemical sales into the 'key housing and autos' markets. It also suggested that chemical company M&A activity might be hit, as investors 'might no longer automatically support high-priced acquisitions of chemical companies which rely on high debt levels'.
On 31 July, it noted Henry Kaufman's suggestion that the underlying problem was that 'the distinction between liquidity and credit availability had been blurred, with 'debt being considered as an asset'. On 20 October, it quoted Warren Buffet's assessment that Bear Stearns was in major trouble, well before it went bust in March. And sadly, the blog still expects many more major problems to emerge in the banking sector, as investors worry about 'return of capital', rather than 'return on capital'.
The turn in the cycle. On 14 July, the blog noted a strong statement from the President of Wal-Mart USA, where he suggested that their new strategy was to help 'our customers find lower prices by working with key suppliers, reducing packaging and lowering distribution costs'. The blog suggested that the likely combination of rising oil prices and declining volumes meant that chemical company CEO's needed to develop and implement 'a major cost-leadership programme'
By EPCA in early October, the blog was suggesting that 'a turning point in the petchem cycle had been reached', and that 'the consensus forecast for 2008 is very optimistic'. On 22 October, it went further and argued that Boards needed to be 'putting in place contingency plans' for a downturn. It forecast this would be led by a cutback on 'non-essential spending by the US consumer' and the 'continuing problems in the banking sector that may well turn off the tap of consumer, and maybe even corporate, lending'.
The impact on margins. On 22 January, the blog reviewed the new ICIS Weekly Margin report, which showed there had been 'a dramatic fall in polymer margins towards the end of the year. It hoped that the 'massive US Fed rates cuts' and the 'proposed tax rebates' might restore consumer confidence. But as Q1 progressed, the blog worried that this looked increasingly unlikely, and on 25 May it noted that the Report was 'starting to tell a very sad story about polymer margins'.
Since then, the blog has noted Dow's leadership in raising prices on a universal basis to try and support margins. Whilst supporting the effort, it cautioned on 18 June that we may be seeing a return to 'roll-through pricing', as 'when demand drops, the 'industry quickly loses its pricing power, as plants are very slow to shutdown'. As a result, it feared that 'profits are likely to take a significant hit in the second half of the year, if demand doesn't pick up soon'.
China/India/Asia. The blog has followed Asian developments at first hand, via regular visits to this important Region. On 17 July, it worried that Western central banks were mistaken in ignoring rising inflation in food and energy costs, and suggested that 'we could easily see 5% plus inflation rates next year' as a result. By 29 October, it was noting that Chinese inflation had hit 6.5%.
Since then it has tracked China's 'export' of inflation, noting on 17 February that whilst 'China has been a major source of price deflation for the past decade', the situation was now changing, with wage inflation at 18%. By 15 June, it was observing at first hand in Thailand the social and political unrest that was caused by 'rising food and energy prices' in many parts of Asia. It also noted Morgan Stanley's suggestion that Asia's next export would be stagflation (higher inflation, lower growth).
Brighter moments. My favourite posting was on 22 August, when the blog documented how a London hedge fund manager had been 'too busy' to remember that he had parked his new £80k ($160k, €120k) blue Maserati Cambiocorsa illegally. As a result, it was nearly crushed by the authorities. The blog wondered whether anyone should 'trust their money to someone who can't look after his own car'?
Another great story was on 6 November, when the blog noted that super-model Gisele Bundchen had refused to accept US dollars for advertising Pantene shampoo, insisting on euros instead. Her gain so far is around 9% from this decision. I am glad to say that I supported her judgement at the time, commenting that 'I shall continue using her shampoo with renewed confidence'.
Summary. The aim of the blog is to identify key changes in the wider landscape, as early as possible. As a natural optimist, I would prefer these to be positive changes. Unfortunately, however, the last 12 months have instead proved to be full of warning signs. But hopefully, reading the blog has provided you with valuable insights into the underlying issues, and helped you to prepare for the problems that lie ahead.
Many thanks for your support over the past year. Lets see what the next 12 months may have in store for us! ]]>
US auto sales collapse in Junetag:www.icis.com,2008:/blogs/chemicals-and-the-economy//88.333242008-07-03T10:38:48Z2008-07-08T10:26:12Z'Collapse' is not a word that should be used lightly in business. But there is no other way to describe June's US auto sales figures:...Paul Hodges
'Collapse' is not a word that should be used lightly in business. But there is no other way to describe June's US auto sales figures:
GM reported June sales down 15%
Toyota were down 12%
Ford were down 28%
Chrysler were down 36%
These declines came in spite of the fact that 130 million households are currently receiving tax rebates (as part of the $168bn economic stimulus programme). Equally, they were not one-offs, as readers will know from previous monthly updates. They are part of a trend will has been gathering pace for the past 12 months. Ford and Chrysler seem to be in major trouble.
Optimism about a speedy rebound has also disappeared, with Ford's Group VP, Jim Farley, commenting that 'Consumer fundamentals and consumer confidence deteriorated as the first half unfolded. The economy enters the second half of the year with a notable absence of momentum and a high degree of uncertainty'.
Given the importance of auto sales to the chemical industry, H2 is shaping up to be very difficult indeed.]]>
Global chemicals growth slows to 2%tag:www.icis.com,2008:/blogs/chemicals-and-the-economy//88.331492008-07-01T08:37:52Z2008-07-01T08:44:40Z Global chemical growth seems to be slowing. Although the data can be volatile, the latest American Chemistry Council report shows it has fallen from 5.1% in June last year, to just 2% in April. As shown in the chart,...Paul Hodges
Global chemical growth seems to be slowing. Although the data can be volatile, the latest American Chemistry Council report shows it has fallen from 5.1% in June last year, to just 2% in April. As shown in the chart, Asia-Pacific growth has halved over the period to 5.2%, whilst both N America and W Europe are now seeing negative growth. Latin America and the Middle East/N Africa have been stable, but Central/Eastern European growth has fallen from 9.7% to 1.4%.]]>
Chemicals feel the wind of changetag:www.icis.com,2008:/blogs/chemicals-and-the-economy//88.330672008-06-30T04:34:32Z2008-07-08T10:15:08ZThree major themes (ICIS Jun08.pdf) emerged from our Asian Conference last week, co-organised with ICIS: • Change. The world is clearly changing very rapidly. Feedstock prices are rising. At the same time, major new capacity is starting to come on-stream...Paul HodgesICIS Jun08.pdf) emerged from our Asian Conference last week, co-organised with ICIS:
• Change. The world is clearly changing very rapidly. Feedstock prices are rising. At the same time, major new capacity is starting to come on-stream in the Middle East, and in Asia.
• Complexity. There are many more issues to understand. Feedstock costs are being affected by geo-politics, gasoline and biofuels. Whilst economic growth is also looking much weaker.
• Challenge. Over the past decade, companies have focused on optimisation within their own chosen 'silos'. This has been a very successful strategy, but it may not be sufficient for the future. ]]>
A major theme in the blog over the past year has been that companies should develop contingency plans, in case the credit crunch became something more serious. It now looks, unfortunately, as though these plans will need to be put into action.
The last major global recession took place between 1990-4. This means that nobody under 35 has any first-hand experience of what a recession is really like. In fact, only people over 45 have actually managed businesses through such a recession.
Management teams might therefore benefit from external challenge and support, as they seek to navigate through increasingly difficult conditions.
Gazprom challenges OPECtag:www.icis.com,2008:/blogs/chemicals-and-the-economy//88.330512008-06-29T10:24:44Z2008-07-08T10:12:16ZAlexei Miller, CEO of Gazprom, believes 'that OPEC doesn't have any real influence on the global oil market nowadays'. Interviewed by the Financial Times, he claimed that 'not a single decision has been passed of late that would really influence...Paul Hodges
Financial Times, he claimed that 'not a single decision has been passed of late that would really influence the global oil market'. And he repeated his suggestion that oil could reach $250/bbl, noting that 'the last 10 years saw Chinese energy consumption almost double and India's grow over 1.5-fold'.]]>
noted last year, it is worth remembering that Gazprom also has a clear ambition to grow its own presence in the petchem sector. ]]>
Andrew Sentance of the Bank of England has issued a very clear analysis of current oil and commodity price movements. It rejects the view that these have been primarily caused by speculators. Instead, it points to increasing demand, and lack of supply, as the main causes of today's higher prices. The slide above sums up his case, showing recent increases in non-OECD oil demand in light blue, the OECD increase in dark blue, and supply increases in purple.
The diamond shape (◊) shows total demand, which has run well ahead of supply until this year. And today's supply/demand balance, is only due to the demand destruction caused by higher oil prices in OECD countries. Non-OECD demand continues at similar levels to 2005-7, due to subsidies. Sentance analyses the situation as follows:
• Investment in non-OECD countries tends to be in capital goods and new building work, 'which require large amounts of materials and energy'.
• Consumers in non-OECD countries spend more of their income on physical products, whereas OECD consumers purchase more services.
• The fall in energy prices between 1986-2003 discouraged producers from 'investing strongly in new capacity', or in developing alternatives.
Sentance concludes that it is essential to bring inflation back under control. He says central banks must now raise interest rates to 'squeeze spending and incomes', even though this will have adverse 'consequences for economic growth and employment in the short term'. Those preparing 2009 Budgets might want to include this Scenario in their planning.]]>
Oil price movements are now dominated by the Iranian nuclear issue.
Last month, they jumped $10/bbl to $146/bbl as news leaked of Israel's training exercise against Iran's nuclear sites. I've since talked to someone who was on holiday in Southern Greece at the time, and he says it was an amazing sight - the sky was apparently filled with planes.
Early last week, prices fell $10/bbl as news agencies headlined Iran's leader saying 'There won't be war'. But his actual comments made it clear that he wasn't backing down. Rather, he was arguing that the US/Israel were bluffing, and calling the threat of an attack a 'joke'.
And then prices rose $10/bbl again. First, Iran fired missiles which it claimed could reach Israel. Then the Jerusalem Post carried reports from the Iraqi Defense Ministry that the Israeli air force had been using US bases in Iraq in further training exercises.
Nothing is certain in life, except death and taxes. But it is hard to see markets becoming less volatile until either an attack takes place, or a peaceful solution is confirmed. And with oil now around $150/bbl, two quite different outcomes seem possible:
• In the event of an Israeli attack, prices might well rise $50/bbl to reach $200/bbl, at least temporarily
• But if diplomacy works, they could easily fall $50/bbl to $100/bbl
Both would cause problems from a chemical industry viewpoint. If prices do hit $200/bbl, it will be impossible to pass them on downstream. If they fall back, then working capital (stocks etc) will take a massive short-term hit. Prudent CFOs and business managers might well wish to consider hedging their purchases and sales against these possibilities. ]]>
Dow's potential interest in Rohm & Haas had been much rumoured since December, when it announced the petchem/polymer JV with Kuwait's PIC. That deal has yet to close, but further evidence of the growing link with Kuwait comes with the news that the Kuwait Investment Authority will invest $1bn as part of Dow's financing for yesterday's $18.8bn purchase of R&H.]]>
BASF as a determined counter-bidder. Dow's analyst presentation, issued following the R&H announcement, therefore takes on added interest as to the rationale for the deal. It provides two insights which have wider implications for the global industry:
• It suggests that the chemical industry of the future will have 2 components. As shown in the above chart, Dow believes a 'Basics' business, growing in line with GDP, now requires feedstock integration - in Dow's case via the PIC JV. Similarly a 'Performance' business now requires a 'solution-orientation' if it is to grow at above GDP rates.
• The 2nd insight comes in a later slide, where Dow gives its view of the timing for the next chemicals cycle. This agrees with the view expressed here last month, as it suggests the 'next industry trough' will be in 2010/11, and that the 'next industry peak' will not occur until 2015.
'Game-changing' is a much over-used word. But Dow's CEO, Andrew Liveris, is certainly right to use it in relation to his deals with PIC and now R&H. Neither are without risk. But those companies currently without either upstream integration, or a strong solution-orientation downstream, must worry that Dow's analysis might prove correct. If it is, then there will be few places for them to hide during the coming downturn. ]]>
I'm rather surprised my fellow blogger Barbara has missed this story. Still, it shows us commercial types have a life, too.
Bloomberg reports that the economic downturn has caused major cuts in the prices of 'shoes, bags and dresses' during the current Paris fashion sales. France's biggest department stores, Au Printemps and Galeries Lafayette are offering discounts of 50% to attract shoppers. Whilst smaller stores including Jonak and Maje have cut prices by 70%.
The reason, of course, is the slowing economy, and declining consumer confidence. But as the photo shows, the Grand Sale has brought the shoppers back after a very weak June. Bargains apparently include dress heels with silver straps selling for €49, down from €149.99. I'm not sure what they are, but it sounds like a bargain.]]>
Its now a year since the blog started. Since then, 213 postings have appeared. It is now read in 72 countries and 620 cities (shown above). Most encouragingly, readership continues to steadily increase. Since January, it has risen a further 301%.
The blog's aim is to identify 'the influences that may shape the chemical industry over the next 12 - 18 months', and to 'develop useful insights into the key factors that will drive the industry's future performance' . So a first birthday is a suitable moment to assess its success:]]>
Oil and feedstock prices. Exactly a year ago today, the blog warned that '$100/bbl is not impossible, if current geo-political concerns continue. And today's tightly balanced market could persist to 2010'. At the time, this was very much a minority view, with oil looking weak at $70/bbl, but it has been proved right by events. Crude hit $100/bbl on 2 January (how long ago that seems!), and by 5 March the blog was warning that 'we appear to be back to the difficult times of 1973/4 and 1979/80'.
On 16 April, in noting that Russian supply is 'peaking', the blog suggested $125/bbl was likely, and warned that 'it will be very hard to pass this price on to customers'. It added that 'End-user demand will also suffer, as Western consumers are forced to spend more on fuel and energy costs'. Since then, the situation has worsened, with the blog noting on 30 April that OPEC's President was suggesting 'oil prices could hit $200/bbl'.
The credit crunch. In another early posting on 11 July, the blog worried that a sub-prime induced downturn in the US housing market could impact chemical sales into the 'key housing and autos' markets. It also suggested that chemical company M&A activity might be hit, as investors 'might no longer automatically support high-priced acquisitions of chemical companies which rely on high debt levels'.
On 31 July, it noted Henry Kaufman's suggestion that the underlying problem was that 'the distinction between liquidity and credit availability had been blurred, with 'debt being considered as an asset'. On 20 October, it quoted Warren Buffet's assessment that Bear Stearns was in major trouble, well before it went bust in March. And sadly, the blog still expects many more major problems to emerge in the banking sector, as investors worry about 'return of capital', rather than 'return on capital'.
The turn in the cycle. On 14 July, the blog noted a strong statement from the President of Wal-Mart USA, where he suggested that their new strategy was to help 'our customers find lower prices by working with key suppliers, reducing packaging and lowering distribution costs'. The blog suggested that the likely combination of rising oil prices and declining volumes meant that chemical company CEO's needed to develop and implement 'a major cost-leadership programme'
By EPCA in early October, the blog was suggesting that 'a turning point in the petchem cycle had been reached', and that 'the consensus forecast for 2008 is very optimistic'. On 22 October, it went further and argued that Boards needed to be 'putting in place contingency plans' for a downturn. It forecast this would be led by a cutback on 'non-essential spending by the US consumer' and the 'continuing problems in the banking sector that may well turn off the tap of consumer, and maybe even corporate, lending'.
The impact on margins. On 22 January, the blog reviewed the new ICIS Weekly Margin report, which showed there had been 'a dramatic fall in polymer margins towards the end of the year. It hoped that the 'massive US Fed rates cuts' and the 'proposed tax rebates' might restore consumer confidence. But as Q1 progressed, the blog worried that this looked increasingly unlikely, and on 25 May it noted that the Report was 'starting to tell a very sad story about polymer margins'.
Since then, the blog has noted Dow's leadership in raising prices on a universal basis to try and support margins. Whilst supporting the effort, it cautioned on 18 June that we may be seeing a return to 'roll-through pricing', as 'when demand drops, the 'industry quickly loses its pricing power, as plants are very slow to shutdown'. As a result, it feared that 'profits are likely to take a significant hit in the second half of the year, if demand doesn't pick up soon'.
China/India/Asia. The blog has followed Asian developments at first hand, via regular visits to this important Region. On 17 July, it worried that Western central banks were mistaken in ignoring rising inflation in food and energy costs, and suggested that 'we could easily see 5% plus inflation rates next year' as a result. By 29 October, it was noting that Chinese inflation had hit 6.5%.
Since then it has tracked China's 'export' of inflation, noting on 17 February that whilst 'China has been a major source of price deflation for the past decade', the situation was now changing, with wage inflation at 18%. By 15 June, it was observing at first hand in Thailand the social and political unrest that was caused by 'rising food and energy prices' in many parts of Asia. It also noted Morgan Stanley's suggestion that Asia's next export would be stagflation (higher inflation, lower growth).
Brighter moments. My favourite posting was on 22 August, when the blog documented how a London hedge fund manager had been 'too busy' to remember that he had parked his new £80k ($160k, €120k) blue Maserati Cambiocorsa illegally. As a result, it was nearly crushed by the authorities. The blog wondered whether anyone should 'trust their money to someone who can't look after his own car'?
Another great story was on 6 November, when the blog noted that super-model Gisele Bundchen had refused to accept US dollars for advertising Pantene shampoo, insisting on euros instead. Her gain so far is around 9% from this decision. I am glad to say that I supported her judgement at the time, commenting that 'I shall continue using her shampoo with renewed confidence'.
Summary. The aim of the blog is to identify key changes in the wider landscape, as early as possible. As a natural optimist, I would prefer these to be positive changes. Unfortunately, however, the last 12 months have instead proved to be full of warning signs. But hopefully, reading the blog has provided you with valuable insights into the underlying issues, and helped you to prepare for the problems that lie ahead.
Many thanks for your support over the past year. Lets see what the next 12 months may have in store for us! ]]>
Global chemical growth seems to be slowing. Although the data can be volatile, the latest American Chemistry Council report shows it has fallen from 5.1% in June last year, to just 2% in April. As shown in the chart, Asia-Pacific growth has halved over the period to 5.2%, whilst both N America and W Europe are now seeing negative growth. Latin America and the Middle East/N Africa have been stable, but Central/Eastern European growth has fallen from 9.7% to 1.4%.]]>