Chemicals & The Economy

Last month, the blog introduced its new Boom/Gloom Index, designed to track sentiment in financial markets. The chart above now updates it to reflect the whole of June.

The Index has continued to move up, and is close to the levels last seen in October 2007. Equally remarkable is the performance of the Green Shoots Index, which has hit another all-time high. There is little doubt that the performance of the two indices is related. Investors clearly want to believe that recovery is 'just around the corner', even though there is little hard evidence to support this belief.

Chemical companies have done well in exploiting this improved sentiment. Dow managed to raise nearly $10bn to repair its balance sheet, via asset sales and equity/debt issues. Ineos are well on the way to agreeing new covenants with their lenders. Neither looked easy to achieve before the market began its March rally.

Now, of course, comes the hard part. Will the current restocking process turn into a real recovery? The blog maintains its doubts, and fears the green shoots may wither to become yellow weeds.

Capacity closures are always hard to achieve in the petchem industry:

• First, these are a 'zero sum game' - if I shut my plant, then other producers gain in terms of overall operating rates and margins, at my expense
• Secondly, there is the integration issue. Closing a consuming plant also impacts output from an upstream plant, and may make it unviable

Dow Chemical's announcement of US capacity closures reflects this underlying logic. By shutting downstream consuming plants, and an ageing cracker, Dow will align its overall US ethylene balance. It will no longer purchase ethylene in the merchant market. Dow is therefore passing on the pain of any necessary upstream closures to its suppliers.

But Dow also added a wholly new dimension to the debate, when Brian Ames, Global Hydrocarbons Business director, spoke to ICIS' Nigel Davis. His comment, no doubt carefully prepared, was that US capacity had to shut because "demand overall is lower than it used to be".

The blog shares Ames' view. US exports must suffer, in spite of the Gulf Coast's ethane advantage, as major new capacity arrives in the Middle East and Asia. Equally, there must be doubts about underlying US demand, unless housing and autos recover quickly to their former levels.

Dow's moves are therefore likely to prompt further debate about how to best manage capacity closures during depressed market conditions.

The good news from the latest reports on US house prices and auto sales was simple - things have stopped getting worse. US house prices saw "some stabilisation in some regions" according to the S&P/Case Shiller Index for April. Whilst auto sales are clearly bouncing along the bottom, down "only" 29% in June versus May's 35% decline.

The bad news in terms of house prices was that the decline is really only just getting underway in some key markets. Chicago and New York, for example, "posted record annual declines in April", and are now down 19% and 13% respectively. By comparison, Phoenix, the worst market, was down 35% versus last April, and 54% from the 2006 peak.

Anecdotal evidence from the blog's recent New York visit certainly suggested that the city's bankers are only now beginning to sell up. Initially, those newly unemployed in Q4 had held on to property, believing that they would quickly find new employment. But now cash is getting tighter, and H2 may well see more homes up for sale.

The auto market is also showing diverging trends. Ford seems to be on a bit of a roll, as the chart shows, even though its sales were down 11%, and it claims to be reducing price incentives. Other producers fared less well, with Chrysler having to increase its incentives by up to $750.

The other good news is that auto inventories are also coming down, due to the recent plant closures. Ford is actually increasing Q3 production by 25k vehicles, having dropped inventory by 214k since last June. GM has also reduced stocks by 206k over the same period. This should certainly help hard-pressed chemical and polymer suppliers.

The chemical industry has benefited from a benign paradigm over the past 25 years:

• Demographics in the west have encouraged consumption, as the baby-boom generation reached middle age
• Globalisation meant this could be achieved at lower cost, by outsourcing production to lower-wage countries in the east
• Workers in the east saved their money, which allowed banks to make good profits by lending it back to consumers in the west

Now, all three pillars of this paradigm are under threat:

• The baby-boom generation is starting to retire and a new, more frugal, type of consumption is emerging in the west.
• Asian countries are trying to rebalance their economies, to promote more domestic demand and replace lost exports.
• And many banks are amongst the ranks of the walking wounded, unable to resume lending at previous levels

What happens next, is therefore a key question. The Bank for International Settlements (BIS), the central bankers' bank, suggests that "A financial crisis bears striking similarities to medical illness. In both cases, finding a cure requires identifying and then treating the causes of the disease."

Its analysis, in its newly-released Annual Report, suggests that investors, consumers and policymakers have been "fooled into thinking that trend growth was higher than it really was". And the BIS's conclusion is that "countries have been left with bloated financial sectors, the ability to build more cars than their populations need and, in some cases, surplus housing stocks."

Housing and auto demand have, of course, been a key support for chemical demand in the past few years. If the BIS are right, then considerable downsizing awaits the industry over the next few years, as it adjusts to the new realities.

After yesterday's post, Edwin Pang of Credit Suisse in Hong Kong has raised an interesting question over the likely rationale for China's massive increase in petchem imports, such as polyethylene (PE), in 2009.

As the chart shows, its monthly PE demand (production plus net imports), was very steady in 2007-8. It averaged 980kt in 2007, and 970kt in 2008. Yet in 2009, it has soared to record levels, averaging 1270 kt/month.

This makes no sense at all in terms of real demand. China's total exports are down 26% so far this year. And it defies belief that the government's fiscal stimulus could have caused such a massive increase in domestic demand, in so short a time.

The blog's view is that the rise is instead due to traders':

• Desire to bet on the rising oil price, and a global economic recovery
• Ability to access cheap credit, as part of the fiscal stimulus

This creates a serious risk that a vicious circle could develop, if the oil price continues to slip, and global demand does not recover in H2.

The blog therefore continues to worry, as it noted back in March, that "China may well end up having to dump this inventory on world markets, at whatever price they will fetch".

Sometimes, the blog gets lucky with its timing. A week ago, it wrote bearishly on crude oil markets, and suggested that "chemical companies need to keep a close eye on changing sentiment in financial markets". By Friday, oil prices had tumbled 11%, as the US S&P 500 index continued to weaken from its 12 June peak.

The blog does, however, feel able to give itself another pat on the back for its underlying analysis. Back in May, it thought there was a good chance that oil prices (then $60/bbl) could well see a "move towards $80/bbl by the summer, if investors remain confident". And it also cautioned that if financial market "sentiment begins to change", then a downwards move towards "$40/bbl could happen very quickly".

The driver for the changing sentiment in financial markets seems to be changes in the US$: € rate. The evidence for this is as follows:

• The US$ hit a high of 1.26 versus the euro on 3 March
• The S&P 500 bottomed 3 days later at 666.
• The euro then rallied strongly, peaking on 3 June at 1.43 versus the US$
• The S&P 500 also rallied strongly, peaking on 11 June at 956.

And as the updated chart above shows, WTI continues to track the S&P very closely. It also peaked on 11 June, at $72.69/bbl.

The blog will keep a close eye on future $:€ developments. It would welcome readers' insights as to why these might currently be so crucial.

If you want a loan, go to China. That's the message from the chart, courtesy of Credit Suisse, which shows the staggering growth in bank lending since the start of the year. Now, even the People's Bank of China is starting to get concerned.

Lending so far this year has reached $1trn, equal to a quarter of the country's annual economic output. $223bn was lent in June alone, as local banks scrambled to meet government targets by the end of the quarter.

This is not an academic issue, as far as the global chemical industry is concerned. As a senior executive from a N American company told my fellow blogger, John Richardson, "I keep returning to the fundamentals and cannot understand why prices have risen so steeply since mid-February."

But what would you do, if the government offered you a cheap loan, and you saw the oil price was rising? Would you buy polymer, and store it? Just as US homeowners took subprime loans at cheap rates and bought houses they couldn't afford, on the basis that prices couldn't fall?

The blog hates to be a party-pooper. But it is growing increasingly worried by the 'China story', and continues to fear that it will all end in tears.

Any improvement in the troubled auto sector is extremely good news for the chemical industry, after the battering of the past few months. Thus the blog welcomes news, as the chart shows, that European sales increased 2.4% in June, the first rise for over a year.

Government support for scrapping older cars has led the way. The German market is up 41% versus 2008, and may hit 4 million sales in 2009. Italy was up 12% and France 7%. But the UK and Spain were both down 16%, as homeowners worry about negative equity.

Analysts JD Power warn that the market could collapse again, if the schemes are not renewed for 2010. They suggest Germany, for example, could see a 35% fall to 2.6 million sales. But for the moment, at least, government action on both sides of the Atlantic continues to keep chemical and polymer sales moving through the auto supply chain.

In 2007, Sweden was the largest private equity market in Europe, as a percentage of the country's GDP. And the local banks lent freely, as elsewhere, to fund investments. Now they, and other Nordic banks, are struggling to minimise their losses.

According to Bloomberg, Sweden's second-biggest bank, Handelsbanken, "seized parts of Plastal Group and Plastal Holding AB on July 2, after a cash infusion from Stockholm-based private equity firm Nordic Capital failed to save the plastic-parts maker from bankruptcy".

75-year old Plastal had sales of €1.3bn in 2007, and 6000 employees in 10 countries. But since then, it has been badly hit by the downturn in its core automotive market. Now "Handelsbanken, which loaned the company 2.1 billion kronor, plans to merge Plastal's Belgian, Norwegian and Swedish units into a new company".

Sadly, Plastal is unlikely to be the only company whose ownership moves from private equity to their bankers, as the downturn continues.

As expected, Ineos have today confirmed that their proposed new covenants have now been accepted by their lenders.

For those unfamiliar with the mechanisms used in the world of high-yield debt, this does not involve any new money, or a refinancing. Instead, it means that the lenders have agreed to provide Ineos with more head-room in terms of its day to day operations. Thus the company have confirmed that there will be a "reset of the Leverage, Interest Cover and Debt Service Cover covenant levels, effective from September 2009".

This sounds like financial small print. But it means Ineos and their lenders have agreed to make an adjustment to the conditions of existing loans, rather than to change the whole capital structure of the business. So Ineos employees, as well as their customers and suppliers, will no doubt be very reassured that everything has now been finalised.

The blog is rather pleased with the performance of its new Boom/Gloom Index©, as financial markets continue to respond positively to any suggestion of "good news".

The Index is based on Ben Graham's famous concept that markets are:

• A voting machine in the short-term but
• A weighing machine in the long-term

It is therefore meant to identify whether positive or negative sentiment is driving short-term performance. And clearly, market sentiment is indeed still remarkably positive, in spite of the fact that there is no sign of any real improvement in the underlying fundamental position.

One example of the continuing influence of positive short-term sentiment can be seen in the positive reaction to the news that US housing starts rose 3.6% in June to an annualised rate of 582k. Yet as the above chart from the American Chemistry Council shows, the long-term fundamentals still remain dreadful:

• Last month's starts were 46% down on June 2008 levels, and were worth just $9.3bn in terms of chemicals sales (each house uses c$16k of chemicals) on an annualised basis.
• This compares with sales worth $35bn of chemicals during the boom period, when starts were running at a 2.2 million level in 2006/7.

The blog is very mindful of Keynes' insight that "markets can remain irrational for longer than most investors can remain solvent". It will therefore be keeping a close eye on the Boom/Gloom Index©, to identify when today's positive sentiment starts to wane.

California's Governor, Arnold Schwarzenegger, has now made a provisional agreement to reduce the State's soaring budget deficit.

Its main features are a $9bn temporary cut in the education budget, plus multi-$bn cuts in welfare and health programmes.

The only good news is that it clears the way for oil drilling to resume off the Santa Barbara coast. The ban, aimed at preserving California's beaches, had clearly become an expensive luxury for the US's most populous state.

In another sign of the economy 'bouncing along the bottom', US drivers appear to have returned to the road in recent months. Latest figures from the US Highway Administration show a 0.1% rise in vehicle miles travelled during May, the second consecutive month of positive growth since 2007.

But this is unlikely to provide much support for increasingly hard-pressed refiners. European players saw crack margins tumble 62% in Q2 to $1.20/bbl, versus an already low $3.20/bbl in Q1. Weak demand is leading to low refinery operating rates, whilst normally strong diesel margins have failed to keep up with higher crude oil prices.

US refiners are also worried, with new government proposals for carbon 'cap-and-trade', likely to increase their costs significantly. Plus, of course, new CAFE standards aim at raising average auto mileage by 42%, at the same time as legislation to promote ethanol usage is also effectively reducing oil product demand.

Last August, we published a major Study, 'Feedstocks for Profit', with refining experts Wood Mackenzie, which forecast that "competition is likely to increase within the main regions, as exporters find life much more difficult." This scenario now seems to be coming true.

In terms of chemical sales, the increased competition comes at a time when demand is already weak. But on the positive side, refiners' problems could well provide chemical companies with an opportunity to mitigate their problems, by accessing feedstocks at distressed prices.

The excellent weekly report from the American Chemistry Council (ACC) has a number of interesting insights:

• As the chart shows, global chemical production seems to have bottomed. All regions are, however, now showing a decline versus 2008.
• Separately, the ACC has updated its valuable survey of the state of inventories down the US polymer chain. This suggests that these were finally being rebuilt in May and June, for the first time in a year.
• Equally, they note that total inventory of existing US homes reduced to 9.4 months, with sales stable at similar levels to June 2008.

The latter is a critical leading indicator for chemical sales. But according to the US Realtors Association, the housing market is now seeing 2 quite different sets of drivers:

• Homes priced under $250k are selling fast, often via foreclosure, and inventories are down to 6 months
• But homes priced over $1m are seeing very little activity, with inventories now at 20 months.

The question, of course, is what happens next? The risk is that rising unemployment starts to force owners of more expensive homes to sell on a distressed basis. This would clear inventories, but would also cause further problems for the financial system, as lenders would then have to go through another round of debt write-offs.

Hopefully, these owners will be able to hang on. But even then, the chances of a V-shaped recovery remain low. As the ACC note, it is likely that "headwinds from massive deleveraging and lingering fallout from housing will offset the typical inventory bounce".

Source: Chartoftheday.com
There are "lies, damn lies, and statistics" according to Mark Twain, the famous American humorist. His argument was that statistics are often (a) untrue* and (b) used without the necessary context.

Last week provided a perfect example of the latter. As the blog's own Boom/Gloom Index© shows, sentiment is currently very positive in global financial markets. And so US markets rallied 4%, on the basis that reported company earnings were "above estimates".

Yet in context, this "outperformance" disappears. The above chart from ChartOfTheDay.com (COTD) shows 12-month, 'as reported' S&P 500 earnings, adjusted for inflation. And COTD highlight that these are now down over 98% since peaking in Q3 2007. Equally, they say this is "by far the largest decline on record (the data goes back to 1936)".

Also ignored last week was S&P's own report on Friday that forecasted total S&P 500 earnings for the 12 months to September "to be negative ($-1.01 EPS), for the first time in index history". Howard Silverblatt, S&P's senior equity analyst noted that any recovery in earnings will depend on a recovery in sales, as "you can only cut so much, and for so long".

*The blog carefully checks all those it uses with reputable sources

Its not only the blog (and fellow blogger John Richardson), who worry about the speculative frenzy underway in China, and its impact on global polymer and chemical markets.

Wu Xiaoling, former deputy governor of the central bank, has called the growth in new lending "excessive", and warned it is creating "bubbles in the property and stock markets".

Wu says China's bank lending in 2009 will be "a staggering increase of 40% of the entire stock of outstanding loans". The blog had to read this statement several times to fully grasp its importance.

It does not mean that bank lending will increase by 40% in 2009 versus 2008 - which would still be a very large increase. It means that the total value of all bank lending at the end of 2008 will have been increased by 40% during 2009.

Equally, Stephen Roach, chairman of Morgan Stanley Asia, and a long-time China bull, says he "is starting to worry" about the direction of current policy. The blog likes Roach, particularly for his accurate analysis in December 2007 that "decoupling (of China's economy from the West) is a good story, but it's not going to work going forward". He notes:

• In 2007, premier Wen Jiabao warned the economy was becoming "unstable, unbalanced, uncoordinated and ultimately unsustainable"
• Roach claims that current policies "compound the very problems the premier warned of: aiming a massive liquidity-driven stimulus at its most unbalanced sector"
• He adds that they "leave little doubt as to how bad it was in China in late 2008 and early 2009", to cause the government to react in this way

But Roach warns the loan growth is "ultimately a recipe for failure".

This week, the government began to respond to its critics, with regulators starting to insist that its Rmb 7400bn ($1080bn) of loans so far this year, be "used to bolster the real economy and not to speculate". But as we know from recent experience, bubbles on this scale don't usually subside gently. And when they burst, a lot of innocent people can get hurt.

Natural gas is a major feedstock for US chemical producers. So the problems caused by the rush to buy a fund that "invests" in the natural gas futures market, are a concern.

Olivier Jakob of Petromatrix has been warning for some time that the UNG fund was becoming too large. Investors have been so keen to bet on rising commodity markets, that it now represents 70% of open interest in the nearby futures contracts! As a result, the market itself has become dysfunctional, and UNG is being forced to close some of its positions.

The UNG problem is another example of rampant speculation in financial markets. When this happens, it usually ends in tears

This week's company results have been keenly awaited, as the industry seeks to form a view on what happens next to demand and profits.

My new IeC colleague Paul Satchell reviews them, from the point of view of a highly-experienced financial analyst, in his 'Chemicals Viewpoint'. But the blog thought it would also be interesting to simply quote the actual words used by companies themselves, as reported by ICIS news:

Akzo Nobel, "With the exception of some emerging markets, we see little significant recovery of growth," CEO Hans Wijers.
BASF, "Capacity utilisation rose from below 60% in the first quarter to slightly above 60% in the second - there was no reason why the second half would show an improvement on the first, and could possibly be worse", CFO Kurt Bock
Bayer, "The bottom of the cycle has been reached, but there is still no sign of a sustained recovery in demand," CEO Werner Wenning.
BP Chemicals, "The outlook continues to be challenging"
Celanese, "We're not seeing signs of a widespread strong recovery," CEO David Weidman
Dow, "Second-quarter operating rate was c75%, with overall demand still below last year and excess capacity remaining", CEO Andrew Liveris.
Dow Corning, "global economic recession continues to dampen demand", CFO J Donald Sheets.
DuPont, "My concern is the true demand recovery. Are we going to be bumping along the bottom," CEO Ellen Kullman
ExxonMobil Chemicals, "Q2 prime product chemical sales fell 6.7% versus 2008."
Mitsubishi, "Ethylene production in the quarter fell 13% year on year"
Olin, "Precipitous decline in caustic soda pricing and the continuation of weak demand," CEO Joseph Rupp
Reliance, "Attributed its rising margins to the fact the industry was operating on a low level of inventory, and the depreciation of rupee against the dollar".
Rhodia, "Demand in emerging countries returned to 2008 levels and customer de-stocking in Europe and North America was essentially completed," CEO Jean-Pierre Clamadieu.
Shell Chemicals, "Reduced global demand for chemical products significantly impacted the chemicals manufacturing plant utilisation rate, which dropped to 68% from 84% in Q2 2008"
Siam Cement, Thailand, "It remains to be seen what path the recovery process takes and over what period."
Sherwin Williams, The "past three years have erased a decade of growth in the coatings market", CEO Chris Connor.
Sinopec, "Mainstream ethylene plants were running at full capacity from January to June 2009. We haven't seen signs of demand falls and will keep high production".
Wacker, "Customers are still cautious about placing orders. They are ordering smaller quantities or concluding contracts with shorter durations".

Sinopec is clearly still benefiting from the Chinese "bubble". But demand elsewhere shows no sign of returning to pre-2008 levels.

The blog was also interested to see Akzo Nobel's CEO Hans Wijers adopting one of its own mottoes for the crisis, that "We hope for the best, but we prepare for the worst."

Merrill Lynch's Bob Farrell was the doyen of sentiment analysts. He famously suggested that 'bear markets have three stages - sharp down, reflexive rebound, a drawn-out fundamental downtrend'.

So far we have certainly seen the 'sharp down' period, and the blog's new Boom/Gloom Index© seems to have signalled the current 'reflexive rebound', with July's Index correctly indicating that market fundamentals and sentiment would continue to diverge:

• The former remained neutral, as shown in the round-up of company statements, and fellow-blogger John Richardson's Asian review.
• But sentiment remained very positive, as the financial sector claimed to "look through" current fundamentals to a more positive future outlook.

However, August's Index suggests they may now be starting to realign. And this is supported by the 26% decline in the Green Shoots reading.

So far, investors have been willing to assume that the current restocking process is indeed becoming a real recovery. But if Farrell's analysis is correct, they may soon start to demand more evidence to support this belief. The clear risk is that this would then lead markets to enter his next phase of 'drawn-out fundamental downturn'.

Sales of most chemicals are down due to the recession. But US sodium silicate volumes could see a massive boost, according to the Wall Street Journal. The reason is that the government has mandated its use to destroy the engines of the old cars that it buys under the subsidy scheme.

Normally 'liquid glass', as it is otherwise known, is used to repair leaking gaskets. But now, mechanics around the US are apparently queuing up for the chance to "kill" the engines. The blog was intrigued to learn that older engines take longer to die - 1988 Dodge vans take 6 minutes, but a 1999 Jeep takes only 2 minutes.

As the downturn began In July 2007, leading retailers Tesco and Wal-Mart "signalled a major shift in consumer priorities".

And Tesco added a warning that "If you don't have the basic things right, you will be talking at the edge rather than at the centre".

2 years later Procter & Gamble, one of the world's major consumer companies, has learnt this lesson the hard way. Its sales last quarter were down 4%, and profits down 18%, as they tried to maintain a premium position against low cost 'value-based' competition.

But large, successful companies like P&G don't usually just disappear. They have learnt to adapt to a changing world. And P&G's response is the the product above. It is part of a totally new strategy, which includes the European launch of a new Pampers Simply Dry product.

The new product, 'Tide Basic' no longer seeks to focus the consumer's eye on the words 'new' or 'improved'. Instead, it is a response to the growing mood of frugality amongst consumers, as discussed in the blog last month. It is 'Basic'. It has no new features. In fact, P&G has deliberately reduced its performance.

From a chemical industry viewpoint, this means it offers no scope for value-added innovation. That's very bad news for those specialty chemical companies who would normally supply the innovation. And it is further confirmation of Wal-Mart and Tesco's warning two years ago that "coming down the road is a tougher time".

The blog's favourite financial journalist, Gillian Tett, has written an excellent article summarising the similarities between today's problems in the western banking system, and those of Japan's during the 'lost decade' of the 1990's.

Her point is that although central banks are pouring money into the system via 'quantitative easing', it is clearly not reaching the wider economy. In particular, small and medium sized enterprises (SMEs), find bank loans very difficult to obtain.

Tett says she observed exactly the same issue in Japan, when working there 10 years ago. As now, politicians were jumping and down, urging the banks to lend. The government even set quotas for SME lending. But Tett describes the results as "almost comical". Her research uncovered, for example, that some banks were meeting their SME quota via loans to Toyota subsidiaries; hardly the result that was required.

Fast forward 10 years, and it seems the same process is being repeated. Large corporates, seen as low-risk, can tap markets - Dow raised $2.75bn to repay borrowings this week. But as Tett notes, "numerous small or risky corporate ventures in the West complain they cannot get loans". Consumers also struggle. And she concludes that "the pipes (of the banking system) are badly clogged, if not broken".

As a result, Tett says we are seeing a "backflow" of the liquidity created by the central bank money. It is ending up back with the government, via purchases of government bonds. In Japan, this process caused long-term interest rates to fall to 1%. The blog suspects that the same outcome could occur in some western countries too, if the plumbing of the banking system remains blocked.

As regular readers will know, the blog believes benzene is a good leading indicator for chemical demand, due to its widespread use in the industry. Last November saw its price "on the floor", indicating a major downturn, and it remained there until March, before its price began to "surge" in early April as destocking ended down the value chain.

Since then, as the chart based on ICIS pricing shows, benzene (blue line) has risen 270%, twice the oil price increase. But benzene's main derivative, styrene (red dotted line), has only increased in line with oil prices. Thus the spread between styrene and benzene prices (dotted purple line) has been squeezed.

This suggests underlying levels of chemical demand are still weak. And my IeC colleague, John Keeley, has seen this picture before, when he ran Shell's European aromatics business. His judgement is simple, "go short benzene now, unless you think styrene is about to tighten".

Cerberus' timing was clearly not very good with its Chrysler acquisition in Q3 2007.

And Steve Feinberg, Cerberus co-founder, admitted this when he told the New York Times "we were too optimistic on timing. Maybe what we should have done was not bought it."

So far, they have lost $6bn of their original $7.4bn investment. But the interview makes clear that their mistakes were not just due to timing, or over-optimism at the top of the 2003-7 credit bubble. They are also a warning sign of how new influences are starting to shape the investment landscape in the 'new reality'.

Steve Lewandowski of Total Chemicals wisely pointed out to the blog recently that Political, Environmental, Societal and Technology (PEST) issues are moving up the agenda around the world. The blog shares his view that careful study of these should be high on the list, when companies look at producing SWOT (Strengths, Weaknesses, Opportunities, Threats) analyses.

Last week, Nissan said its new Leaf model had achieved 367 mpg (156 kpl) in city driving. And this week, GM said its Volt could get an average 100 mpg rating.

Pedro Spohr of Galp in Portugal was therefore clearly right last October, when he suggested to the blog that the new range of electric cars could help to change naphtha balances. Of course, prototypes are not the same as mass motoring. But given the success of the duel-fuel Toyota Prius, and the likelihood of government incentives to keep prices low for the new cars, the blog will continue to keep a close eye on developments.

The latest OPEC monthly oil report paints a bearish picture of the market. It expects OPEC to supply 28.4mbd in 2009, down 7.5% from 2008 levels. And it forecasts more of the same for 2010, expecting to supply just 28 mbd.

Its analysis suggests that "the market is still fundamentally weak amid ample stocks of crude and products". And it notes that "US oil consumption is still showing a massive reduction". However, it says China saw "strong growth" in June "after a devastating contraction in Q1", and India is seeing "significantly higher growth".

OPEC notes that recent high levels of oil price volatility "indicates the increasing sensitivity of oil prices to conflicting economic signals". Its own view is cautious, suggesting that "expectations for a strong recovery (in the US economy) may still be premature".

Companies normally have 3 ways of pleasing investors:

• Meet or better expectations for revenue and earnings
• Cut costs to meet earnings if revenues disappoint
• Focus attention on a more favourable earnings definition

When things are going well, the first option is preferred. But under the pressure of a sustained economic downturn, it is understandable that some companies might investigate other options.

According to Paul Marson in the Financial Times, the third option is very popular at the moment. More companies than ever are focusing attention on 'operating earnings' rather than 'reported earnings'. These sound much the same, and 'operating' even seems more 'hands-on' than 'reported'.

But 'operating' earnings allow companies to exclude items that have to be included in 'reported' earnings, under GAAP accounting standards. And Marson notes the gap between the two is now at an all-time record of $54/share. Today's 'reported earnings' for the S&P 500 companies are just $7.20/share, versus $61.20/share 'operating earnings'.

Of course, if recovery were just around the corner, then companies might be right to highlight this to investors. But there is little evidence to support this argument: last month's US retail sales were down 8% versus 2008, and even retail giant Wal-Mart saw a 4% decline, reporting that "customers around the world are forced to do more with less".

Leading retailers such as Wal-Mart are an excellent leading indicator for the world economy. And as US head Eduardo Castro-Wright noted, the outlook is weak as "more people are concerned about unemployment".

In fact, Q2 saw many companies following Wal-Mart's reaction to falling sales revenues by taking the second option of cutting costs. In turn, of course, this creates a vicious circle by increasing unemployment.

At the same time, US foreclosures continue to climb. July's record volume saw 360k properties receive a foreclosure notice last month - a scary 1 in every 355 households. And of course, the consumer accounts for c70% of US GDP, and 16% of total global output. So a problem for the US consumer is a problem for the global economy.

Budget season is about to start, when chemical companies start to take a view on the outlook for 2010. Although the blog would like to be optimistic, it doubts that the optimistic view portrayed by 'operating earnings' is reliable evidence of a real recovery in the US economy.

Henry Mintzberg is one of the blog's favourite management gurus. The reason is that he understands the constraints under which most managers operate. His view is that the best managers aren't Superman or Superwoman, but "are simply ordinary, healthy people who aren't too screwed up".

In an interview with the Wall Street Journal, he outlines the 3 ways in which managers make things happen:

• Direct action. "Sometimes managers manage actions directly. They fight fires. They manage projects. They negotiate contracts."
• Via other people. "Managers build and motivate teams, and they enhance the culture and train them and do things to get people to take more effective actions."
• Via influence. "Managers manage information to drive people to take action--through budgets and objectives and delegating tasks and designing organization structure."

Mintzberg's view is that today, we "have much too much managing through information. It doesn't take genius to say: Increase sales or out you go. That's the worst of managing through information. The alternative is to give more attention to the people plane and the action plane. Even when you're managing information, you can manage in a much more nuanced way than just shooting a bunch of figures around."

Mintzberg's new book, 'Managing' has one further tip for managers. In his view, interruptions are a major cause of failing to manage properly, and "email--and especially BlackBerries in the pocket and all that--really makes it much worse".

Some 20 years ago, the blog launched ICI Watercare - which became the largest water treatment business in the chemical industry. So it has kept a close eye on opportunities in the water industry ever since.

The weak monsoon season in India highlights one such opportunity. As a new report from the UN Food and Agriculture Organisation (FAO) notes, Asia's vast irrigation systems were built 40 years ago, at the time of the 'Green Revolution'.

It says they have become "underused, poorly maintained and inefficient", and calls for major investment to finance their modernisation.

This is clearly a multi-billion dollar opportunity for the chemical industry. Such investment will not only require polymers, sealants and other products for the irrigation systems themselves. It is also an opportunity to provide much-needed expertise, to ensure the rebuilt infrastructure operates more efficiently in the future.

Many western governments have not seen manufacturing as a major priority in recent years. Instead, they have favoured moves to boost services, particularly the financial sector.

US manufacturing employment, for example, has fallen from 19.6m in 1979 to just 11.8m today - the lowest level since 1941. Over the same period, China has taken the opportunity to become the manufacturing capital of the world. Understandably, companies have preferred the more welcoming environment there, and in other emerging economies.

Now, however, there are signs that the politicians' love affair with financial services is coming to an end. British deputy prime minister, Lord Mandelson, has said the UK "needs an economy with less financial engineering and more real engineering". And according to Bloomberg, President Obama is considering the appointment of a new manufacturing "czar" to oversee the development of new policies.

The question that Boards need to consider is whether this new interest will be benign, or disruptive. The blog's worry is that the politicians will not just focus on support for the low carbon economy, and green technology. Instead, they may move to disrupt current patterns of world trade by encouraging companies to repatriate jobs to western countries.

Already the President's economics head, Larry Summers, has called for the US to become "export-oriented". And as Fred Bergsten notes in the Financial Times, Summers is sowing the seeds of future conflict by effectively arguing that "China can no longer behave like China, because the US intends to behave much more like China".

The blog is very interested to see the different outlooks being proposed by central bank heads. US Fed Chairman Ben Bernanke claimed Friday that the financial crisis was due to "panic", rather than fundamental problems such as reckless lending. As a result, with the "panic" over, he now saw the potential for securing "a sustained economic recovery".

But at the same meeting, European central bankers were more cautious, believing that the world economy still faced major problems:

• Germany's Bundesbank President Axel Weber said it was "too early to say it won't be a bumpy road ahead."
• Whilst European Central Bank President Jean-Claude Trichet was "uneasy when I see that because we have some green shoots here and there, we are already saying, 'Well after all we are close back to normal".

The underlying issue is shown in the chart from thechartstore.com, which shows "official" recessions in grey. And these are much shorter than the "real" recessions faced by industries such as chemicals. This is because the end of the destocking process produces a statistical recovery, as GDP rises in response to a renewal of underlying demand.

Thus the "official" 1980's recession ended in 1982, and that of the 1990's lasted just 6 months. Yet in reality, the chemical industry had to wait 3-4 years before a real recovery took place. And even the minor downturn of the early 2000's was far shorter officially, than in reality.

The US housing crisis is still getting worse, causing the weekend collapse of Guaranty Bank, the 11th largest US bank failure. As the Wall Street Journal notes, this marks a "new stage" in the banking crisis. Guaranty Financial had bought low quality, "toxic" mortgage loans, and its woes illustrate the "boomerang effect" that is now hitting thousands of small to medium sized US banks.

The problem, as the Independent Community Bankers of America note, is that most low quality mortgage loans "have declined in value, and it is not clear when they are going to come back in value, if at all." Whilst the Mortgage Bankers Association warn that "more than one in eight homeowners (are now) delinquent or in the foreclosure process". And Deutsche Bank calculate that 27% of US homeowners (14m) now owe more on their mortgages that their homes are worth.

Thus it is not really good news that US sales of existing homes rose in July, as shown in the above chart (blue column). For new data shows that "two-thirds of (existing) home sales are either foreclosures or banks taking a loss on the mortgage". And the 13% rise in inventory (red line) since January suggests more forced sales are in the pipeline.

Financial markets continue to believe in a quick V-shaped recovery. But wishful thinking of this kind would be dangerous for chemical company Boards. Today sees the end of an important source of recent demand, as the US "cash for clunkers" auto stimulus programme finishes. And with US banks now failing at the fastest rate since 1992, the blog fears that the outlook for demand is unlikely to see much medium-term improvement.

Our 8th European Aromatics & Derivatives conference, co-organised with ICIS, has a number of distinguished industry speakers including:

• BASF, Jaroslaw Michniuk, Group VP, Styrenics Europe
• Reliance, Rajen Udeshi, President Polyester Chain
• Shell Chemicals, Jonathan Forbes-Lane, GM, Aromatics Europe

In addition, the blog will be presenting its thoughts on "5 Key Steps to Take in 2010" to help your business cope with the twin problem of increasing capacity and slowing demand growth.

It will be held in Amsterdam on 25-26 November. The 'early bird' discount on delegate fees ends this weekend on 27 September.

For more info on the agenda and booking, please click here.

The blog was asked to write an analysis for ICIS Insight on the growing concerns about the outlook for China's economy, and their potential impact on the global chemicals inustry.

Please click here if you would like to download a pdf copy.

Further evidence of the trend towards a more frugal consumer comes from L'Oreal, the world's largest cosmetics company.

Like Procter & Gamble, it was slow to react to the trends identified by the major retail chains some 2 years ago. As a result, its profits fell 14% in H1, after decades of 10% annual increases.

And like P&G, it is undertaking a fundamental reassessment of its product portfolio and mission statement. As CEO Jean-Paul Agon notes, its new focus is on "affordable innovation" rather than "premium-isation".

Until recently, its aim was "more performance and higher prices". Now, Agon says the drive is to "create affordable ranges".

Agon also casts doubt on the idea that lipstick sales increase during a recession, as consumers seek "an inexpensive indulgence". He says this is no longer true, and that instead women want their "skin to look perfect". No doubt readers, as well as my fellow-bloggers Barbara, Malini and Doris, will be able to provide global insight on Agon's new theory?

There are clear signs in the above chart that the inventory cycle has turned positive again, as customers restock. Globally, data from the American Chemistry Council shows chemical production now down 10.5% versus last year, after being 13.4% down in March, in line with signs that GDP in the west is now stabilising.

But will we go back to the levels of demand seen in the 2003-7 Boom period? This seems unlikely. Moody's economy.com, for example, has produced interesting new data that shows the average US household's wealth has reduced from a peak of $540k to $421k in Q1. And Moody's note that consumers are becoming more frugal, due "to a general uneasiness about the future".

Of course, some argue that Asian consumers may be more extravagant. But total Asian consumption is worth just $5trn, half that of the USA. It is hard to see them spending enough to make up for slowing western growth, especially with 50% of Asia's GDP based on exports.

Many readers have been out of the office during August on a well-deserved break. As usual, the blog is therefore highlighting below the main postings over the past month, in the hope this will help you to catch up quickly on key developments - please click on the highlighted title if you want to read the original posting:

Demand has stabilised, but companies saw no sign of major upturn when reporting HI results. More questions were asked about China's apparent boom. The manipulation of 'operating earnings' to meet analyst expectations reached a new peak amongst S&P 500 companies. GDP in the west made a statistical recovery, as destocking ends, although a weak monsoon is hitting India's GDP.

End-user industries have also stabilised. Auto sales rebounded due to government subsidies, but capacity cutbacks continued, whilst a rise in foreclosures has increased US house sales.

Oil markets remain sentiment-driven and out of line with fundamentals. Benzene prices have dropped $300/t since the blog suggested they were signalling a chemical market peak. The Boom/Gloom index turned cautious, whilst US natural gas markets remain confused.

Bank lending is greatly reduced versus the Boom period, and Gillian Tett suggested their plumbing systems were still blocked. China's banks started to worry about a speculative bubble.

Consumption trends are focusing on cost and sustainability rather than innovation, with P&G introducing a Basic brand. Auto makers drive for higher fuel efficiency creates a feedstock opportunity for chemical companies, as does the need for improved irrigation systems in Asia.

Political issues will need careful attention when companies produce SWOTs in future, as politicians start to focus on real rather than financial engineering.

Prof Mintzberg had good advice for managers on coping with interruptions.

A key rule for any successful trader is that high volume is always bullish, and low volume is negative. The blog first learnt this when trading oil products in Houston, on secondment from the UK in the 1980's. And it has proved an invaluable guide ever since, in a wide range of markets.

The rationale for the rule is simple, namely that (a) more people join in a rally as it strengthens and (b) the end of a bear market is signalled by a "give up phase", when volume rises as people finally lose faith in recovery. In turn, this sets the scene for a new trend to emerge.

Thus the chart above carries a fairly clear message. Trading in linear low density polyethylene (LLDPE) on China's Dalian futures exchange leapt earlier this year, just as benzene prices also surged. By April, Dalian was trading 80 million tonnes - 4 times total annual world production. But August's trading was down 58%, whilst benzene prices have also fallen.

Clearly, the "smart money" feels that it is now time to move on, having made a healthy profit. In turn, this confirms the blog's growing sense that the speculative price rallies of the past 6 months, in commodity and financial markets, may now be coming towards an end.

One of the blog's major themes is that it fears the idea of a quick V-shaped recovery will prove wishful thinking. New figures from the Bank of England seem to bear out its caution.

The slightly complex chart shows that net UK lending for mortgages (yellow line, then red diamond) has been falling steadily since the beginning of 2008. And provisional data (not included in the chart) suggest it actually fell in July, for the first time since records began in 1993.

Overall, mortgage holders paid back £418m ($681m) more than they borrowed. This was in spite of approvals for new mortgages reaching a 17-month high. As the Guardian notes, "cautious consumers and strict lending criteria kept net lending low".

The UK's housing bubble created major demand for most chemicals. If consumers and lenders remain cautious, as seems likely, it will prove very difficult to quickly replace these volumes with other applications.

Today is Labor Day holiday in the USA. But sadly, the latest news on jobs remains deeply worrying. As the chart from the New York Times shows, jobs are still being lost (blue line), long after recovery had begun in downturns from 1974 - 2000. And far more jobs have already been lost.

Total jobs lost since the downturn started now amount to 7.4m, the largest decline in any slump since World War 2. Unemployment rose to 9.7% in August, with 14.9m Americans out of work. And a further 5m were out of work for over 26 weeks (and not counted in the 9.7% rate).

These job losses have continued even with major stimulus programmes in place. And the Financial Times reports that 40% of the 35m Americans now on food stamps (worth c$290/month) are also working part-time, which suggests that wages outside the financial sector are starting to fall.

The figures make it seem very unlikely, to the blog at least, that any "recovery" in official GDP figures will lead to a rapid rise in consumer spending. And that, at the end of the day, is the key factor that will determine chemical company sales and profits next year.

China was the first major country to feel the impact of the financial crisis. In August 2008, it noted that "the era of low costs and high growth has come to an end for China, and an economic restructuring is inevitable".

Since then, of course, China's export-dependent economy has meant it has been one of the worst-hit economies. GDP growth fell to 0% in Q4 last year, when 23m jobs were lost. Thus the blog was fascinated to read a detailed status report on the government's recovery efforts by Premier Wen Jiabao in today's China Daily.

Wen says China has so far only replaced 6.66m of the lost jobs, and warns that "to counter the global financial crisis is a long-term and arduous task". He adds that "the impact of the crisis is as strong as ever and is unlikely to disappear anytime soon". And he worries that "the stabilization and recovery of the Chinese economy is not yet steady, solid and balanced. With many uncertainties remaining in the prospects of the world economy, we still face tremendous pressure of the decline in external demand".

Last year, exports represented 37% of China's GDP, and these are still down over 20% versus 2008. Just replacing this volume is itself a major task. Wen is therefore only being realistic when he suggests that "perseverance" is required as boosting "domestic demand is a long-term strategic policy", and not the 'quick fix' assumed by financial markets.

Any executive whose business depends on China, directly or indirectly, would probably find the full speech well worth reading, for the perspective it provides on the government's current ambitions and future goals.

Globalisation flourished whilst economic growth was strong. Jobs lost in Western countries were replaced by new jobs. Whilst cheaper production offshore kept consumer prices low, as well as bringing more people into the world economy.

But today's economic downturn means this virtuous circle is turning vicious. Western countries are becoming more protectionist and hope to repatriate offshore jobs. Thus the USA, with nearly 10% unemployment, has now imposed a 35% import duty on Chinese tyres.

The justification is the 3-fold increase in China's US market share to 17% between 2004-8, whilst 4 US tyre factories shutdown. Such "market disruption" allows punitive duties to be imposed under World Trade Organisation rules. Thus. as we forecast in our landmark 'Feedstocks for Profit' Study last year, regionalism is now making a comeback.

Chemical companies supplying the tyre industry will be amongst the first to have to consider relocating their plants back home. But with high oil prices also increasing the cost of extended supply chains (as P&G have noted), many others will need similar debates as the downturn continues.

After destocking, and then restocking, what next?

The blog is a great believer in following the insights of the major retailers, who have been consistently "on the money" in their analysis. Thus it takes very seriously the comments of Wal-Mart CEO, Mike Duke, who has joined the camp of those who believe we face a "new normal" - not a return to the levels of demand seen in the 2003-7 boom period.

Interviewed by the Financial Times, Duke was quite clear about the challenges ahead. "The 'smart' shopping, the customer that really looks at price and value and quality, the deferral of purchases ... this is something that will be with us for a long, long time."

Whilst chain-store JC Penney, which targets middle- America, told investors that "consumers are acting rationally, they are paying down their debt, they are spending for things they need. And for the more discretionary thing, they are being more cautious." US Federal Reserve data confirms this trend, with consumers repaying $21bn of debt in July, the largest amount ever seen since records began in 1943.

Equally, the head of ING, the largest US thrift bank told US investment magazine Barrons that "a lot of the data is showing there's a fundamental shift in spending habits". CEO Arkadi Kuhlmann said demand for the critical Christmas sales will be relatively slow as 80% of people now believe that "having money in the bank" makes them happier than "buying something".

US private consumption is worth $10trn and accounts for 16% of total world GDP. So this change of spending habits carries enormous implications for chemical industry demand. The blog's annual Budget Outlook, due next month, will tackle the issue in more detail.

It might be interesting to see whether blog readers agree with the ING opinion poll results.  You can vote below, if you wish.

The above chart, from Moncef Hadhri's excellent monthly report from CEFIC (the European chemical industry association) provides an interesting snapshot of the state of the EU chemical industry.

On the positive side, it shows that recovery from the destocking period was well underway in June (the latest data available). Volume (green line), had risen 10% from November's low of 82. And versus June 2008, volume is now down 'only' 12.4%, versus November's 25% decline.

But on the negative side, EU volume is now down 18% versus the all-time peak of 110 seen at the end of 2007. Volume is also 10% below 2005's average level of 100. This figure will clearly improve as restocking continues down the chain. But even if we get back to the 100 level, this will still mean the industry has effectively 'lost' 3 - 4 years of growth.

US corporate earnings were down a record 89% in Q1 versus the previous 12 months at just $7. Q2 saw only a minor improvement with earnings at only $8. Its interesting, therefore, to see market expectations for 2010.

The chart is based on S&P analyst forecasts, and shows "reported earnings" (red line) are expected to recover to c$45 in 2010 as restocking continues. But this would still only take them back to 2003 levels.

Unsurprisingly, therefore, analysts are choosing to focus on "operating earnings" (blue line) which, as the blog discussed last month, exclude many negative items that have to appear in "reported earnings" under GAAP accounting standards.

This discrepancy featured in the 2000-2 downturn, but was not seen in the 1990-4 downturn. It thus usefully highlights the wide gap between those expecting a quick V-shaped recovery now restocking is underway, and those who (like the blog) fear a more prolonged U-/W-shape will develop.

Pity your poor CFO. As well as keeping cashflow positive, they are also coping with major US$ volatility. In July 2008 it was trading at $0.63: €1, but then rose 43% to $.80: €1, before declining 28% to $0.68: €1 today.

The catalyst for this volatility seems to be oil price movements. As the chart shows from a new report by the James A Baker III Institute (kindly forwarded by my fellow-blogger John Richardson), there has been an 82% inverse correlation between the US$ exchange rate index and changes in crude oil prices since 2001.

The reason is that tighter crude oil supply/demand balances have led to higher oil prices. As a result, US oil imports cost $331bn in 2008, and were 47% of the US trade deficit, versus just 19% in 2002. So last year's collapse from $147/bbl in July to December's $34/bbl was good news for the US$. But this year's recovery to $70/bbl has caused a further US$ fall.

Adding to the CFO's problem is that 2009's price movements have been purely speculative, as traders 'look through to economic recovery". OECD crude oil inventories have actually risen steadily, from 52 days in June 2008 to 57 days by December, and then to 62 days by July 2009. Equally, today's US distillate stocks are the highest since 1983, whilst European heating oil stocks are at an all-time record.

Nothing is certain in life but death and taxes. But with refining margins now only $3.42/bbl, a fall in crude prices back towards $40/bbl would not be too surprising. CFO's probably need to consider whether to hedge against this possibility, and the problems it could cause - not only with year-end inventory, but also via a "surprise rally" in the US$ as well.

ExxonMobil Chemicals was 6th in the ICIS list of Top 100 companies in 2002, during the last downturn. By last year, it had risen to 2nd place, according to the latest ICIS list.

One of the secrets of its success was set out in an interesting Bloomberg interview yesterday with Basic Chemicals SVP, TJ Wojnar. This made it clear that EM is focusing ever more intensively on optimising production along the refining/petchem interface. Thus Wojnar noted that "the company would only consider buying plants that can be connected directly to Exxon Mobil oil refineries", in order to ensure that "by-products of the refining process can be turned into chemicals when fuel demand and prices are low".

Wojnar also gave an interesting example of this strategy in action, revealing that over the past 3 weeks, EM has been increasing the amount of refinery-produced vacuum gasoil (VGO) used in ethylene/polyethylene production, due to slowing gasoline demand. As he noted, the rationale for this move was simple, that "VGO is in surplus", and so it made sense for the company to take advantage of the lower feedstock cost..

Last November, the blog suggested "4 tips for survival", based on a Financial Times series on recession survival strategy. A new article this week on 'Leadership beyond a Downturn' provides some key tips on how to manage next steps:

• Prepare for continuing downturn, but also for some growth to return.
• Look outside to see what's changed, don't rely on old strategies.
• Continue to keep a close eye on cash-flow, but loosen some constraints.
• Maintain clear and honest communication, acknowledging uncertainties.

The blog believes that the landscape has changed during the current downturn. We came into it on the back of a major boom in consumption, supported by reckless lending and borrowing. This mind-set seems unlikely to return quickly.

Instead, as the period of destocking/restocking comes to an end, we may face a "new reality". This probably involves a paradigm of higher savings, lower consumption, and global GDP growth of perhaps 2.5% rather than the historical 3.5%.

This scenario is more challenging than the consensus view of a quick V-shaped recovery. But if correct, it will also present a number of major opportunities for those companies who recognise that the basis of industry competition has now changed.

I outline some of the key issues in a new article for this week's ICIS Chemical Business. Please click here if you would like to read it. As always, I would welcome your insights on the points discussed.

China's perceived demand has been the major driving force behind the rallies in financial and commodities markets this year. It has also attracted large volumes of polymer imports. But this wishful thinking ignores the fundamental issue that China's economy is relatively small (just $4trn in a world economy of $60trn) and is 104th in terms of GDP/capita ($3k, versus $46k in the USA).

Instead, traders have focused on the opportunity to make easy money, with at least 50% of the government's $1trn lending package estimated to have been used for speculative purposes. As the blog has noted, the Dalian futures markets has been a focus for some of this activity - at its peak in April, 80 million tonnes of LLDPE was traded, versus total world annual demand of c2 million tonnes.

Since then, the bubble has begun to deflate, and September's volume continues this trend. It was down 63% from April, at 29 million tonnes, whilst PVC trading volumes crashed the same amount in just one month. Volume still has a long way to go to return to more "normal" levels, but the trend (blue line) in the chart is clear. No government, not even China's, can continue to lend 25% of its annual GDP every 6 months.

My first European Petrochemical Association (EPCA) meeting was in 1985. Since then, I have found that it provides an unique opportunity to look back over the current year, and focus on what might happen next.

Thus in October 2007, just after I began writing the blog, my discussions led me to warn that we were at "a turning point in the petchem cycle". Similarly, last year, it helped to convince me that we should expect "a multi-year downturn" of the type we had seen in the early 1980's and 1990's, and not a short V-shaped recession as in 1997-8 or 2001-2.

This year, however, I found myself sharing the consensus view. Very few people claimed to see any sign of a real upturn in critical demand areas such as housing and autos. In fact, visibility on future orders seems as low as ever, as companies focus on reducing working capital for year-end.

This led me to reflect on where we are in the industry cycle. As readers know, I have long argued that the 2007-8 period was paralleling 1979-80. Then, as recently, a major oil price rise led to a massive rise in inventory (as companies bought ahead to beat price rises), whilst end-user demand was collapsing. And the result was the same - a traumatic collapse in demand as people destocked, followed by modest restocking.

Thus I found myself thinking of parallels with 1981-2. And I was reminded of an excellent series of lectures that I attended many years ago at the IMD business school, given by Prof Casse. His summary slide, above, provides the clearest view I have ever seen of the "life-cycle" through which industries seem to pass. It features 6 distinct stages:

1. The industry enjoys some success and cautiously expands (eg 2003-4)
2. Emboldened by success, it then takes greater risks (eg 2005-7)
3. Sadly, it then hits problems, and failures occur (eg 2008)
4. It discovers there is no "quick fix" and begins to struggle (eg 2009)
5. Then, it begins to learn from its mistakes (2010 ?)
6. Finally, it discovers strengths and potentials (2011 onwards?)

This year in Berlin, I was reassured to find a number of companies, including many of the largest, starting to move into Stage 5. I found this very positive. Clearly we face major difficulties as an industry, with slow demand growth and growing over-capacity. But there will also be opportunities, for those who correctly identify the strengths that will be required to access them.

(If you would like a copy of Prof Casse's key slides, please click here)

The blog has argued for some time that the chemical industry is facing a "new normal" as growth returns to the economy. Now US Federal Reserve Governor Dan Tarullo has helpfully spelt out some important changes that he expects to occur. He notes that:

• "Just about everyone understands we will never return to the credit markets of the middle part of this decade"
• "The habit of building personal savings predominantly through appreciation of one's home is one that Americans will have to change.
• "The growth models of emerging market countries dependent on unshakeable American consumption and ever-increasing borrowing will not be sustainable even as recovery becomes more established."

Tarullo also highlights the fact that "very few people believe they understand what the "new normal" will look like once the crisis has fully passed and the economy is on a sustained recovery path." He adds that "I suspect that this uncertainty is itself an impediment to stronger growth, since it makes financial planning more difficult."

The blog will aim to answer some of these key questions, as they relate to the chemical industry, when it presents its annual Budget Outlook next weekend.

The blog is now preparing its annual Budget Outlook for 2010. Before this is published next weekend, it makes sense to assess the blog's credibility by looking back at last year's Outlook, to see how well it performed. Past performance may not be a perfect guide to future outcomes. But it is one of the best that we have.

The 2009 Outlook was titled "Budgeting for Survival". Once again, as with the 2008 Outlook, "Budgeting for a Downturn", the blog was in a small minority of forecasters who had the courage to go against the optimistic consensus. Its main forecasts were:

• "Survival, not growth, is the prudent objective".
• "2009 is likely to see global recession".
• "Chemical demand is likely to be badly hit, as it is focused on consumer spending, particularly housing/construction and autos".
• "These areas may begin to bottom during 2009, but any real recovery is unlikely before 2011".
• "Unemployment is likely to rise, and banks will be reluctant to lend".
• "Companies selling into more favoured sectors (agrochems/pharma) will probably see lower demand and pricing pressure".
• On oil prices, "the most likely outcome is that OPEC will cutback production and seek to hold $70/bbl".

The blog's aim is to 'share ideas about the influences that may shape the chemical industry over the next 12 - 18 months'. It therefore feels very proud of having correctly forecast these key areas correctly.

It hopes that its 2009 Outlook enabled readers to better prepare for today's more difficult economy.

Our major Feedstocks for Profit Study last year foresaw difficult times ahead for European refiners. Now it seems this forecast by our partners, refining experts Wood Mackenzie, is coming true.

Total, Europe's largest refiner, today reported that European refining margins fell 85% in Q3, to just $6.60/bbl, the lowest level for 7 years. And they note that demand for oil products is falling, as the economy remains slow and consumers cut back on travel.

Wood Mackenzie will give their latest insights at our European Aromatics & Derivatives Conference next month in Amsterdam, co-organised with ICIS. Attendees will also hear from several leading industry experts including speakers from BASF, Shell and Reliance.

Please click here for further details.

2010 should be a better year for the chemical industry, as demand grows in line with a recovery in global GDP.

But a quick V-shaped return to the 2003-7 Boom years in terms of volumes/margins seems unlikely.

Governments will worry about budget deficits, and may well scale down support for critical end-uses such as autos and housing. Equally, major amounts of new capacity, planned during the Boom years, will start to come onstream in the Middle East and Asia.

In effect, therefore, 2010 will be a year of transition to a 'new normal'. The blog expects global GDP growth rates to average around 2.5%- 3% for the next few years, the 1980-2000 average. This will be a significant reduction from the 3.5%-4% levels seen in the Boom years.

The rationale for this change is that we will start to see a rebalancing of the global economy. The West will see lower consumption, as people rebuild their savings, and borrow less. In turn, this will mean lower export demand for the emerging economies. The outcome will be a more sustainable world economy, but it will be a difficult journey.

Growth Forecasts. Most chemical markets are mature, and growth rates are therefore tied to GDP. The blog would therefore suggest that companies review their forecast growth rates for individual businesses in the light of their expectations for global GDP growth. One of the problems of the Boom years was that arbitrary growth rates (often of 5% or more), were assumed for many products. This also led to a perception that major amounts of new capacity were needed to meet this assumed demand. A more realistic view of demand would highlight potential problems of over-capacity, and perhaps encourage companies and governments to address the problems this will bring.

Demand. On a global basis, chemical output is now back at 2006 levels, having lost 3 years of growth. If GDP now grows as the blog expects, then demand from key sectors such as construction/housing, autos and electronics should improve next year. But the impact of government stimulus measures will make for a bumpy ride. The end of specific measures will cause major falls in perceived demand, whilst new stimuli will create short-term upward fluctuations. Excellent supply chain management will therefore be required, and Boards will need to keep a very careful eye on underlying trends.

Protectionism. Unemployment is set to become a key political issue in the West, as economies adjust to the 'new normal'. Hopefully, it should peak in 2010, but is unlikely to quickly return to previous levels. Arguments about the 'export of jobs' will therefore increase, and lead to a rise in anti-dumping activity. In turn this will cause job losses in emerging economies. Chemical companies will need to keep a close eye on the political arena, as they operate in a complex value chain, and may not otherwise appreciate the potential impact of a development in a key supplying or consuming industry.

Credit issues. A recovery in demand puts great strains on cash-flow, and many companies go bankrupt as a result. This could be a particular problem in the current recovery, given the underlying fragility of large parts of the banking system. CFOs will need to institute robust monitoring mechanisms, and be prepared to keep customers on 'cash before delivery' terms if they have grounds for concern. New customers represent a particular risk, if their credit history is weak, even though their promised volume may be attractive.

Oil prices. These are likely to remain volatile in 2010, as speculative price movements linked to traders' bets on the US$'s value will continue. Neither $100/bbl, nor a return to $40/bbl, would be a great surprise on a day-to-day basis. But underlying supply/demand balances may well remain weak in 2010, in spite of the expected economic recovery. Thus we might see prices coming under more pressure during 2010. $50/bbl might be an average price, in the absence of major geo-political events.

Overall, the blog expects 2010 to be a transition year. Full economic recovery is unlikely to take place much before the 2011/13 timeframe. But the return of economic growth will offer companies the opportunity to identify likely future market needs. Those that focus on this new reality, rather than simply hoping for a quick return to the Boom years, will position themselves for future success.

The blog's new Budget Outlook is an independent view of the key issues which will impact chemical sales and margins in 2010. Previous Outlooks have stimulated much debate within the industry. We are therefore proposing to run a free 1 hour Webinar next week for blog readers, on Thursday 29 October at 15:00 GMT (16:00 CET, 11:00 EDT, 19:00 Dubai).

The format will be a 30-40 minute presentation, followed by online discussion. The Webinar will be hosted using Microsoft Live Meeting. If you would like to join the Webinar for the presentation, please click above, and use entry code w@\!7{F For audio you will need to dial +44 1452 584201, conference code is 4389561610

If you wouild like to obtain a PDF copy of the presentation before the Webinar, please email either Simon.Robinson@icis.com or myself, adding 'Chemicals and Economy Group' in the subject line of the email. Colleagues and business partners are also very welcome to join the Webinar.

Protectionism continues to build, as unemployment rises around the world.

ICIS news reports China has imposed tariffs of up to 36% on nylon 6. BASF will suffer a 30.4% tariff on US exports, and Honeywell 36.2%. Last month, of course, the US hit China with a 35% tariff on tyres.

The threat of more duty barriers may well lead to a move to supply domestic markets with locally produced product. It therefore represents an increasing threat to the globalised business model adopted by many chemical companies.

Mid-week update. India plans 20% duty on caustic soda, ICIS news .

Protectionism will be one of the key issues discussed in the blog's free Budget Outlook webinar next week (details yesterday). If you would like to register, please email simon.robinson@icis.com or myself, with Chemicals and the Economy Group in the subject line.

"Never in the field of financial endeavour has so much money been owed by so few to so many. And, one might add, so far with little real reform."
Bank of England Governor, Mervyn King,
proposing that banks should be split up.

He argues that high-risk trading activities should be split off from low-risk utility banking (eg payment systems). Then, next time the investment bankers go bust, only their shareholders will suffer. The blog imagines most people in the chemical industry would support the Governor's argument.

9 months ago, the blog reported on the resilience being shown at the UK's Wilton chemical site, one of the world's largest.

It noted that "the power of the teams being created there could be immense".

It is therefore delighted to see that the North East Process Industry Cluster (NEPIC) is now moving forward on a new initiative aimed at creating a framework to ensure the area's survival.

This is being led by the blog's friend and former ICI colleague, Bob Coxon, supported by all the major stakeholders. He has made it clear that "any initiative had to be private- sector led. But government also had a role to play in creating a framework that made that process easier."

Hopefully, government is starting to get the message. Lord Mandelson, UK Business Secretary, has recently repeated his call for "less financial engineering and a lot more real engineering." He has also recognised that the UK is the world's 6th largest manufacturer - something that has been rather forgotten in recent years.

China will pump loans worth $1.3trn into its economy this year, equal to 1/3rd of GDP. Equally, by tying the yuan to the US$, China has achieved a major devaluation against major currencies such as the euro.

The result has been that China's Q3 GDP rose less in "nominal" terms than in "real" terms. Normally one has to deduct inflation from the "nominal" figure. But in Q3, China's "nominal" GDP growth was just 4.7%, but rose to 8.9% in "real" terms as a result of massive deflation.

When one looks at specific chemical industry statistics, the result is just as alarming. As the blog noted back in February, China allocated $58bn to accelerate the implementation of petrochemical expansion plans. And as ICIS news has reported, the new capacity is clearly not being delayed.

The two big projects for 2009, PetroChina Dushanzi and Fujian are now online. And there seems little reason to expect 2010's big projects (Sinopec Tianjin, Sinopec Zhenhai) to be delayed. Including other smaller expansions, and PetroChina Fushun in H1 2011, China will have increased ethylene capacity by 6 million tonnes in 2.5 years.

The impact is shown in the excellent new ICIS Asian weekly polyethylene margin report above. The yellow bar shows regional ethylene margins (based on NEA export netback values into PE) are already down to just $105/t. As one experienced industry observer told the blog, "2002/3 conditions are beckoning" if Western demand does not recover quickly.

The blog has learnt to be sceptical when new political leaders announce new directions for their country, after winning elections.

But its Japanese friends emphasised at EPCA that real change might be taking place in Japan, after 50 years of LDP government.

This, of course, could have a major impact on Asian politics. Japan is also the world's 2nd largest economy, with GDP of $5trn, and a leading player in global chemical markets.

New prime minister, Yukio Hatoyama, certainly set out a new direction in his speech to parliament today, claiming that "we're standing at a crossroads whether to go down a declining path by holding onto traditional thinking or find a new road fostered by new aspiration and ideas."

He also played down hopes of a quick economic recovery, noting that "the financial and economic crisis has had a serious impact on the economy and unemployment, and things are still in an unpredictable state."

The purpose of liquidity in financial markets is to enable price discovery. But when super-fast computers take over the trading, that purpose disappears. Instead, we have today's "correlation trading".

Olivier Jakob of PetroMatrix demonstrates this with the above chart, which shows Tuesday's detailed trading patterns in WTI and the Dow Jones Index. Clearly, they are simply trading in tandem on momentum, with no regard for real fundamentals or market sentiment.

This creates a very high risk scenario for chemical companies. As Jakob notes, we are now in "a situation where no single market knows exactly what it is pricing". Real supply/demand balances for crude oil are irrelevant to these computers, and the traders who drive them.

But, at some moment, probably not too far away, fundamentals will reassert themselves. Higher oil prices destroy demand. Already, consumer confidence is falling, even whilst stock markets (normally a positive driver) move higher.

Prudent CFOs and business managers should be alarmed by what is happening, and take the necessary avoiding action. It will all end in tears.

The good news is that the stabilisation seen in Q2 has been maintained. But companies remain cautious on the outlook, to judge from Q3 reports.

CEOs are sceptical about the impact of government stimulus efforts in the West, and fear demand will fall back as these end. The only optimists are in China and India.

Akzo. "Overall we don't foresee a quick recovery."
BASF. "A very slow recovery and an uneven recovery at that."
Bayer. "Too early to speak of a self-sustaining upswing in industry".
Borealis. "We are seeing a slow grind upwards".
BP. "Margins under pressure in Q4 due to new capacity".
Bunge. "Fertilizer business pressured by weak pricing."
Celanese. "See modest recovery of global economies."
Croda. "Tough market conditions".
Dow. "Do not count on material improvements in market conditions."
Dow Corning. "Still feeling the impact of the global economic recession."
DuPont. "Seeing market stabilisation and early signs of recovery".
ExxonMobil. "Earnings down by 19%, mainly due to weak margins".
WR Grace. "Dynamic and challenging market conditions."
Henkel. "We see stabilisation in our markets".
Ineos. "Challenge is the slow return of domestic demand."
Lonza. "Environment of high volatility is expected to continue".
LyondellBasell. "Outlook weakened by signs of declining US PE exports."
Nalco. "Starting to return to a growth path as economies recover."
Occidental. "Continued weakness in the US economy".
PetroChina. "Ethylene output in the 9 month period rose".
Polimeri Europa. "Prolonged weakness in industry fundamentals".
Praxair. "Demand has yet to show meaningful signs of recovery".
Quaker. "Still a great deal of uncertainty in our end markets."
Reliance. "Demand for most petrochemical products remained strong".
SABIC. "Has maintained the same operational levels."
A Schulman. "Signs of economic recovery could prove misleading."
Sherwin-Williams. No real signs of "the rumoured economic recovery."
Shell. ""Affected by the weak global economy."
Sinopec. "Demand upturn of chemical products".
Solvay. "Continued to be affected by the difficult economic environment"
Trelleborg. "Demand in many segments remained weak".
Yara. "Distributors still unwilling to build inventories for the spring".
Yule Catto. "Uncertainty remained about the global economic situation".

"Buy on the rumour, sell on the news" is the classic indication of a weak market. A lack of follow-through buying reveals that market action is not supported by fundamentals, but only by sentiment and momentum.

Friday's 2.8% fall on the US S&P 500, in reaction to Thursday's positive US GDP number, was therefore a clear sign of underlying weakness. Equally, the new IeC Boom/Gloom Index (above) shows no increase in sightings of "green shoots". And the Frugal Index has actually risen.

This conclusion is supported by the generally cautious tone of recent company results. The chemical industry is a well-known leading indicator for the global economy. If a real upturn was underway, the major western companies would have noticed it by now.

This year's speculative boom in China's economy, created by major government lending and stimulus programmes, now seems to be ending.

The evidence for this is in the above chart, showing LLDPE futures trading on the Dalian exchange. This hit 80 million tonnes (MT) in April, versus total global output for this type of polyethylene of only 2MT a year.

But volume has since been falling steadily. Last month, it was back at 13MT. And prices failed to make new highs, even though crude oil prices hit a new 2009 peak at over $80/bbl.

The blog is changing its US auto sales chart, now that a year has passed since volumes collapsed last October. Year-on-year % changes become meaningless as a result.

Instead, it will now show monthly volumes, on a total US basis (blue line) and for the major producers (dotted lines). Key highlights this month are:

• The impact of the stimulus programme has now disappeared. Total US sales were 673k vs 1007k in August.
• Ford, GM and Toyota maintained the same volumes as in October 2008, but Chrysler was down 30%.
• Looking back 2 years to October 2007, total sales were down 30%. Toyota and Ford were down c25%: GM and Chrysler were down c50%.

US autos are a critical market for chemicals. Between 1995 - 2007, over 15 million were sold each year. Last month's annualised sales rate was just 10.5 million. This implies a total market worth only $29bn, versus over $40bn in 2007. This change is one indicator of the 'new normal' that the blog expects for the next few years, as Western consumers spend less and rebuild their savings.

In these circumstances, chemical companies with the best strategy and execution ability will be relative winners, like Ford and Toyota. Those who do not adapt well risk following the fate of GM and Chrysler into bankruptcy.

Recent comments from LyondellBasell's COO, and BASF's CEO, seem worth highlighting as we come to the end of the results season.

Ed Dineen noted that China's polyethylene demand seems partly linked to changes in crude oil pricing, "It turned down somewhat as we saw crude retreat a little, but as crude turned back up toward $80/bbl, we saw the Chinese market react strongly to that".

Secondly, Jurgen Hambrecht worried that although "business had stabilised at a low level", "little attention was being paid to structural overcapacities".

Hambrecht also warned that "the effects of stimulus packages are starting to peter out, many companies are dealing with financing problems, the number of bankruptcies is increasing and unemployment is rising".

Politicians and analysts often focus on selling dreams. Otherwise, we might not be tempted to buy their promises of better times ahead.

But those running businesses have to remain realistic. BASF's CEO, Jurgen Hambrecht, did exactly that in his comments on the outlook. And the above chart, from the UK's National Institute of Economic and Social Research, provides a visual example of the current economic position.

The black line shows the change in UK GDP during the 1930/34 recession. And the thick red line shows how uncomfortably close we are to following its path in the current downturn. Only the 1979/83 recession (green line) comes close to matching it in recent times.

Of course, some countries are currently seeing better economic performance than the UK. But it is still the world's 6th largest economy, and accounts for 3% of global GDP. As such, it is not a bad benchmark.

The blog does expect GDP to begin to recover in most major economies next year. But the chart is a good reminder that it may take some years for many countries to regain the 2007 peak in terms of actual size of GDP.

The US accounts for 23% of global GDP. Its economy is 3 times larger than the No 2 country, Japan. And most critically for the chemical industry, 70% of US GDP is consumer-based.

Developments in US housing/construction, auto and electronics industries are therefore the biggest single influence on global chemical sales.

In turn, the level of unemployment is a critical influence on consumer spending. Sadly, especially for those who have lost their jobs, it rose to 10.2% in October. The broader measure, including those who have given up looking for work, or have taken part-time work, reached 17.5%, or 1 in 6 of the total workforce.

A key driver for the rally in crude oil markets has been the increase in China's demand. The assumption has been that this confirms economic growth is recovering strongly.

Crude oil imports have certainly been rising since Q1, and have recently averaged 500kbpd more than 2008. Refinery runs have also been higher.

However, new analysis by Petromatrix shows that much of this increase is flowing into oil product exports, not domestic demand. As the chart illustrates, China was importing large quantities of diesel/gasoline in the run-up to the Olympics. Now, as the new refining capacity starts up, it has become a major exporter of both diesel and gasoline.

Petromatrix conclude that China's increased refining capacity has effectively therefore "shut down refining capacity in OECD Asia", rather than feeding domestic demand. It also worries that as more refineries come online in both China and India, their output will also be exported and compete with existing "refining capacity in the Atlantic Basin".

The blog regards Wal-Mart and other major retailers as excellent leading indicators of trends in the wider economy.

It was therefore concerned to see CFO Tom Schoewe reporting today that Wal-Mart continues to "operate in a very challenging economy", where the key driver is to provide "the lowest prices to our customers around the world."

US CEO, Eduardo Castro-Wright, added that US same-store sales were actually down 0.4% versus 2008. He said the decline was "driven by price deflation that was well beyond what we had expected, across many food categories, as well as electronics."

This deflation is occurring at a time when oil prices have doubled since the start of the year. It suggests that chemical companies and polymer convertors will have a tough task pushing through price increases, especially as Wal-Mart expect price deflation to continue into Q1.

The new World Energy Outlook from the International Energy Agency (IEA) spells out two major challenges. It:

• "Identifies higher oil prices, coupled with the downturn in oil sector investment, as a serious threat to the world economy, just as it is beginning to recover".
• Suggests that "a profound transformation of the energy sector" is required, to achieve the Copenhagen goal of restricting greenhouse gases to 450ppm of CO2 equivalent.

OPEC is also now concerned about potential demand destruction at today's high oil prices. A year ago it cut output dramatically, as the financial crisis hit. But it is now tacitly encouraging more production. Quota adherence is just 61% today, versus 89% in March.

Most significantly, Saudi Arabia allocated increased supplies to Asian refiners this week. And Oil Minister al-Naimi "maintained that price extremes in the low and high ends are not sustainable", and made clear that he favours increased control of commodity exchanges to reduce today's, trader-inspired, high levels of volatility.

On the Copenhagen agenda, the IEA noted that "energy efficiency is the largest contributor, accounting for over half of total abatement by 2030 (whilst) low-carbon energy technologies also play a crucial role." This represents both a problem and an opportunity for the chemical industry.

Increased energy efficiency will require increased investment, which will not be easy in today's financial climate. But it will also drive increased use of chemicals and polymers in key industries such as housing and autos. Similarly, the process engineering skills that support the chemical industry will be vital for successful development of low carbon technologies.

Leading indicators are useful reference tools, but sometimes they can also mislead. The chart above, from the ACC's excellent weekly report, seems to provide a good example of this problem.

The blue line shows the official Leading Indicator for the OECD area plus the 6 major non-OECD countries. It suggests that a strong recovery is underway. Yet actual global industrial production (the red line) is only showing a very weak recovery.

The problem is that the OECD Indicator has to use "expectation-dependent" indicators such as share and commodity prices. These have been on a roll recently, as financial investors bet on a V-shaped recovery. But as the blog has noted, at today's levels, factors such as higher crude oil prices can actually slow down recovery, rather than support it.

In February, the blog worried that we were at the start of a cycle of deflation, as depicted in the above chart from Comstock Partners.

The warning signs were that major excess capacity was developing in many industries, and some major countries were devaluing. Since then, the US and China have both undertaken competitive devaluations versus the euro, following the lead of the UK and other countries.

Now Nobel Prize-winning economist Paul Krugman raises the same issues in the New York Times. He believes that "in recent months China has carried out what amounts to a beggar-thy-neighbor devaluation". And he worries that this is happening as US unemployment is getting worse.

Equally, China has not yet come close to replacing its 23 million job losses in Q4 last year. And the risk is that both China and the US will want to devalue against each other. As Krugman suggests, this could easily lead to "month after month of headlines juxtaposing soaring U.S. trade deficits and Chinese trade surpluses with the suffering of unemployed American workers".

Without capacity reductions, industries such as chemicals will not be able to restore their pricing power. The risk is that we will then see increased calls for protectionism in many countries. The cycle of deflation will then become unstoppable.

IPIC, Abu Dhabi's International Petroleum Investment Company, made a very shrewd acquisition of Nova at the bottom of the market, earlier this year. And now they are apparently in talks with a number of major chemicals companies about joint ventures and possibly acquisitions.

The key for IPIC is to obtain technology, with which they can go further downstream. At the moment, their focus is on the ethylene/propylene chain via Borouge, the JV with Borealis (36% owned by OMV). The driver is the IPIC decision to develop the enormous Chemaweyaat project, scheduled to start coming online in 2014.

This will be based on liquid feeds, rather than ethane. It will therefore allow Abu Dhabi to grow their propylene position, and to move into the other 'building block' products, such as butadiene, benzene and paraxylene for the first time. In turn, this drives a need for derivative technology, such as polycarbonates, where they are reportedly talking to leading player, Bayer MaterialScience about a JV.

Abu Dhabi has the world 5th largest oil and gas reserves. Its increasing interest in petchems is another sign of the Middle East's growing role in the chemical industry.

The irresponsibility of some parts of the global banking system continues to upset the blog.

First, there was news that several banks are planning to award themselves huge 'bonuses', based largely on their trading success.

Yet the money they are using for this trading has mostly been provided by central banks and governments. And it was supposed to have instead been used to support lending to companies and individuals.

The blog completely fails to see the social value in what has been achieved as a result. This trading may have been profitable for a few banks, but it has created increased volatility in currency and commodity markets, and higher prices for key products such as crude oil.

And now comes news in today's Financial Times that US Treasury bills are now paying negative rates of interest. The FT says this is because banks are wanting "to polish their balance sheets for the year end". Once again, the cash being lent out by central banks is instead being used for selfish purposes by the recipient commercial banks.

How can it be sensible for governments to allow this type of activity to continue? The chemical industry is a $3trn business worldwide. Maybe it is time for its leading CFOs to express themselves more publicly on the problems being created by some banks, and set out what needs to be done to solve them?

LyondellBasell (LBI) yesterday confirmed the rumoured takeover bid from Reliance. In a statement posted on its website, it says it has "received a preliminary non-binding offer from Reliance Industries Limited to acquire for cash a controlling interest in the company contemporaneously with the company's emergence from Chapter 11 reorganization".

It noted "this offer is in addition to the previous non-binding equity financing proposals received by the company and represents a potential alternative to the initial plan of reorganization previously filed by the company."

On Sunday morning, the Financial Times reported that Reliance are offering c$10bn for a majority stake in the world's 3rd largest chemical company. 2 weeks ago, the FT had said Reliance were considering a $6bn bid for LBI. At $10bn, the $51bn turnover LBI would certainly be a major step-out opportunity for India's leading chemical company, if problems exiting Chapter 11 can be overcome.

It would be a good fit in terms of product mix, and also provide Reliance with access to LBI's excellent technology portfolio and its global market coverage. Both could be key building blocks as Reliance moves to become a fully-fledged global player.

The deal, if consummated, would represent a remarkable contrast in fortunes. The blog first did business with Reliance in 1984, when the company was a small producer of polyester yarn. At that point, they were seeking a licence to move upstream into PTA production. Since then, of course, they have become the world's largest PTA producer, and also successfully back-integrated into refining and oil/gas production.

LyondellBasell was created via acquisition, first through the €4.4bn purchase of Basell from BASF and Shell, and then the $22bn purchase of Lyondell in July 2007. The blog commented at the time that this was an "extraordinary price for a commodity chemical business", and so it has proved, with Lyondell sadly falling into bankruptcy last January.

By coincidence, the blog's friend Rajen Udeshi, now President of Reliance's Polyester Chain and a Senior Executive VP of Reliance Industries, will be speaking on Thursday in Amsterdam at our annual European Conference, co-organised with ICIS. It should be an interesting morning.

The US housing market was worth $35bn a year in terms of chemical sales in 2006. In that Boom year, 2.2m homes were built, each using $16k of chemicals. But as the chart above shows, from the ACC's weekly report, there has been a steady decline since then.

The recent introduction of the $8000 first-time buyer tax credit may have helped to temporarily stabilise the housing market, but it hasn't led to a recovery. Starts actually fell in October to just 520k, worth just $8bn in terms of chemicals. Even in 1975, 1981 and 1991, starts only fell to 800k.

Worryingly, the delinquency rate on mortgages is still rising, reaching a record 9.6% in October, according to the Mortgage Bankers Association (MBA). And the pain of foreclosure is spreading from sub-prime loans to fixed-rate mortgages. These accounted for 44% of foreclosures in Q3.

The problem is rising and widespread unemployment. As Jay Brinkmann, the MBA chief economist told Barrons, "mortgages are paid with paychecks, not percentage point increases in GDP".

Oil markets are looking increasingly uncertain as we come to year-end.

One example of this is a new survey of floating storage by oil brokers, Gibson. This found 42 ships in use, up from the 29 seen in September. Normal levels are just 5 - 7 vessels. Another is OPEC's weaker discipline on quotas, which is now just 61% versus 89% in March.

Equally, Petromatrix note that floating stocks of oil products are also rising, with distillates storage having risen 500% in 2009 to 90mbls. And they note that floating stocks already cover all the forecast oil demand increase for 2010. As a result, refinery margins will therefore continue to be under pressure for some time.

Petromatrix also note that the floating storage represents production that has been 'brought forward' in advance of actual demand. They therefore warn that if/when financial markets tire of the "correlation trade" (selling the US$, buying crude), traders may look for a "quick exit", and put oil and product prices under pressure.

The numbers to watch seem to be $1.50 : €1.0 on the $ : € exchange rate, and $80/bbl for crude oil. Currency traders seem to find it difficult to push the euro above this level, causing oil prices to also retreat.

The excellent ICIS European margin report for ethylene shows an interesting picture this week.

The chart above compares contract margins based on naphtha (red line) and LPG (yellow line) feedstock. Both have been slipping since September, when they peaked at €398/t and €357/t respectively. This week, they are over 40% lower, at €232/t and €208/t.

This highlights the difficulty of passing through rising crude oil prices when demand growth is slow. As ICIS note, last week's $22/t rise in naphtha led to a €48/t fall in total margin.

Peter Drucker wrote some of the most useful, and widely read, books on management. The title of one of his main works, 'Management, Tasks, Responsibilities, Practices', sums up his serious approach to the role.

This month is the centenary of his birth, and the Financial Times marks it with a report of a celebratory conference held in his birthplace, Vienna.

Drucker developed 5 key questions, to help managers "look out of the window and see what is visible, but not yet realised" by their competitors:

• What is our business (or mission)?
• Who is our customer?
• What does the customer value?
• What are our results?
• What is our plan?

These questions remain as powerful today, as they were when Drucker first developed them to help managers battle the major downturn of 1974.

The blog congratulates Teesside's industry leaders on their 10-point plan to safeguard the future of the area's chemical industry.

They have worked very quickly since the initiative was established last month. Clearly, self-help can only take the industry so far, in today's crisis. It is clearly right that government support should also be provided.

The blog hopes that Lord Mandelson, Business Secretary, responds positively to the request being made.

Teesside is the centre of the UK's chemical industry, and of its process industry. A strong chemical industry on Teesside is essential, if the UK is to develop a leading position in the low carbon industries of the future.

The above chart, courtesy of trade data experts GTIS, shows the extraordinary leap in China's polyethylene imports this year.

They have surged 63% January - October in 2009 (blue bar) to 6.7 million tonnes versus 4.2 MT in 2007 (green bar) and 2008 (orange bar). Many countries have seen massive rises. Iran exported 404kt vs just 48kt in 2008; S Korea 1.2MT vs 800kt; USA 830kt vs 510kt; Saudi Arabia 678kt vs 420kt; Russia 209kt vs 52kt, Japan 464kt vs 237kt; Brazil 151kt vs 6kt.

These are not 'normal' increases. Some volume compensated for the 6% fall in H1 production. Recycling also fell earlier this year due to low prices for virgin material. But China's own production is now expanding as the major new integrated refining/petchem projects come online. The real support has come from the government's stimulus efforts, and speculation linked to the rising price of crude oil.

Will this support continue? It seems unlikely that the government can afford to add a further $1.3trn of loans into its $4.3trn economy next year. Regulators are already worrying about the potential for rising levels of bad debts. And crude prices might well fall, once currency markets tire of the "correlation trade".

The 'China effect' has been very positive for polymer sales this year. The blog worries next year may be more difficult.

In difficult times, the industry looks to the major companies for their advice. And they certainly provided this at our 8th European Conference (co-organised with ICIS),

Shell's Jonathan Forbes-Lane, European GM, focused on the "gale-force recession" now underway. He expected "prices to stay volatile and unpredictable because they were being pulled in opposing directions by fluctuations in consumer demand and feedstock supply". He also noted that Shell had "taken a creative approach to customers' credit risk by agreeing shorter payment terms, linking buying and selling contracts, or allowing customers to move from contract to spot pricing".

BASF's Jaroslaw Michniuk, Group VP, warned that "expansions in the Middle East mean there will be more interpolymer competition in the near future". He also highlighted the need for older-established businesses "to become even more innovative by focusing on new and still-expanding markets".

Reliance's Rajen Udeshi, President of the polyester chain, focused on the importance of "strong integration as a tool for ensuring its own economics". He believed that markets would become more regional in future, noting that Reliance was now "responsible for 3% of India's total GDP, and was also a substantial exporter within Asia".

The blog's own presentation highlighted lessons learned during previous downturns, particularly 1980-4. It warned against the dangers of "a purely short-term approach, as this will see companies in a vicious circle which will close down their options for the future". Please click here to download full reports of the presentations from Bloomberg and ICIS.

Wall Street may be paying out $bns in bonuses. But in the rest of the USA, rising unemployment and foreclosure are having a major impact.

In a new analysis, the New York Times reveals that the Federal food stamp programme "now helps feed one in eight Americans and one in four children".

Renamed the Supplemental Nutrition Assistance Program, it enables families and individuals to buy groceries, and averages $130 per recipient each month. Around 90% of those helped live below the poverty line ($22k for a family of 4). Blacks are worst hit, with 25% receiving aid. 15% of Latinos are being helped, and 8% of whites.

These are worrying statistics for chemical companies. Many products that we produce are discretionary rather than essential. And people who need help to buy food are focused on 'needs' rather than 'wants'. This will hold back the recent recovery in industry sales.

The American Chemistry Council's excellent weekly report contains some potentially good news on the outlook for Q1 demand.

Its detailed analysis of US polymer markets (above) suggests customers are currently reducing their inventories. CFO's presumably assume that the main impact of the housing/auto stimulus programmes is now finished, and are no doubt keen to keep working capital under control for year-end.

Thus October's end-user demand (blue line) was around 100kt higher (230 m lbs) than actual product supplied (red line). This continued the Q3 trend, when consumers reduced inventory by c70kt (150 m lbs) a month. It is quite likely this destocking will continue through December. But then the situation could change, as consumers should need to restock ahead of the usual Q2 demand peak in autos/construction.

In turn, 2010 might therefore see the industry return to its normal seasonal pattern, with a strong H1, followed by a slow Q3 holiday season, and then a final burst of activity in October/November before the Xmas break. Demand forecasting would become easier, and inventory levels could be better aligned with market needs.

The main risk to this scenario lies in crude oil markets. The blog continues to worry that today's $80/bbl price is driven by the 'correlation trade' (sell US$, buy oil and the S&P 500) and not supply/demand fundamentals. If financial markets tire of this trade, and oil prices weaken, then renewed destocking in the value chains is a real possibility.

The blog has recently noted a major change of mindset in the financial community. As the Financial Times commented this week:

"For the first time in a long time, banks seem to be in control of their lending policies. During the credit boom, the banks were held hostage by companies and private equity groups, as they chucked their balance sheet behind deals almost for free, in exchange for higher margin investment banking products such as advising on mergers and acquisitions. Today, the banks are controlling their lending decisions."

A rare interview today with INEOS CEO, Jim Ratcliffe, in The Times confirms this trend. It notes that INEOS's covenant waivers in the spring came at a high price in terms of interest charges. And Ratcliffe comments that "Under our agreement with the banks, we need to generate levels of cash which it is difficult to imagine the business doing. At some stage there has to be an asset sale".

The Times reports that "the total sum that must be raised is €700 million in two "bullet" repayments". And it says that Ratcliffe "thinks that a sum of €250 million due in January 2011 is manageable 'with a fair wind', but the second tranche in July of €450 million is 'quite a large slug'".

As Ratcliffe notes, Ineos could reasonably expect in the Boom period to make €2bn EBITDA. But this target will be hard to achieve in the future, if we are moving to a 'new normal' of slower growth and less debt, as the blog set out in its 2010 Budget Outlook. With INEOS debt at €7.3bn, the risk is that the banks will become increasingly hard taskmasters.

China's Dalian polymer futures market continues to have a major influence on regional, and global, polyethylene markets. But November's trading volume was lower than a year ago, at 25 million tonnes. This is the first negative annual growth since volume took off in June last year.

Last month, the blog noted a comment from LyondellBasell COO, Ed Dineen, that China's polyethylene (PE) market seemed to be following crude oil prices. And the chart above certainly provides support for this theory. It shows LLDPE prices (red dotted line) beginning to shadow crude oil prices (blue line) from July 2008, just after Dalian volumes began their meteoric rise from 100kt/month to April's record 80 million tonnes.

Normally, one would expect LLDPE supply/demand balances to have their own separate impact on pricing. In H1 2008, for example, LLDPE prices fell, even though crude prices were rising. Thus the chart does highlight a clear risk that part of China's massive import demand this year for PE may be linked to speculation on crude oil prices, financed by the government's massive lending programme.

We will only find out for certain, if indeed crude prices do slip from today's levels. But if the blog was a major player in PE markets, it would certainly now try and hedge this risk as far as possible.

Q3 comments from Tesco, the world's 3rd largest retailer, confirm the picture of a more frugal consumer suggested by other majors.

On the positive side, they report "a material improvement" in sales "in both Asia and Europe". And Tesco expect "this trend to continue into Q4 and beyond".

But on the less positive side, CFO Laurie McIlwee said "competition was intense in the run-up to Xmas, with promotional activity at an 'unprecedented level'". Consumers seem increasingly focused on cut-price offers, and even then they seem to be cautious in their spending.

Chemical companies supplying directly into the retail sector have been feeling this pain for some months. It has become very difficult to pass on higher oil prices, particularly with Retail Price Indices now in negative territory in many countries.

The blog is delighted to see that the UK government has now allocated GBP30m to:

"Equip Teesside to move beyond traditional heavy industry to realise its potential to be part of our low carbon manufacturing base.

"It also includes investment to establish bio-based materials, to reduce energy use of industry in the area, for initiatives on carbon capture and storage and support for technology transfer and new business practices."

It is very good news that the skills of the chemical industry are being recognised as fundamental to the development of the low carbon industries and technologies of the future. The Teesside 10-point plan, and the leadership provided by key local figures and organisations, will now have some financial firepower behind them.

For most of this year, the banks' trading houses have been earning vast sums of money promoting the "correlation trade" (sell the US$, buy crude oil, gold and equities). As a result, around 150mbbls of oil and oil products is now in floating storage, with much more on land.

Next year, the same traders and brokers might well decide there was more money to be made from promoting a different trade. They might argue, for example, that the world economy was still too fragile to afford $80/bbl oil, and instead suggest oil should be sold, not bought.

These things happen. But they can cause problems for those who have to budget forward. Governments dependent on oil revenues, for example, find it difficult to simply 'turn off the tap' on spending, just because prices on the NYMEX futures exchange have fallen.

This is behind Mexico's decision to hedge its entire crude oil output for 2010 at $57/bbl after costs. All 230m bbls have been hedged, as a follow-up to 2009's successful hedge at $70/bbl. This added $5bn to government revenues in H1, a critical sum for any organisation.

Hedging often gets a bad name, when it is used to describe a trading activity. But as Mexico's Finance Minister, Agustin Carstens, noted ""We want this as an insurance policy. If we don't collect any resources from this transaction, it's OK with us. That would mean the oil price had remained above $57 a barrel".

The blog suspects that Mexico's $1bn insurance premium for its hedging strategy may again prove money well spent in 2010.

"The most important 'fuel' of all, will be energy saved through fuel efficiency". That's ExxonMobil's (EM) latest view of the outlook for meeting world energy demand over the next 20 years.

And as Nigel Davis highlights in ICIS insight, this "will require materials and innovation - the backbone for the chemicals industry".

EM expect "40% of the world's electricity will be generated by nuclear and renewable fuels" by 2030. It also expects the carbon price to reach $30/t over the next decade, making natural gas the most economically attractive fuel for power stations. But whilst EM see wind, solar and biofuels growing at 10%pa till 2030, these will still only have a 2.5% share of global energy needs, as they start from a low base.

The key issue for the chemical industry is EM's forecast "that efficiency gains of about 300 quadrillion Btu a year can be achieved by 2030, equal to twice the growth in energy demand over the period". A potential $30/t CO2 price makes it essential for companies to reduce carbon footprint from a cost point of view. But, as Nigel comments, this could also position them "to tap into growing markets for energy efficient materials and the demand for more energy efficient products".

The blog continues to believe that the current downturn is a transition period, at least in the West, towards a more frugal way of life. And its theory has received a boost from a New York Times feature which suggests this might be happening in the bastion of consumerism, New York.

The NYT suggests the key question is whether middle class Americans "Can change their mind-sets and lifestyles in order to accumulate capital and work down debt?" And rather than focusing on upwardly-mobile lifestyles, it provides tips on how to be more frugal.

It says half-way measures might be to "make an effort to live off cash, not credit cards", as "your spending may seem more real when green pieces of paper disappear, than it does when you swipe a card". And it notes that previously "upwardly mobile Americans (are becoming prepared) to defer gratification, another necessary mind-set change".

It also reports a Pew Research Center survey found that since 2006, Americans have begun to separate "need" from "wants". Only 47% now think microwave ovens are a necessity, vs 68% in 2006: 54% now "need" air-conditioning vs 70%; 66% "need" clothes dryers vs 83%.

Currently, US consumer spending accounts for 16% of global GDP, and is the single most important driver for chemical demand. Companies therefore need to keep a very close eye on the potential implications of such a major shift in US consumer culture.

EU auto sales continued to improve in November versus 2008, with total volumes up 27%. But as the chart from ACEA (EU Automobile Manufacturers Assoc) shows, they were still lower than in 2007.

The difference between sales in W Europe, and in the new EU Central European states (EU CE), was quite dramatic. Sales in the former rose 31% in November, whilst they fell 17% in the latter.

Overall, total EU sales are now down 2.8% versus 2008. W European sales are only down 1%, thanks to the major stimulus programmes adopted in many countries. But EU CE sales are down 27%.

The key question, of course, is the 2010 outlook? Many fear that subsidies have only brought forward planned sales, and not created genuinely new demand. If they are right, and governments prove unwilling, or unable, to further subsidise sales, then chemicals volumes in this important market may well come under further pressure.

Financial crises take time to mature. Yet until the end is nigh, apologists will insist that nothing needs to change. Thus valuable time is wasted.

Last year, Iceland was the obvious example of this problem. Now it is Greece, a eurozone member.

Back in January, S&P had downgraded Greece's bonds, due to debt concerns. And they were already yielding record amounts versus the German benchmark. Since then, nothing has really changed, and there is talk that Greece may soon need a rescue package from the International Monetary Fund (IMF).

Will Greece now move to tackle its high debt, low growth problem? Probably not, as the government is already facing major social unrest. But as Germany's Budget spokesman, Norbert Barthie notes, Greece is just "the tip of the iceberg" within the eurozone. Portugal, Ireland, Italy and Spain all face similar problems, whilst Austria had this week to nationalise its 6th largest bank following losses in E Europe.

The concern, as the Wall Street Journal notes, is "that the Continent's economic recovery could be derailed." Already, it says, the growing crisis is forcing "financially stronger countries to think about how to shore up other members of the euro zone against a potential financial-market rout". This may still be a relatively small risk, but it is no longer one that can be safely ignored by the chemical industry.

P&G's new CEO, Robert McDonald, has "warned of the risks to global growth posed by increased protectionism in the US and around the world, stemming from the global recession".

interviewed by the Financial Times, McDonald noted that 20% of P&G's jobs in the US depend on their international business, which accounts for 60% of P&G's annual sales of $79bn. And he went on to argue that "it is short-sighted for the US government to think they can create jobs at home by hurting our ability to compete internationally."

Interestingly, and in a positive sign for chemical industry recruitment, McDonald added that the downturn was changing the attitudes of potential recruits to P&G. He noted that "I'm finding from students that they want to live a life with meaning. Making products or marketing brands that improve people's lives is more meaningful than being involved in a financial transaction that creates no value."

OPEC's Angola meeting lasted just 70 minutes yesterday. Before the session, Saudi Oil Minister al-Naimi noted that prices were at their target level of $70-$80/bbl, and called this "a perfect price".

However, the underlying supply/demand balance remains fragile. As the chart from Nomura shows, current OECD oil/product inventories are well above normal levels. Whilst today's high prices have tempted many OPEC members to increase output above their production quota.

Quota compliance is now down to c60%, compared to 80% in H1, when prices were below $50bbl. Nigeria is pumping 1.96mbd (quota 1.67mbd), Iran 3.78mbd (3.34mbd), Venezuela 2.24mbd (1.99mbd). Equally, geo-political issues are less important, at least temporarily. Hostilities in the Niger delta are greatly reduced, whilst Iran's nuclear ambitions have also moved off the front pages.

OPEC's own statement also showed it remains aware that supply is well ahead of current demand levels, noting that "it is not yet clear how strong or durable the recovery might be" and adding that "the world (was) still faced by shrinking industrial production, low private consumption and high unemployment".

The blog is now 2.5 years old. Readership continues to grow, both within the chemical industry and its investment community. It is now read in 121 countries, and 2735 cities, versus 89 countries and 1244 cities a year ago. Readers are also very loyal, with 23% reading it twice a week.

Its readership covers all the major areas of chemical production. The UK, USA, Germany, Netherlands, Turkey, China, India, France, Singapore, Belgium make up the Top 10 countries, with Japan, S Korea, Italy, Brazil, Saudi Arabia and Russia all featuring in the top 25. English is a 2nd language for most readers, who speak 55 different first languages.

The blog aims "to share ideas about the influences that may shape the chemical industry over the next 12 - 18 months", and so it focuses on:

• The major companies
• Key consumer industries, including housing and autos
• Economic data such as GDP, industrial production and exports
• Developments in oil and financial markets

698 posts have been made in total, with 142 written in the past 6 months.

The blog's annual Budget Outlook continues to attract strong interest. This year's, 'Budgeting for a New Normal', was also the subject of a well-supported Webinar, and will shortly be published as a White Paper.

Thank you very much for your continued support.

China's bank lending has rocketed this year, as the government attempts to maintain employment in the face of a major collapse in vital export volume. New figures show it had reached $1.35bn by the end of November. By comparison, lending in the whole of 2007 was just $0.5bn.

As the Wall Street Journal notes, this has been "one of the biggest credit expansions in history". And it is all the more remarkable as a percentage of China's GDP ($4.23trn). In addition, of course, China also launched a $580bn stimulus programme, aimed at speeding up construction of new refinery/petchem plants, and major infrastructure programmes.

Yet in terms of virgin polymers, the impact has been quite variable. As the chart shows, based on an excellent ICIS analysis by Becky Zhang of CBI, the main feature in 2009 has been a 27% rise in PE consumption (blue line) versus 2007, and a 22% rise in polypropylene (red line), both after a flat 2008. But PVC volumes (black line) were flat versus 2007, whilst polystyrene (green line) and ABS (purple line) were 4% higher.

Equally, CBI's figures also show that China's domestic recycling sector has been rising strongly over the past 2 years. 2009's imports of recycled plastic at 6.95m tonnes were equal to 2007 levels, but domestic recycled volumes rose 24% to total 9.92m tonnes.

Over the past century, many parts of the world have seen an extraordinary increase in living standards and life expectancy.

As the Financial Times notes, we used to marry at c15 years, become grandparents at c30 and die at c45. Yet whilst 15 - 30 - 45 is still the demographic cycle in the poorest countries, developed economies are now moving to a 25 - 50 - 75 cycle, and some to a 30 - 60 - 90 cycle.

The chemical and pharma industry has played a major role in enabling this improvement to take place. Its products are critical for the supply of clean water, improving food production/storage, and in healthcare.

Now Anna Jagger has written a very interesting ICB article looking at likely Next Steps in terms of the long-term societal megatrends that will drive chemical/pharma industry growth during the 2010's.

She notes that companies are not only redesigning their innovation processes to cut carbon emissions, but are also focusing on key areas including Renewable Energy, Food, Energy Efficiency and Water.

She highlights some of the activities underway at leading companies including Bayer, DuPont, Dow Chemical, Dow Corning, Evonik, ExxonMobil and Wacker. And she also summarises new studies by McKinsey (for the International Council of Chemical Associations), the United Nations and the World Economic Forum.

Extended downturns, of the type that we are now suffering, generally mark a transition period from one set of business conditions to another.

I look at what might be in store for us during this transition, in this week's edition of ICIS Chemical Business. The analysis focuses on the key areas in the chart - Restructuring, Supply Chain, Technology, Financial Size and Commercial.

It suggests that companies need to balance today's immediate priorities with future needs, under the motto 'Think about tomorrow, and act today'. I hope you find it helpful.

The IeC Boom/Gloom Index remains cautious as we enter the New Year.

Meant to track sentiment in financial markets, it shows clearly that talk of 'green shoots' (green line) leading to a quick recovery has virtually stopped. Whilst the reading for 'frugal' (red line) steadied, as we went into the Christmas period.

The Index itself (blue column) is confirming the caution shown in most chemical company comments in recent weeks. It has failed to recover the levels seen before the end of 2007. The next few weeks may well provide a good indication of whether this caution is justified.

The Financial Times' Investment Editor argues this week that "there is no point in forecasting stock market performance to the last digit".

Instead it presents 3 scenarios for 2010:

• Standard Bear Market. This view suggests that the current rally is "the normal adjustment after a market crash". After the rally ends, we will then see "a decade of trading in a range", with money to be made "by traders rather than long-term investors".

• Great Panic. This suggests 2007-9 was merely a "panic". Now "the risk of disaster" has gone, there is a "buying opportunity" for investors, and "profit opportunities for companies, as they can cut costs more easily".

• Second Great Bust. The downside fear is that whilst "cheap government money rescued markets" last year, this caused a "credit bubble" in China, and meant "the US put its credit rating on the line". The likely "next event will be a market disaster", taking us below 2009's lows.

The FT has sympathy with all 3 scenarios, but suggests the odds favour the Bear Market view at 60 - 70%. It gives a 10 - 20% probability to the upside and downside views.

It says its prefered measures of stock market value, Tobin's Q and the cyclically adjusted price/earnings ratio, both show markets are now overvalued. The FT therefore concludes that "it is still a very risky world".

US auto sales last year at 10.4 million were the worst since 1982. Even this figure was slightly artificial, due to the support provided by the $3bn 'cash for clunkers' programme in the summer.

This impact can be seen in the chart, with total volumes (black line) picking up again in December under the impact of major discounting as manufacturers cleared stocks of deleted model lines. Overall:

• Toyota (red dotted line) moved into the No 1 spot for the first time
• GM (blue line) continued to downsize, after its bankruptcy
• Ford (green line) remained the most successful American manufacturer
• Chrysler (purple line) made little progress under Fiat's ownership

Total sales of chemicals and polymers to the US industry were worth just $31bn in the year, based on the ACC's estimate of $2973/auto. Between 1995- 2007 they were worth $45-50bn at today's value, with auto sales steady at 15 - 17 million/year. And even the most optimistic analysts only expect 2010 sales to recover to 12.5m.

On a more positive note, China is now the world's largest auto market at 13.6m. Its sales grew 46% last year, under the impact of the government's stimulus programme, which including halving the sales tax on smaller cars. But analysts suggest growth will moderate to 5% in 2010.

The other bright spot for auto sales this year should be India, where sales rose 17% in 2009. But analysts expect Europe and Japan to remain difficult, as consumers continue to cut back on non-essential items. Even with incentives, Japan expects 2010 sales to be at 1978 levels.

The Financial Times reports today that Ineos has postponed plans for an initial public offering. It says this "was one of a range of options that had been considered by the company to strengthen its balance sheet, which was burdened with more than €7bn ($10bn) of debt". It adds that Ineos is still looking at "full or partial sales of operating businesses to help reduce its debt", as noted last month by the blog.

The FT says that the possible IPO was discussed with Barclays Capital, one of Ineos' main lenders. But it notes that in today's investment climate, "highly leveraged companies such as Ineos may find it difficult to float". It says Ineos' net debt "was €7.49bn at the end of 2008, roughly seven times last year's expected EBITDA" and compares this with "a survey of investors by RBS Hoare Govett in the summer (which) revealed investors' reluctance to support IPOs for companies whose net debt after flotation would be more than three times their EBITDA".

Blog readers have a wide range of interests.

That is clear from the list below of the Top 10 posts in 2009.

It also confirms the complexity of the chemical industry, and its fascination.

In alphabetical order, it is as follows:

• Bubble, bubble, toil and trouble
• Companies remain cautious on the outlook
• "Green shoots" likely to be "yellow weeds"
• IEA warns on economic downturn, lower oil demand
• 'It's the price that matters': Wal-Mart and Tesco signal a major change in consumer priorities
• New US auto fuel standards provide chemical companies with major opportunities
• OPEC worries about weak oil market fundamentals
• Rotterdam oil storage running out of space
• Russia's chemical production tumbles
• The nudist beach on Wall Street

Interestingly, the list includes 2 'classic' posts from 2007 and 2008, which are obviously still valued by many readers as reference points:

• The insight from Tesco and Wal-Mart which pinpoints the moment at which consumer priorities began to shift from 'wants' to 'needs'
• Warren Buffett's then controversial views on financial markets, just before they began to implode.

Pity your poor Purchasing Director this week. They know the West is having a cold winter, but they have done their analysis and can show you slides, such as the one above from Petromatrix, that indicate the US has the highest stocks of distillates since 1999. In addition, the world has 75mb of distillate in floating storage. So there is no shortage of product.

So why are oil prices above $80/bbl?
• Is it because crude oil is somehow short, or gasoline? No. We have high stock levels for these as well, plus plenty more in floating storage.
• Is it instead because higher prices are needed to justify sufficient E&P investment in finding more oil for the future? Perhaps, but then we have to ask the related question, namely 'what level of global GDP growth can be maintained if oil is going to be $80/bbl or higher'?

Or to put the issue another way, can industries such as chemicals successfully pass through such prices, and maintain previous growth levels? We all know, after the experience of 2007-8, that the perception of today's high prices being easily absorbed is not the same as reality. Purchasing managers are virtually forced to buy forward, if they see higher prices round the corner. But this doesn't mean their sales colleagues can sell the same volume, or maintain the same margins.

And in reality, as will likely become clear as and when prices fall again, high oil prices (as we first saw in 1973-4, and 1979-80), in fact cause demand destruction. They effectively act as a tax on the general population, who have to heat their homes, and travel to work and the shops. This gives them less to spend on other products and services.

So, then, why are oil prices so high? The answer is very simple - 'money talks'. As the Wall Street Journal notes this weekend, banks "including Citigroup Inc., Bank of America Corp., J.P. Morgan Chase & Co. and Morgan Stanley are offering levels of borrowing--known as leverage--that they haven't provided in more than two years". But this money is not flowing into loans to industry.

Instead, its going straight into trading activity in financial markets. And in so flowing, it has the remarkable effect of creating the illusion of recovery, as outsiders look at high oil prices, and assume that demand levels must have recovered. This could become a very dangerous assumption indeed, if it becomes shared by policymakers.

CEO's are now preparing their comments on 2009 performance, and the 2010 Outlook. It would be very helpful indeed, if they included a paragraph that noted what is happening in oil markets, and questioned why this is being allowed to continue.

The Dalian polymers future market had a strong end to 2009. As the chart shows, Linear Low Density Polymer volumes (blue line) jumped to 44 million tonnes. The new PVC contract saw the same volume.

But there are growing signs that this may prove a 'last hurrah'. The government is clearly starting to worry about the impact of speculative excess from its major loan/stimulus package last year:

• Today, the central bank raised deposit reserves by 0.5%, which starts to reduce the amount banks can lend
• It has also begun cracking down on banks' off-balance sheet loans, the 'hidden loans' that don't show up in official figures
• Premier Wen Jiabao has pledged to tackle "excessive" house price rises, after they rose 5.7% in November alone

China's rise to become the world's leading exporter in 2009, overtaking Germany, also means the government will come under more pressure to let the currency rise.

In turn, these measures may start to slow China's demand for polymers. This has been a major boost for hard-pressed Western companies, facing slow domestic markets. But with the China Daily now carrying stories about how young people can't afford to marry, because of high apartment prices, it is clear that policy changes are round the corner.

The blog has been worrying for some time about what will happen when governments end their stimulus programmes. It does not share the optimism of financial markets, that these will provide to be the "escape velocity" for a quick return to 2003-7 Boom conditions.

Today's data from Germany seems to support its concerns. According to Roderich Egeler, German statistics office president, "the German economy contracted for the first time in six years - and at a pace not seen before in post-war history". The office estimates GDP declined 5% in 2009, and says the economy "stagnated" in Q4, following the end of the pre-election government support measures, such as the car scrappage scheme.

Equally, the Wall Street Journal reports that small/medium size companies (SMEs) in Europe and the USA are finding it increasingly difficult to obtain vital loans to keep their businesses alive. These are critical players in the chemicals value chain, accounting for 70% of EU private sector workforces, and 49% in the US. As a result, the Journal says that insolvencies and job losses are likely to continue to rise.

The blog has come across an interesting example of the impact of China's credit growth, courtesy of Merryn Somerset Webb in the Financial Times. She highlights a YouTube video (link above) which investigates the new city of Ordos.

The old city has become known as "China's Texas", because of the recent wealth generated from the local coal industry. It claims the highest GDP/capita in China after Shanghai. Over the past 5 years, this has led the authorities to build a new city, 30km away, to house 1 million residents. Now the new city is complete, but it is apparently empty.

From the government's point of view, it's a success, because it has made a significant contribution to GDP growth. And the housing has all been bought by speculators, who believe (as we used to in the West) that prices always rise over time. For them, as an academic working in China notes during the video, "its not a place to live, but to put your money".

Webb closes her analysis with the disturbing comment that, according to the US National Bureau of Economic Research, the best indicator of a coming financial crisis is "rapid credit growth". It certainly adds to the worries about the sustainability of chemical and polymer demand expressed by my fellow-blogger, John Richardson, last week.

Almost unnoticed, the EU became the largest regional auto market last year. Thanks to the support of scrappage programmes (particularly Germany's €5bn scheme) it sold 14.4 million autos, compared to just 10.4m in the USA and 13.6m in China.

W Europe continued to see higher sales than Central Europe, due to greater government support. But overall, EU sales were still down 1.6% versus 2008 and 9.5% versus the peak Boom year of 2007. Unsurprisingly, the scrappage schemes boosted sales of smaller, more fuel-efficient autos, causing Ford, Renault and Fiat to gain market share. BMW and Mercedes dropped to 8th and 9th place.

It seems unlikely that governments can afford to maintain this level of support in 2010. GM Europe president Nick Reilly expects sales to decline by at least 1.6m, whilst analysts JD Power forecast a 10.5% fall to 12.2m sales. In turn, this suggests chemical and polymer sales into this important market will remain under pressure.

Will Beacham of ICIS interviewed me yesterday in London's Trafalgar Square. Please click above if you would like to see the discussion. Or click here if you would like to see Will's summary on ICIS news.

US housing is still limping along the bottom. December's housing starts were only 0.2% above 2008 levels. Overall, 2009 saw just 554k starts, the lowest level for 50 years, despite the support of the $8k tax credit.

During the Boom period, as the ACC's chart above shows, starts (blue line) peaked at a 2.2 million rate. This was worth $35bn in terms of total chemical sales, with each house using $16k of products (in 2009 money). The current figures imply a market of c$9bn.

On the positive side, building permits (red line) rose 16% in December versus 2008. This is hopefully a leading indicator that some confidence is returning to the market. But a full recovery to the 2006 peak would require a 400% increase from today's levels. The blog would not bet its own money on this happening any time soon.

The above chart, based on data from the excellent weekly American Chemistry Council report, highlights the changes in chemical production over the past year.

November saw world production (black line) finally turn positive again versus the previous 12 months, for the first time since August 2008. For an industry used to steady growth in line with GDP, the past 15 months have been traumatic. And, of course, as the ACC note, total production in 2009 seems likely to be down 3.8% versus 2008.

The strength of China's recovery is also highlighted in the chart, with Asia Pacific output (dotted brown line) up 8% versus November 2008. N America (blue) and W Europe (green) also saw production rebound, although at a slower 3% rate. This was in line with the Middle East's performance (purple), although the latter was more impressive as it grew steadily till May 2009, before entering a shallow downturn.

Still showing negative annual growth are Latin America (pink), down 4%, and Central/Eastern Europe (light blue), down 9%. This highlights how those with small domestic regional markets have been worst affected by the overall fall in demand. Hopefully, though, these regions will also soon start to see a return to annual growth during 2010.

The oil market rally seems finally to be running out of steam. For months now, it has been driven by the 'correlation trade', whereby Wall Street traders sell the US$ and buy crude oil. But as the chart shows, the two lines have now begun to diverge.

Fundamentals have clearly started to affect the €:$ rate, as real-world concerns about the Greek economy no longer make the euro a one-way bet. The blog suggested in November that traders would find it difficult to push the euro above $1.50 : €1.00. As the blue line shows, it has since retreated quite significantly, and is now around $1.39.

The monthly average crude oil price (black line) is now at the $80bbl resistance level. And in futures markets, where Forward supplies trade, a major change has taken place. In H1 last year, the contango between the current month and the future month was extraordinarily high at $20/bbl.

This gave traders the ability to store oil offshore and make a certain profit. But now, the contango has almost disappeared. Forward prices for May are only $1bbl higher than the current month, not enough to allow traders to store oil offshore profitably. So they may now start bringing all 150mbls of floating oil back onshore again. If they do, there seems little to stop oil moving back to $40bbl, apart from geopolitical events.

As the blog has argued before, this kind of volatility is exactly what the chemical industry does not need, with the economy already so fragile.

ICIS have now published the blog's 2010 Budget webinar as a White Paper. Please click here if you would like to obtain a free copy.

My thanks go to Nigel Davis for his editing skills, and to Jamie Barnes for masterminding publication.

One can only feel sorry for China's government leaders. A year ago, they faced 23m unemployed, as their export markets collapsed in the West. In order to avoid major social unrest, they opted to unleash what the Wall Street Journal called "one of the biggest credit expansions in history". $1.4trn was lent during 2009, in a total economy of only $4.2trn. In addition, there was a stimulus programme worth $580bn.

Of course, some of this money will have been spent wisely. But it is unlikely that the required number of financially sound projects could have been found in such a short space of time. A considerable amount must have gone to fund speculation. As the above chart shows, the statistics from the Dalian futures exchange confirm this suspicion, as LLDPE volume (blue line) rose from 20m tonnes to a peak of 80m tonnes by April.

More recently, volumes have begun to slow as the government now tries to reverse course and avoid major asset price inflation. January saw only 28m tonnes traded. And this month's volume may be lower, with the Lunar New Year holiday beginning 3 weeks later (14 February). Yet there is still little evidence that China's main Western export markets (which accounted for 37% of GDP in 2007) are about to stage a full recovery.

Anti-dumping duties (ADDs) are on the rise, as countries seek to protect their own manufacturers.

The most publicised ADDs so far, of course, were those by the US on Chinese tyres in September. In retaliation, China hit companies such as BASF with duties on US produced nylon 6. Separately, India imposed an ADD on caustic soda.

Now, the whole issue is revving up again. Last week, Europe imposed ADDs on Chinese shoes. And, as ICIS news reported , China imposed ADDs on PTA imports from Korea and Thailand - both long-standing suppliers to the country. Yet it is only a month since the new free trade agreement between China and Asean came into force. Today, India has taken action against phenol imports from Japan and Thailand.

These ADDs are likely to be only the start of the story. As China's new petchem capacity comes online, its demand for imports will greatly reduce. Equally, India is unlikely to want to see these volumes move into its domestic market, just as it is also expanding capacities. Whilst Western countries are unlikely to want to encourage imports, when their own unemployment is at high levels.

As John Richardson notes today, the combination of the global economic crisis and big increases in petchem/polymer capacity is a lethal cocktail. As a result, those without a strong domestic market will likely find it increasingly hard to move their traditional export volumes.

The Toyota problems, with over 9 million autos being recalled around the world, has set the blog thinking about how to spot corporate disaster in the making.

One excellent source of insight is Prof Jim Collins' book, 'How the Mighty Fall', published last year. This suggests that doomed businesses pass through 5 key stages.

Encouragingly, Toyota's management are apparently using Collins' analysis below to help identify the root causes of their problems:

• Hubris born of success. This is when people begin to believe their own propaganda, and assume that they will always achieve their goals.
• Undisciplined pursuit of growth. Getting bigger becomes confused with being good, and business models get pushed beyond the actual capability of the people involved.
• Denial of risks. The top people refuse to accept that things are going fundamentally wrong, and instead re-organise.
• Grasping for salvation. Management begins to panic, but still resist making changes to their, by now, clearly flawed business model.
• Bankruptcy or downsizing. Nothing can now be done to rescue the situation, and the business is broken up, or closed down.

As Collins notes, decline is a disease that develops in small stages. He says it is "harder to detect but easier to cure in the early stages; easier to detect, but harder to cure in the later stages'. Sadly, Toyota is unlikely to be the only such example that we witness during this current downturn.

The blog is delighted to learn from ICIS that thousands of copies of its new White Paper, 'Budgeting for a New Normal', have been downloaded in the first week of publication.

Please click here if you would like to obtain a free copy.

The blog was in Vienna this week for a World Refining Association conference on the Global Petrochemical outlook. It had the privilege of chairing a very distinguished panel of industry leaders in a discussion about managing through the downturn.

One of the key inputs came from Anton de Vries, LyondellBasell SVP, who had earlier shown the above slide illustrating the close relationship between polyolefins demand and GDP/capita. The vertical axis shows consumption of polyolefins/capita, and the horizontal axis GDP/capita. It highlights a number of key factors:

• The developed Regions (eg EU, USA, Japan) have GDP/capita of over $40k, and use over 40kg/capita of polyolefin.
• Emerging countries (China, India) have GDP/capita of less than $5k, and use only c10kg/capita.
• Total demand (the size of the circle) in emerging countries is therefore much less than in the developed world, even though they have much larger populations.

The blog has added a trendline to the chart, in order to highlight the relatively gradual way in which higher GDP/capita leads to higher polyolefin consumption. As Anton noted, the emerging countries can expect to see major increases in demand as their populations become richer. But it will probably take decades for them to reach the current level of per capita demand in developed economies.

CFO's have a lot to think about currently. Volatility is rising in currency and oil markets. Plus credit risks on previously safe 'sovereign' debt markets are also increasing.

Today, for example, there are new concerns that investors in Dubai World's $22bn debt may lose 40% of their investment.

Equally, current problems in the eurozone over Greece's debt may well spill over into Spain, Portugal and even Italy - where debt levels are also high.

Recent history would suggest these problems represent a one-way bet for speculators. Ever since George Soros famously 'broke the UK£' in 1992, it has been assumed that markets rule. But this is only a recent development. When the blog started work in 1976, for example, it was only allowed £50 for each business trip abroad, due to capital controls.

Now, John Dizard in the Financial Times warns that "sooner rather than later, European officialdom will impose higher taxes, credit restrictions and transaction barriers aimed at global macro traders", and "shock measures that force the unwinding of politically undesirable trades".

Of course, such moves in defence of the euro are not on the agenda today. But Dizard has a record of being proved right over time. And if they did occur, CFOs might wake up one morning to find they now have significant amounts of money locked away in the wrong place.

Prudent CFOs will therefore no doubt want to consider the potential impact of capital controls, where they next update their risk management strategies.

The European Union was the leading auto market in the world in 2009. It sold 14.4m, versus 13.6m in China and 10.4m in the USA.

January has continued this promising trend, with volumes up 13% versus 2009. But it is likely to prove temporary, as government scrappage schemes end. This has already happened in the major German market, where January sales were actually down 4% versus 2009.

The chart also gives a good picture of the relative decline in volumes since the downturn began. Versus January 2008, EU volumes last month were actually down 17%. And between 2003 - 8, January sales ranged between 1.2m - 1.3m, versus only 1.06m this year.

The blog has been following the development of GM's new all-electric car, the Chevrolet Volt, with interest, ever since Pedro Spohr of Galp in Portugal highlighted its potential to impact naphtha balances.

Of course, it won't do this on its own - but GM's adoption of the technology makes it essential for other manufacturers to follow suit.

The Volt's launch is scheduled for next year, and now ICIS news reports that GM say it will run on E85 blend ethanol, as well as electricity. It is part of a trend that led BP's CEO, Tony Hayward to forecast last week that gasoline consumption in the western world probably peaked in 2007.

This has to be good news for the chemical industry, over the medium and longer-term, as it means the competition with gasoline for oil-based feedstock supply will become easier.

15% of Americans were either in foreclosure, or at least one payment overdue, according to the Q4 Mortgage Bankers Association survey. This is a record high, but the MBA sees some signs that the numbers may have peaked. It is concerned, however, over the rise in the number of long-term unemployed, now a record 40% of total unemployed.

US housing was a $35bn market for chemicals as recently as 2006, when housing starts ran at a 2.2 million rate. They are now 74% below that level. January's figures showed some sign of a bottoming, but were still just 591k. One sign of the current crisis is that, as shown in the above chart from thechartstore.com, they need to rise c35%, just to get back to the lowest level ever seen in the period 1959-2008.

Update: In later news today, the S&P Case-Shiller Index of house prices fell 3.1% versus December 2008. 11.3 million US households are now in negative equity (where the house is worth less than the mortgage). This equals 24% of all US properties with mortgages.

The blog's quarterly survey of company Outlook statements shows CEOs remain very cautious. There has been a rebound after the destocking disaster of Q4 2008 - Q1 2009. But there seems little confidence that we will quickly return to the levels of demand and margin seen in the 2003-7 Boom period. China's stimulus and loan programme has certainly had an enormous impact in Asia, but NAFTA and Europe remain weak.

BASF CEO Jürgen Hambrecht perhaps best summarises the overall mood, with his view that "the worst is behind us, even though dark clouds remain ". He added that:

"Overall, there are no signs of a self-sustaining, long-term recovery. We are still significantly below the capacity utilisation rates that were seen ahead of the crisis. (We expect) the majority of growth to come from the emerging economies in Asia, especially China, and from South America. The economy is still sputtering in Europe and North America. Growth in Europe would not return to 2008 levels before 2012. Stimulus programmes are being wound down, credit is becoming tighter, excessive national debt is leading to austerity measures, the number of jobs is falling and overcapacities still exist. There are further risks associated with geopolitical tensions and a trend towards protectionism."

Akzo Nobel. "The recovery is fragile and will be slow."
BASF. "The worst is behind us, even though dark clouds remain".
BP. "The pace of global economic recovery would be slow and gradual".
Bayer. "Expected the impact of the 2009 global business downturn to continue to be felt for some time to come".
Clariant. "Saw no fundamental reason for growth to pick up".
Cytec. "Markets are funny right now. They improve for a couple of months, and then they go down for a bit."
Dow Chemical. "Growth will continue to lag in the US and Europe, however, as high unemployment persists and questions about the sustainability of government stimulus spending remain."
Dow Corning. It's still a volatile economic environment, but the year ended with many positive signs."
DuPont. "In step with a transition out of a recessionary environment".
Georgia Gulf. "This year is going to be a step-up in some areas, but to say robust would be an over-statement".
Idemitsu Kosan. "Demand for products improved during the nine months, led by the economic stimulus package in China."
Johnson Matthey. "Visibility remains limited in some of our end-user markets, the group is well placed to benefit from economic recovery."
Kemira. Cost-cutting "had proceeded faster than planned and would be completed by the end of 2010".
LG Chemical. "Demand from China was expected to be robust as the country continued its 'solid growth'".
Lonza. "Demand reflected a reduction in orders for life-science ingredients and large-scale biopharmaceutical projects in custom manufacturing."
LyondellBasell. "Olefins profitability would be subject to oil price movements, while the polymers outlook would largely depend on whether the US PE export window to Asia remained open."
Occidental. "Continued weakness in US housing, durable goods and agricultural markets."
OMV. "Performance was affected by lower volumes and realised margins in the fourth quarter of last year".
Polyone. "Government stimulus programmes may have helped the economy in the back half of 2009 and this may not continue this year."
Praxair. "Cautiously optimistic that growth in the US and Europe will continue to improve, but recovery would be slow and deliberate".
Reliance. "A substantial improvement in overall margins as the industry was operating on a low level of inventory, leading to higher domestic realisation."
Rhodia. "Global economic conditions had improved but growth in Europe remained uncertain."
SABIC . "As the global economy improves during the year, we expect to see demand for our products improve."
Shell. "We are not assuming that there will be a quick recovery, and the outlook for 2010 is uncertain."
Sherwin Williams. "Demand in most end markets remained weak and industry-wide volume was down significantly from peak levels".
Sinopec. "China's chemical market in 2010 would face challenges, such as intensified market competition, the rise of trade protectionism and overcapacity".
Solvay. "Prepared in case of a longer crisis. Market conditions remain challenging,"
Sumitomo. "Consumer spending remained sluggish amid worsening employment conditions and capital investment fell substantially against the backdrop of depressed corporate earnings."
Sunoco. "We continue to expect a challenging market due to ongoing economic weakness and excess global supply."
Unilever. "Face pressure on consumer spending power and heightened levels of competitive activity."
Unipetrol. "The petrochemical industry is recovering but at a slow pace. It is quite clear that we still have hard times ahead."
Vitol. "The global economic outlook and the dynamics of future oil demand remain uncertain".
Wacker. "The upturn in demand experienced since April 2009 continued through the fourth quarter, but did not offset the drop in sales caused by the economic crisis."

World trade fell 12% last year, its worst decline since 1945. First estimates also suggest global GDP fell 2.2%, according to Pascal Lamy, head of the World Trade Organisation. This confirms the World Bank's fears back last March, that the global economy might shrink for the first time since World War 2.

Lamy went on to add the following downbeat assessment of the current position:

• The "freefall in trade" has been due to the "simultaneous reduction in aggregate demand across all major world economies (and) the drying up of trade finance".
• "The positive impact of national stimulus packages is fleeting and worries are mounting over the huge budget deficits rung up by many governments."
• "The International Labour Organization estimate the number of jobless worldwide at over 200m."

Lamy also highlighted the importance of trade to national employment:

• "22% of total employment in Germany depends on exports".
• "20% of US employment relates to exports of manufactured goods".

The chemical industry is a major beneficiary from growth in global trade. So it is unlikely that we will see a full recovery in demand whilst international trade itself, and global employment, remain depressed.

The above chart presents an excellent snapshot of the development of Asia's chemical industry over the past 20 years. It comes from the American Chemistry Council's global production report, and shows volume growth in each country/region, with a base of 100 in 2002.

• China (blue line) has seen the largest growth over the past 20 years. Its output has risen 18-fold since 1989. Since 2004, its growth has accelerated, with volume doubling by 2009.
• S Korea (black) and India (pink) have been the other big winners, with 4- and 3-fold growth since 1989. Both have also continued to grow output through the current downturn.
• The smaller producers (yellow) have also seen 3-fold growth. But their combined volumes have fallen 4% since 2007.
• Taiwan (brown) and Singapore (green) have seen slower growth since 1989, and are now also seeing volumes slip. Taiwan saw output fall 8% last year, whilst Singapore fell 13%.
• Japan (red) and Australia (light blue) were the largest producers in 1989. But their growth rate has been much slower, and their output in 2009 was only c20% above 1989's level.

Most Asian countries have pursued an export-driven development model over the past 20 years. China, India and S Korea have grown remarkably as a result, along with other NEA/SEA countries.

But with export growth now slowing as a result of the downturn, competition within Asia is now starting to increase. This can only intensify, as the major new import volumes start to arrive from the Middle East.

A year ago, Ben Bernanke (head of the US Federal Reserve), startled financial markets with his claim that "green shoots" of recovery were now visible. This helped to lead to a major stock market rally, based on the sentiment that the US and other western economies would quickly bounce back to 2003-7 growth levels.

Observers such as Nouriel Roubini suggested that Mr Bernanke was confusing signs of restocking with real recovery. Sadly, as the chemical company Outlook comments show, Roubini has been proved right.

The new IeC Boom/Gloom Index above shows that sightings of 'green shoots' (green line) in the Financial Times have reduced to almost zero. In turn, the Boom/Gloom Index itself (blue column) remains below its highs of Q2 last year, and well below its highs prior to the Crisis in 2008.

The good news is that global chemical production (the blue diamond line) grew during H2 2009. At the end of H1 2009, it had been equal to the level at the start of 2006. The bad news is that as the chart shows (based on data kindly supplied by Kevin Swift at the American Chemistry Council), it was only back to the level seen at the end of 2006.

At its peak in Q2/Q3 2008, production had been 9.5% above the Q1 2007 level. But at the end of December 2009, it was only 3.5% above this level. So the world essentially lost 6% growth over the interim period. And it seems unlikely that this will be recovered quickly, given the deleveraging underway by consumers and governments.

Different regions continue to perform at different rates:

• N America (red line) was the weakest performer, in spite of its Asian exports, with volume at 89.5% of the Q1 2007 level.
• The Middle East (brown) continued to run hard on the basis of its advantaged feedstocks, and its volume was up 20.7% versus Q1 2007.
• Asia (blue) recovered strongly following China's stimulus programme, and was up 18.1%.
• W Europe (purple) also recovered due to stimulus programmes, and production was up 4.1%.
• Latin America (green) also recovered, and was up 2%.
• Central Europe (light blue) remained weak, with volume at 93.4% of the 2007 level.

The blog was recently interviewed by ICIS' Anna Jagger at Vienna Airport, on its way back from the World Refining Conference. The conversation covered the need for companies to focus on innovation, as well as on survival, during the downturn. It also highlighted specific examples of opportunities that could be pursued today, within the context of strategies being pursued by leading companies such as BASF and Shell..

The financial crisis has highlighted the need to move away from the simplistic approach of the "shareholder value" cult, where short-term targets dominate company thinking.

Even Jack Welch, former GE CEO and original instigator of the approach, now agrees that the concept was "a dumb idea".

The blog therefore welcomes DSM's new approach to the question of Board pay:

• The key principle is value creation for People, Planet and Profit
• It takes into account the company's long-term strategic goals
• It also aims to create more external transparency

Of course, one still wants companies to manage the short-term effectively, whilst remaining focused on longer-term objectives. So it is sensible for DSM to base 50% of short-term and long-term incentives on financial targets. The other 50%, however, will be based on "measures such as the introduction of 'green' products, energy consumption reduction, reduction of emissions of greenhouse gases and the engagement of the company's workforce".

The proposals go to shareholders for approval at the end of the month. Those interested in quick "in-and-out trading profits" will no doubt be dismayed. But those interested in a company's ability to generate robust profit streams - to be used for the payment of pensions, and other long-term goals - will hopefully give their support.

More evidence is emerging of the real estate bubble that China's easy money policy has created over the past year. Wen Jiabao, China's premier, has described property markets in some cities as now being like a "wild tiger". And new figures explain his concern, with the government reporting property sales rose an astonishing 80% last year, to a value of $560bn:

• Shanghai is the epicentre of the bubble, with prices 150% above their 2003 level
• The average apartment now costs $200k, although average wages are just $5k
• Luxury apartments cost 20% more than in New York's Manhattan district
• Outside Shanghai, Tianjin has built a $3bn "floating city" on a reservoir
• It is about to add the world's largest indoor ski resort

Property bubbles can be fun whilst they last. But after they burst, the hangover can be very painful for chemical companies, due to housing's importance as a key sector for demand. As we saw in the 2003-7 Boom period, a bubble leads to over-optimistic forecasts of future demand. And the new plants built to meet this perceived demand remain online, to depress prices and margins, long after the original bubble has collapsed.

The blog sends its very best wishes to Ralf Kuhlmann of ExxonMobil, who retires this week as Business Director, Basic Chemicals Europe.

The phrase "a pillar of the industry" might have been invented to describe Ralf. He was President of APPE (Assoc of Petrochemical Producers in Europe) until recently.

He was also an EPCA Board member, President of the "European Science & Engineering Program" foundation of Exxon Chemical Europe, and a member of "European Industrial Research Management Association" and of the Energy, HS&E and Logistics Program Council (CEFIC).

The blog has known Ralf for 15 years. It joins everyone in the European hydrocarbons community in wishing him and his family "all the best" for the future.

The above chart is a real labour of love by ICIS' Sue Royse. It comes from the indispensable monthly ICIS Worldwide Ethylene Plant Report. This tracks global operating capacity (except Russia/CIS), and details both planned and unplanned shutdowns. It highlights a number of key issues:

• Total nameplate capacity was basically flat during 2008 at c10500kt/month. It began to rise sharply at the end of 2009, and is now at 12000kt/month. ICIS currently expect it to increase to 13000kt/month by the end of 2012.
• This is a c25% capacity increase. Yet demand historically increases in line with global GDP. So even if we return to Boom period growth of c4% (most unlikely in the blog's view), operating rates will remain well below those 2003-7 levels.

The chart also further explodes the myth that new Middle East/Asian plants have had major delays in starting-up. It is unclear where this myth began, but it seems to have been fed by wildly optimistic expectations in the financial community about the time taken to actually build new cracker complexes.

The chart shows scheduled maintenance as blue columns, and unscheduled as yellow column. The latter rose to historical highs in Q4 2008- Q1 2009, during the great destocking period. But since then, the combined total has reverted to its historical 7% level (left column), in line with the industry norm that maximum operating rates are c93% of nameplate capacity.

A week ago, the BBC carried a report that PetroChina had completed "preliminary work" on a possible bid to buy a stake in Ineos' Grangemouth refinery.

The BBC quoted Ineos as confirming it was in talks with "a number of parties" over the future of Grangemouth, whilst cautioning that "the discussions with interested parties are exploratory and it would be premature to speculate on whether any might lead to investment in the site. The Grangemouth petrochemical and refining facility remains a strategic part of the Ineos Group and the company is committed to its long-term development."

The BBC report came after a rare interview in The Times last December with Ineos chairman Jim Ratcliffe, who noted that "Under our agreement with the banks, we need to generate levels of cash which it is difficult to imagine the business doing. At some stage there has to be an asset sale".

This still seems a sensible strategy, even though the blog understands that Ineos doubled EBITDA to €1222m in 2009, versus €594m in 2008, and is currently trading ahead of its business plan. Its liquidity has also improved by c€100m via the Ineos ChlorVinlys divestment, whilst the $350m fluorochemicals sale should complete later this month.

Then 2 days ago, the Sunday Times newspaper reported "that Ineos has recently held exploratory talks with Sabic, and Kuwait's Petrochemical Industries Company." It added that Ineos CEO Tom Crotty had refused to disclose the identity of the potential suitors, but had said "we are in talks with several parties that may lead to us bringing someone in, either as an equity partner in the group or on certain assets".

Yesterday, the Daily Telegraph added that the "proposals discussed with the Middle Eastern players are thought to have included the possibility of the company hiving off its petrochemical commodities business." It quoted an Ineos spokesman as saying that the company had been open about its plans to "further strengthen its balance sheet", although it had "no pressing need to do any deals given our current performance".

Morgan Stanley, the investment bank have reportedly been advising Ineos on Grangemouth since last June, when 'The Scotsman' newspaper suggested that "PetroChina could buy the refinery, while Ineos would retain the polymer and petro-chemical processing plants located on the same site". Perceptively, however, the paper had also quoted PetroChina as saying that "talks can take a really long time".

European auto sales continue to depend on the influence of government stimulus programmes. The main feature of February's results was the sharp decline in Germany's sales. They were down 30% versus February 2009. This supports the fears of those who saw stimulus programmes as simply bringing forward new sales, not creating new demand.

Overall, European sales were up 3%, due to the continuing stimulus programmes in Spain, up 47%; the UK, up 26%; Italy, up 21%; and France, up 18%. But it seems doubtful that these sales gains will continue beyond the end of government intervention.

Most worrying are the continued problems in Central Europe. In Hungary, for example, the government cannot afford a stimulus programme, and has instead had to increase VAT (sales tax). Sales went into freefall during 2009, and were down 78% in August. Last month they fell a further 58% versus February 2009. Only 3042 autos were sold - in a country whose population is 10m.

Major changes are underway in the US petchem and polymer market:

• Middle East/Asian production will likely eliminate the US Gulf's historical position as 'exporter to the world'
• The arrival of cheaper gas, and the impact of shale gas, is changing cracker feedstock slates quite dramatically
• The continuing decline in domestic gasoline demand creates potential problems, but also opportunities

I look at these issues in an article published this week in ICB, to coincide with the NPRA meeting in San Antonio, Texas. I also summaries the key points in the above video interview with Will Beacham. Please click here if you would like a copy of the article.

Last June, the blog noted research by Profs Eichengreen and O'Rourke that compared the current Crisis to the Great Depression. They have now updated their work to February 2010, 22 months after the Crisis began.

The positive news is that the stimulus measures taken by governments have caused world industrial production to recover. As they say, this is a cause for congratulation - although it is still not clear whether this recovery will continue as stimulus measures are removed.

In fact, the Profs emphasise that we are still 6% below the previous peak, and "considerable excess capacity remains in a number of important economies". They therefore advise that stimulus measures continue.

But in their other 2 focus areas, World trade and Equity markets, the news is less positive. The current Crisis saw a sharper decline than post-1929, and the recent recovery has only brought us back to the trend seen in the Great Depression.

Their chart above of world trade volume highlights this, with today's position (red line) clearly in line with the Depression trend (blue line). This is disappointing, given the size of the recent stimulus programmes.

It is also worrying, as the chemical industry is a major beneficiary from growth in world trade. China's increasing use of anti-dumping duties, and growing US pressure to term China a 'currency manipulator', are worrying signs of the fragility of the current economic recovery.

The death of Sir James Black, Nobel Prize winner and one of the giants of the modern pharmaceutical industry, has been announced this week.

He began work at the blog's former company, ICI after the War. The idea was to build on the success seen with drugs such as penicillin. It was, as we know today, a good decision. But it took 20 years before the pharma business made money. Even in 1978, when the blog joined ICI Petchems, numerous executives would complain that "ICI Pharma was spending all our profits", whilst we were not able to build more crackers.

Black's great discovery was beta blockers - the first effective therapy for high blood pressure, and still widely used today. He then moved to what is now GSK, where he invented Tagamet to treat stomach ulcers. In turn, this led to the development of Zantac, the best-selling drug in history.

Black's death is a reminder, if one was needed, that finance is not the be-all and end-all of the chemical industry. The real driver is the quality and the effectiveness of the products that we make, that help to create a better life for people around the world.

A remarkable thing happened this week in European olefin markets. Contract prices for butadiene and propylene were finalised for April/Q2 at higher levels than for ethylene. This has never happened before, in Europe or other regions.

The chart, based on ICIS pricing data, shows how ethylene (blue line) has normally been the highest priced olefin. Butadiene (green) has often been relatively tight during downturns. And in 2005/6, propylene (red) and ethylene were sometimes similarly priced. But we have never before seen both "co-products" higher than ethylene itself.

The rationale for the changes is the arrival of the ethane-based crackers in the Middle East, and greater use of lighter feedstocks in other regions. This is significantly reducing the amount of propylene and butadiene co-produced on steam crackers. Low refinery operating rates are also temporarily reducing propylene production from this source.

Propylene should return to better balance over the next few quarters, as more new capacity comes on stream via propane dehydrogenation and metathesis, as well as from the new Asian refining capacity. Equally, lower prices for ethylene will start to improve polyethylene's (PE) competitive position versus polypropylene, after an extended period when PE supply has been relatively tight.

Butadiene, however, may well remain tight for some time. This was a key conclusion from our 2008 Feedstocks for Profit Study, when we warned that a Global Downturn scenario would lead to shortages of butadiene as Europe's steam crackers "will turn down relatively harder than auto production, due to Middle East production taking a relatively higher share of C2 demand, and thus reducing the supply of butadiene".

In December, the blog suggested that "2010 might see the industry return to its normal seasonal pattern, with a strong H1, followed by a slow Q3 holiday season, and then a final burst of activity in October/November before the Xmas break".

The chart above, from the excellent American Chemistry Council's weekly report, provides welcome evidence that this may indeed be happening. The red columns show destocking/restocking down the main polymer value chains. Clearly Q4 saw destocking for year-end reporting reasons, with consumers drawing down inventories by 110kt (250m lbs) a month.

But January and February saw this trend reversed, as customers restocked in advance of expected better demand from key industries such as auto and construction. The ACC estimate this led to inventory builds of 75kt (165m lbs) in January, and 25kt (55m lbs) in February. As a result the trend line (black) has become positive for the first time since 2006.

Much is now riding on Q2 demand. We cannot expect a V-shaped recovery of demand back to levels seen in the 2003-7 Boom. But we should hopefully see an improvement versus Q2 last year, even though today's high levels of crude prices will act as a "tax" on discretionary expenditure by causing consumers to focus on higher transport/heating costs.

The blog congratulates Brenntag, the leading distribution company, on its successful flotation yesterday.

Its shares were issued at €50, and rose to €52 in early trading, giving it a market capitalisation of €2.7bn ($3.6bn). New private equity owners BC Partners sold 4.45m shares to raise €223m, and now own 71% of the company.

Brenntag itself also raised €525m by selling 10.5m shares. This enabled it to repay expensive mezzanine debt, and will also finance potential acquisitions in Asia and Latin America.

As distribution industry expert Marc Fermont of DistriConsult noted in a recent speech, the "IPO is a major industry event whose success was essential for the whole sector". He added that Brenntag was a relatively safe investment, as "distributors tend to bring regular cash flows measured as EBITDA, including in period of crisis (whilst) financial risks are limited as very few bankruptcies are reported in the sector".

Prof Nouriel Roubini, one of the few to forecast the current Crisis, is very positive about the opportunities for growth in India over the next 20 years. Speaking in Mumbai, he argued that:

• "While the economies of India and China are not large enough to lead global growth, emerging markets remain 'bright spots' compared with the U.S., Europe and Japan, which all face deflationary pressures".
• "The size of the emerging markets is going to become larger and larger, and it's going to become greater than the GDP of the United States. It may take 20 to 30 years, depending on relative economic growth, but the process will occur (and) we should get used to it."
• "China might be facing a greater challenge in maintaining its double-digit growth rate than India", as stimulus measures are withdrawn.
• "China has been a hare and India a tortoise, but growth is accelerating in India. The positive aspect about India is that its economy is less dependent on exports compared with China."

The blog is always grateful for good news, no matter the reason. Thus it welcomes March's rise in US auto sales to 850k from February's 615k (black line).

The driver for the rise was Toyota's (red line) record level of price discounts, as it aimed to overcome its disastrous sales slump after the quality problems. Its "incentive spending jumped 44%, or nearly $700 a vehicle, to $2,256". In addition, all returning customers (60% of its sales) "were given two years of free maintenance".

Other manufacturers were forced to respond, taking the average level of discount to $2800 per auto. GM offered the highest incentive of $3500.

But even so, the annualised sales rate was still only 11.8m, well below the 15m-17m range seen between 1995-2007. With each auto using $2973 of chemicals, according to the American Chemistry Council, this meant the market is currently worth just $35bn, versus its peak of over $50bn.

China's demand has been the main driver for the global chemical industry over the past year. And prices on China's Dalian polymers futures exchange have been a key indicator of the boom. But now, the rally seems to be running out of steam. The key signs are in the above chart:

• At the end of January, the linear low density polyethylene (LLDPE) contract (red dotted line) was trading at 11210 yuan/tonne, whilst WTI crude oil (blue line) was $73/bbl.
• But by the end of March, the LLDPE contract had fallen to 11010 yuan /tonne, whilst WTI had risen to $84/bbl.

There are probably three main causes for this decoupling:

• New ME/Chinese polymer capacity is starting to arrive
• Today's high oil prices are starting to cause some demand destruction.
• New government credit controls are reducing speculative demand.

Certainly, the Dalian futures trend matches the recent downturn in Asian HDPE margins. As the ICIS Polymer Margin report shows, integrated North East Asian (NEA) margins peaked at $464/t in February. Last week, they were back at £413/t. And standalone HDPE margins are now in negative territory.

The IeC Boom/Gloom Index (blue column) moved up sharply last month, as Western stock markets rallied further on news that the major economies were now officially exiting recession.

Various definitions exist of recession, with most countries referencing 2 consecutive quarters of negative GDP. The USA measures recessions differently, but the head of the official Business Cycle Dating Committee said Friday that it was "pretty clear", based on the employment figures, that the recession had ended.

Of course, the resumption of economic growth is not always the same as full recovery - as the blog learnt in the major downturns of the early 1980's and 1990's. It shares the view of the Governor of the Bank of England, that "its not the growth rates, its the levels that matter here". On this basis, the earliest date that global GDP might recover in real terms (adjusting for inflation) back to 2008's $58.93trn level is probably 2011.

The US 2009/Q4 reporting season is now virtually complete. It provides a valuable snapshot of company health as the US recession ends:

• Reported earnings (red line) for the S&P 500 have recovered to $51. This is partly due to loss-makers such as GM having dropped out of the index due to bankruptcy. But it also highlights that the supposed V-shaped recovery has, in fact, only taken earnings back to the 2004 level.
• Reported earnings are still 40% below the $85 level seen at the peak of the Boom in 2007. And interestingly, analysts have become more cautious since Q4 about future increases, with Q4 2010 earnings now only expected to reach $62.
• Of course, the cheer-leaders on Wall Street will continue to ignore Reported earnings in favour of Operating earnings (blue line), where the analyst can conveniently discard negative items that spoil the bullish story. Even these, however, seem to have stalled in terms of forecasts, and are still showing Q4 as being 15% below the 2007 peak.
• Companies, however, make their own statement about the outlook when paying dividends (green line). These are normally only cut when the Board believes a quick recovery is unlikely. And they have so far fallen 22% since 2008's $252bn peak, to realign with the 1989-2003 trendline.

2009 was a year when companies cut costs and jobs in order to try and maintain earnings. in terms of future earnings, much now depends on whether companies can start to grow revenues again. If not, then whilst the recession has ended, the downturn will continue, as it did in the early 1980's and 1990's.

The chart above, from the insightful Petromatrix report, highlights the on-going divergence between the bullish sentiment driving prices, and the fundamental reality of crude oil markets.

It totals US stocks of crude oil and the main products (gasoline, distillate and jet kero), by year. And it shows very clearly that stocks in 2010 (red line) and 2009 (light blue) have been much higher than in the 2005-8 period. As Petromatrix comment:

• "Stocks remain at multi-year highs", even though last year's major destocking has now finished.
• "There is no stress on the supply system because OPEC is gently lowering its compliance to quota as demand gently comes back".
• US Gulf "crude oil imports are at the highest level in 12 months.

They conclude that current prices "put the demand recovery at risk". And they also note that "the extreme spread between crude and natgas also means that petchems will switch as much as possible from petroleum based to natural gas based feedstocks", causing further demand destruction in the short-term.

The US consumer accounts for 16% of total global GDP, with a value of $10trn. By comparison, total Asian consumption is under $5trn. China's consumption in 2008 was just $1.6trn, about equal to the UK. Changes in US consumer behaviour are therefore critical to global GDP, and hence to chemical demand.

The chart above, from the ACC weekly report, shows the dramatic change that is taking place in US consumer behaviour. Taken from Federal Reserve data, it shows that total US consumer debt has fallen by $114bn since its peak of $2.561trn in 2008. The big shift is in credit card and other revolving debt, which has fallen by $100bn over the same period.

This represents a major shift in behaviour. As the chart shows, consumer debt actually rose slightly during 1990-94, when the economy last suffered a major downturn. Since 2008, however, the consumer has been paying down debt at the rate of 5% pa (blue line).

Similarly, US household debt peaked at $13.854trn in Q1 2008, and has since fallen each quarter to total $13.536trn in Q4 last year. This represents the first fall since records began in 1946.

This is further evidence for the blog's recent White Paper argument that we are moving towards a 'new normal'. It suggested that all major downturns are periods of transition, from one set of priorities to another. In the 'new normal', the consumer reduces debt levels, as now seems to be happening, and focuses more on 'needs' than on 'wants'.

In turn, of course, this means that underlying growth in chemical demand will be lower than in the 2003-7 Boom years, just at a time when all the new capacity commissioned in those years starts to come online.

The dramatic rise of Asia's economies, including China, has been based on an export-driven model. Their growth powered ahead as long as the West grew, and companies continued to outsource much of their basic manufacturing activity to lower-cost countries.

In 2001, for example, China's exports were just 20% of GDP. But by 2007, they had reached 37%.

Similarly, Asia's exports were just 25% of total GDP (ex-China, Taiwan, Japan) in 1980, but were 50% by 2008.

Today, this model looks more and more unsustainable. Thus the blog welcomes comments by China's Vice President, Xi Jinping, calling for a new direction. Speaking at the weekend, he argued that "we must develop the economy mainly by relying on the domestic market and attach great importance to domestic demand, especially consumption demand, in driving economic development."

This comment suggests that the argument by China's Liu He, a finance Vice Minister, back in August 2008, is now becoming mainstream. He suggested then that 'the era of low costs and high growth has come to an end for China, and an economic restructuring is inevitable'.

The transition, though healthy for the long-term, is unlikely to be smooth. Export-oriented factories cannot suddenly be rebuilt to serve domestic needs. Equally, whilst a stronger currency will help keep domestic inflation under control, it will also reduce export competitiveness and volumes. March's first trade deficit for 6 years may not be its last.

The blog's early career, as a petchems trader in Houston, taught it to look out for moments when prices in one market start to diverge from those of a related product. These can often provide advance warning that a trend change is underway.

Thus it is fascinated by the above chart, from commoditycharts.com. It shows US crude oil prices (black line) since December, versus the S&P 500 (red line) and natural gas (green line). Oil and the S&P 500 have continued to move together, as they have for over a year. This has been a self-supporting trade, where higher oil prices provide evidence that a strong recovery is underway, and vice versa.

But natural gas prices have clearly diverged over the past few weeks. They peaked, as normal, in December-January, but are now down 21% versus early December. And in recent weeks, oil has also begun to struggle to keep up with the S&P. It has only risen 1.5% over the period, versus a 7.75% S&P increase.

Lower prices are excellent news for US gas-based chemical producers. And they should continue to be weak. Gas inventories are currently 12% above the 5 year average, and Bloomberg suggests they could reach record levels over the summer as new supply comes online.

Of course, as the blog noted last week, oil also has poor fundamentals, with US stocks well above normal levels. But Wall Street analysts remain bullish, based on "technical" signals. So it will be interesting to see whether declining natural gas prices do now indicate a trend change.

There are increasing signs that China is getting serious about tightening its lending policies. The above chart, from China's central bank, shows how lending has fallen since January. Then, it was 14% down versus 2009. But by the end of Q1, lending was down 43% versus Q1 2009.

In addition, the government has begun to take major steps to cool the housing bubble. House prices in some areas, such as Hainan, have risen 53% over the past year. Now, banks have been told to stop loans for purchases of 3rd homes, whilst buyers also have to provide tax returns and proof of social security contributions.

China Daily notes that 2-bedroom apartments in Shanghai are now selling at 20-30 times annual average earnings, well above comparable costs elsewhere in the world. It also suggests that a property tax may soon be introduced in some cities on a pilot basis.

As the blog warned in February, "chemical companies therefore need to carefully reassess likely levels of Chinese demand for their products, given that key elements of last year's major stimulus programmes may now start to be removed."

We are often told that investment bankers are much cleverer than the rest of us. But sometimes, they do seem to lack common sense.

Their behaviour since the Crisis, in paying out $bns in bonuses to the lucky few, seems no way to appease understandable public anger over the cost of the banks' bailout. The International Money Fund (IMF) today calculates this cost at a staggering $862bn, c1.5% of global GDP.

Thus they shouldn't be too surprised that the IMF is today proposing two new taxes. One is aimed at financing any future bailouts, whilst the other is a more general Financial Activities Tax, or FAT. And when the IMF bothers to think up an acronym like this, you know it means business.

Equally, chemical companies should also be concerned at the way bank profits routinely tower above theirs. As the above Financial Times chart shows, UK banks Return on Equity (the purest measure of profitability), has been consistently over 20% in recent years. Other Western banks have been similarly profitable. By comparison, BASF's ROE between 2000-9 averaged 16%.

The easiest way to start restoring the balance might be a more cautious response when taking investment bankers' calls re prospective M&A targets. This activity accounts for a high proportion of banks' profits, yet all the evidence suggests that most M&A destroys value for the acquirer.

Being smarter at M&A, and only doing higher quality deals, might therefore be an excellent way to boost companies' ROE whilst reducing that of the banks.

LyondellBasell (LBI) is to exit from Chapter 11 bankruptcy on 30 April, 15 months after entering it in January 2009.

The past 15 months have been an expensive lesson for those debt-holders who financed Basell's purchase of Lyondell in July 2007, at the peak of the market.

LBI entered Chapter 11 with $24bn of debt. It will now exit with just $5.2bn of net consolidated debt. Holders of senior secured debt will receive 93% of the new Class A shares in exchange for their claims. The value of these will depend on the outcome of LBI's proposed IPO in Q3. Most other original lenders are wiped out.

LBI is the world's 3rd largest independent chemical company, with 2009 sales of $30.8bn. Its predecessors, Lyondell and Basell, were also excellent companies. This has been demonstrated by the way in which employees have maintained their morale during an immensely difficult time. The blog congratulates them, and LBI itself, on their successful exit.

INEOS CEO Jim Ratcliffe has told the Sunday Times that the UK government "refused financial help" last year, when sales collapsed. He revealed that:

• The company had approached the UK government for help with liquidity, including deferral of VAT (sales tax) payments, but "got absolutely nowhere".
• Ratcliffe had even found it "quite difficult to get access" to senior Government ministers, despite it being the UK's largest privately-owned company.

The blog shares INEOS' frustration, and hopes that the next UK government will prove more responsive to industry's needs.

Its private lobbying of government on chemical industry issues has had some success over the past 18 months. But on one super-critical issue, it received more support from the Bank of England than the politicians.

Trade protectionism is on the rise around the world, as the blog forecast in its Budget Outlook back in October.

It suggested that "arguments about the 'export of jobs' will increase", and argued that "chemical companies will need to keep a close eye on the political arena, as they operate in a complex value chain, and may not otherwise appreciate the potential impact of a development in a key supplying or consuming industry".

Now the GPCA (Gulf Petrochemicals and Chemicals Association) is holding a high-level workshop on the subject in Bahrain next month. It notes "there have been a number of antidumping cases brought against petrochemical and chemical producers in the GCC (Gulf Co-operation Council) recently". It says this creates a need to discuss "this very relevant and important issue".

The chemical industry has gained enormous benefits from the growth of free trade over the past 20 years. And it has passed on these benefits to consumers around the world, in the shape of lower prices, product innovation and higher quality production. It is therefore good to see the GPCA starting to take a lead on this important issue.

Shell CEO Peter Voser has made a fascinating speech in China, where he highlights the length of time taken for new energy technologies to gain adoption.

He says Shell's research shows it takes "30 years for new energy types to capture 1% of the market". And he contrasts this with the electronics industry, where a new mobile phone has to be commercialised within 18 months, "to beat the competition".

The issue is the complexity of the development process, and the sums of money involved:

• It takes 3 years to built a pilot plant, after the original scientific breakthrough
• Then start-up takes a year, and 2 - 5 years to achieve reliable operation
• It takes another 10 years to build 12 or more plants
• And then it takes another decade to gain public acceptance

Thus biofuels is only now reaching its 1% market share, after starting in 1980. Wind, which began in Denmark and the USA in the mid-1980's, is also on track to reach 1% by 2015. Similarly nuclear power took from 1950-80 to become established.

Voser notes that "the 30-year law is not a natural law. It is a societal one". So in principle, it should be possible to speed up the process, if governments give their support. But even so, he cautions that "there are no easy and quick successes", even if "we all feel a sense of urgency".

The PowerPoint programme revolutionised business meetings in the early 1990's. No longer did people turn up with a few notes, and spend 15 minutes drawing out ideas on a flip chart or acetate. Instead, they collected their thoughts beforehand into a well-worked-out proposal.

But PowerPoint has also had unintended consequences. The above slide, from the US Army's Afghanistan strategy planning, is typical of these. As the US/NATO commander General McChrystal commented when it was first shown, "when we understand that slide, we'll have won the war."

Many Generals are now rethinking their use of PowerPoint. General McMaster, who banned its use in his Iraq campaign, told the New York Times, "its dangerous because it can create the illusion of understanding and control." He believes that overuse of PowerPoint not only ties up valuable resources at operational level, but also stifles discussion, critical thinking and thoughtful decision-making.

February was a milestone in US house markets. For the first time since December 2006, prices were higher than a year ago, according to today's authoritative S&P/Case Shiller Index. But the rise in the 10 City and 20 City indices was just 1%. And as the above S&P chart shows, prices are still only at Q3/Q4 2003 levels, even before adjusting for inflation.

S&P expect further gains in March/April, as buyers rush to beat this week's expiry of the $8k buyer's tax credit. But fears are rising that this $12.6bn programme (like auto scrappage schemes) has only brought forward already-planned purchases and not created much new demand.

Yale University Prof Robert Shiller, co-author of the Index, worries about this, noting that "I do have concern about a double dip" once Federal support is removed. The problem is that 1.1m homes are now in foreclosure, up 20% versus last year. Whilst another 4.8m people are either 60 days overdue on their mortgage payments, or already entering foreclosure - a 30% increase on 2009.

Banks have $2.6trn of mortgage loans on their books, and been very slow to crystallise their mortgage losses. This has caused 'shadow' inventory to build, in addition to those houses publicly advertised via realtors. The Wall Street Journal estimates it would take 9 years to work through published and 'shadow' inventory, at current sales rates.

The chemical industry is a well-known leading indicator for the world economy. Yet 18 months after the financial crisis began, the blog's review of quarterly company results reveals few signs of optimism that a sustained upturn is underway.

Q1 has certainly seen the forecast seasonal boost. But Asia, particularly China, remains the real focus of growth. PetroChina, Reliance and Sinopec all see a continuing boom underway, with Sinopec highlighting the importance of "state stimulus measures".

Dow Corning is certainly bullish, seeing "recovery in nearly every industry and geography". Whilst Cognis, also focused on 'green markets', detects improved demand in Europe. But although Dow sees "demand growth returning in developed markets", it notes significant "challenges" remain.

Equally, Akzo Nobel seems typical of the majority when noting it remains "cautious about the strength of the recovery". BASF also notes that "recovery is not certain". And several companies, including Rhodia, worry about the "uptrend in raw material and energy costs".

Air Liquide. "In a context that remains contrasted, this first quarter of 2010 marks the return to growth".
Akzo Nobel. "Expect pressure from further raw material cost increases during the year and remain cautious about the strength of the recovery".
Ashland. "Asia-Pacific remained the most difficult market for recovering raw materials costs; Europe remains tough due to the competitive environment".
BASF. "Limited supplies of certain chemicals as well as restocking of inventories among customers buoyed demand.... We expect that national stimulus programmes around the world will wind down. Further recovery is therefore not certain and surprises cannot be ruled out for 2010."
Bayer. "The decline in business momentum at HealthCare and CropScience was being offset by the recovery at MaterialScience".
BP. "Petrochemicals margins would come under pressure due to new capacity coming on stream".
Celanese. Asia is "the only region in the world that's growing".
Cepsa. "A more buoyant global operating environment with better product prices".
Clariant. "We expect the economic recovery to remain fragile and raw material costs to further rise heading into the seasonally weaker second half of the year".
Cognis. "Business conditions improved due to a pickup in worldwide demand, especially in Europe".
ConocoPhillips. "Chemicals experienced improved market conditions."
Cytec. "There is still some uncertainty about the recovery, and higher energy prices will show up in our costs for the second quarter."
Dow. "Demand growth was returning in developed markets, with strengthened consumer spending in areas such as electronics, appliances and automotive ...balancing out challenges in residential and commercial construction, inflation in emerging markets and sovereign debt issues in southern Europe".
Dow Corning. "Seeing this recovery in demand in nearly every industry and geography we serve".
DSM. "Uncertainties remain in the medium-term economic outlook."
DuPont. "Expected stronger sales growth operating margins as global economic improvements continued, with particularly strong demand in Asia Pacific.
Eastman. "Expected continued volatility in raw material and energy costs".
ExxonMobil. "Q1 chemical product sales were 6.488MT, up by 961KT in Q1 2009, primarily due to improved global demand".
Honeywell. "The timing and shape of the recovery is uncertain and we remain conservative in our planning assumptions".
Idemitsu Kosan. "Demand for petrochemical products recovered, assisted by China's economic stimulus package."
INEOS. "Just as the orders dried up suddenly in August 2008 so they have abruptly resumed in the past couple of months".
Kemira. "Uncertainty remained regarding the development of demand".
Lubrizol. "Do not expect full recovery to our 2008 volume level until 2011...also expect tight supply conditions for some of our raw materials that will result in upward cost pressure."
Occidental. "Significant margin erosion in 2009 carried over into the first quarter of this year."
Olin. "Had a Q1 operating rate of 75%, compared with 65% in Q1 2009."
PetroChina. "Ethylene output surged 37% year on year in Q1, with production of other petrochemicals also strong.
PPG. Saw continued "moderate recovery" in several of its global end-use markets over the quarter."
Quaker. "Anticipate somewhat lower product volume in H2 ...due to credit-tightening actions in China, seasonal factors, the ending of inventory restocking and the conclusion of tax incentives for auto purchases in several countries".
Reliance. "Domestic demand for most petrochemical products remained strong in the January to March period, with polymers demand up by 19% and demand for polyester and fibre intermediates up by 15%".
Rhodia. "The upward trend in raw material and energy costs is expected to continue".
Rockwood. "Difficult to determine what impact customer inventory rebuild is having on our sales."
SABIC. "Overcoming the impacts of the global financial crisis, as well as continuing our strategy of growth and investment in new industrial plants".
Shell. "Industry refining margins had significantly declined reflecting reduced demand for refined products".
Sherwin Williams. "Sales were slightly stronger than we anticipated, although domestic demand remains soft".
Sinopec. "In light of state stimulus policies, demand... grew steadily and the company took various proactive measures to expand the market and optimise the product mix".
Syngenta. "Expects volume growth from Q2 onwards".
Tessenderlo. "Visibility on H2 remains low".
TOTAL. "Chemicals has benefited from the economic recovery since the start of the year."
Trelleborg. "Warned that the demand scenario remains uncertain".
Unilever. "Commodity costs will increase in the second half, economies remain sluggish and competitive intensity will remain high".
Vopak. "We notice the first signs of structural recovery of the European chemicals market."
Wacker. Focused on " improving our cost structures and increasing our competitive edge."

A year ago, China's Dalian futures exchange was hitting its peak, in terms of polymer volume. The Linear Low Density Polyethylene (LLDPE) contract saw 80 million tonnes (blue line) traded in April. This was more than 3 times total annual world production.

But as the chart above shows, volume last month was 'only' 21MT - still high, but down 74% from the peak. A number of other signs also show that the 'China story', which has supported chemical, commodity and financial markets for the past year, may be coming to an end:

• LLDPE prices (red line) are down 4% versus the end-February peak, even though crude oil prices have risen 8% over the period
• Prices on the Shanghai stock market are down 6% over the same period

Plus, of course, the government is now scaling down its massive lending programme - the underlying support for all these markets.

US auto sales (black line) in April showed welcome improvement versus 2009, but were still a long way short of earlier demand levels.

They were up 19% versus April 2009. But even with this improvement, they were down by 24% by comparison with 2 years ago. On an annualised basis, they were only 11.2m versus 14.8m in April 2008.

And it seems that although companies continued to offer major incentives (an average $2800/sale in March), these had less impact in April. Analysts Edmunds.com, who monitor incentives, noted that "people are reining in their spending. We see the recovery as being very fragile".

Sell in May and Go Away" is the oldest rule in stock market investment. This week has certainly provided further support for it:

• The major Western stock markets are down c8%
• The major emerging markets are down between 4% - 13%
• Crude oil prices are down 13%

This May panic may well also mark the markets move into their 3rd, and most destructive phase. As originally identified by Merrill Lynch's analyst guru, Bob Farrell, "bear markets have three stages - sharp down, reflexive rebound, a drawn-out fundamental downtrend".

Greece, of course, and its debts, has been the catalyst for this week's panic. And the chart above (from the Bank of International Settlements), highlights the core problem. European banks have collectively lent $2663bn to the 5 euro countries at most risk of default, the PIIGS (Portugal, Ireland, Italy, Greece, Spain).

The vertical axis identifies the debt held by each country, showing that France has lent $79bn to Greece, and Germany $46bn. As my fellow blogger, John Richardson has noted, "if the whole of Greece suddenly vanished into the ocean, it wouldn't make that much of a difference to the global economy...including chemicals". Nor would Portugal, or Ireland.

But Spain and Italy combined are 6% of the global economy, with GDP of $3.6trn. Between them, they owe $1.8trn to banks in the rest of the EU. If markets become seriously worried about the prospects for economic recovery, then they will clearly be near the top of everyone's concerns. US banks, for example, have $3.6trn of loan exposure to Europe.

This suggests the world economy is now approaching a cross-roads:

• In one direction lies economic recovery, as argued by Larry Summers, US economics chief. His view was that government stimulus would provide, like a 3-stage space rocket, the "escape velocity" to stabilise the major economies and encourage consumers to begin spending again
• The blog, however believes with Pimco (the world's largest bond fund managers) that we face a "new normal" of lower spending and less debt.

As we move into Budget season, Boards will start to debate their outlook for 2011-3. Clearly they will hope, with Summers, for better times. But prudence suggests they should also plan for a less favourable, Pimco-type Scenario. Markets may well rally again short-term. But if Bob Farrell's analysis is right, the third phase of the Crisis still lies ahead.

Senator Dirksen's great one-liner in the US Senate, "A $bn here, a $bn there, and pretty soon you're talking real money" is beginning to seem sadly out of date, as the costs of the financial crisis escalate.

Today saw the Eurozone announce a €750bn ($936bn) bail-out fund, including €250bn from the IMF, to support its weaker members. This does finally provide the leadership that has been sadly lacking till now. But the news caused interest rates to rise in the zone's stronger economies, as investors worried about the costs of the move.

Against this background, another $19bn for the two US mortgage giants, Fannie Mae and Freddie Mac, seems hardly worth recording. Even the total $145bn spent so far on their 'rescue' seems chicken-feed. But, of course, it isn't. It is also real money that taxpayers will have to fund - either via increased taxes, or reduced public services.

Fannie and Freddie own or guarantee $5.5trn of mortgages, around half of the US total. They went bankrupt back in September 2008, but were nationalised, and are now the only major lenders left in the housing market. Politicans therefore daren't close them down but equally, as the blog noted in February, have no idea how to cap their losses.

Fannie and Freddie's continuing need for further bailouts is a reminder that the housing sector, so critical for chemical demand, is still a long way from full recovery.

Paul McCulley of Pimco, the world's largest bond fund managers, has been continually insightful about the lead-up to the current Crisis and its fall-out. He first alerted the blog to the work of Hyman Minsky, which is the best (and so far only) explanation for the disaster that is continuing to hit the world financial system.

Helpfully, McCulley today also provides a simple yet powerful explanation of why re-regulation is essential for the banking system. He argues that no bank can operate without the support of a central bank, as a lender of last resort when times get tough. And he parallels this as follows:

When my son turned 18, he said, "Dad, I'm now the age of majority and I can do whatever I want." I said, 'Son, that's absolutely true. However, I still control the Bank of Dad. And if you want to have access to the Bank of Dad, there are going to be rules. If you don't want access to the Bank of Dad, that's fine. But if you want access to the Bank of Dad, there are going to be rules.'

"The Federal Reserve and the FDIC and the Treasury, together, are the Bank of Dad. And Mom. I expect regulation to be similar to that which I have imposed on my son. It doesn't mean I want to stifle his innovation. That doesn't mean I want to stifle his creativity. I want him to be all he can be. But as long as he's banking at Bank of Dad, there are going to be rules."

Interestingly, Paul Volcker, who is now pushing through the Volcker Rule to re-regulate US banking, was in the audience.

India was the only major country to see auto production growing last year. With the Asian Petchem Industry meeting opening in Mumbai, it seems timely to look at the progress of the Indian motor industry in recent years. As the chart shows (data from the Society of Indian Auto Manufacturers) , the sector has been growing at 12% since 2003/4:

• Two-wheelers (blue column) dominate sales, with 9.4m sold last year
• Auto sales (dark blue) were 1.95m last year, 14% of total output
• Exports (purple) were in 3rd place, and have grown 25% pa since 2003
• Motor bikes are 63% of exports: autos are 25%

Encouragingly for the Indian chemical sector, the government provides strong support for the motor industry. As summarised in its 'Automotive Mission Plan, 2006-2016', the aim is to generate 25m additional jobs by 2016, when the industry should account for 10% of GDP.

The key focus is on smaller cars, such as the Tata Nano. It sells for $2k, with fuel efficiency of 26 kpl (73 mpg). As described by Ratan Tata at its 2008 launch, the concept is to provide an alternative for "families riding on two-wheelers - the father driving the scooter, his young kid standing in front of him, his wife seated behind him holding a little baby".

This growth should provide major support for polymer sales, as manufacturers look for new ways of improving fuel efficiency whilst keeping costs down.

The blog gained some key insights into the current M&A landscape this week, at the annual Pilko & Associates Round Table, co-organised with Shell Chemicals and leading law firm Allen & Overy:

• M&A has become a 'buyer's market', and this is not expected to change in the near future.
• Credit markets remain cautious. Liquidity exists for big corporates, but investors are not confident there will be a sustained profit rebound for petchems, given the amount of new capacity about to come online.
• Maximising the competitive advantage of their own specific operations is the only way for companies to counter this perception.
• Working capital is tight down the value chains, with banks still reluctant to lend, and this is adding to market volatility for many products, as CFO's seek to reduce inventory.
• Companies in emerging economies are looking to establish 'gateways' into developed economies, with a focus on acquiring routes to markets.

Significantly, a major amount of time was spent discussing the potential implications of the Deepwater Horizon oil rig disaster in the US Gulf. This is expected to create a sea-change in risk management. There are clear parallels being drawn with the banking Crisis, where self-regulation has also seemingly failed to provide the results expected by government.

Companies can therefore expect to see increased regulation, as part of the public's increasing distrust of business ethics. Regulators will probably set more rules, and become more pro-active in ensuring the required measures are being carried out. This will increase costs, and limit operational freedom.

10 years ago, Dow was in the middle of completing its $12bn Union Carbide acquisition. This made it the world's second largest chemical company, and a leading player in Basic petchems and polymers.

More recently, however, higher oil prices have made life increasingly difficult for chemical businesses that lack upstream integration. Dow's response, born of realism, has been to de-emphasise the Basics area, and instead focus on growing Performance businesses, as described back in July 2008 when the $19bn Rohm & Haas acquisition was announced.

Now, Dow has taken this strategy one step further, with the announcement of a new Vision "to be the most profitable and respected science-driven chemical company in the world". The chart above highlights the change, with new Dow's Business Model focused on Performance and Market-Driven businesses.

The move is seen as "transformational" by Vipul Shah, Dow's President for SEA, India, Pakistan in an ICIS news APIC interview. He notes Dow is "right-sizing" its Basics business, whose focus becomes to "provide the feedstocks for the needs of our Performance businesses". Whilst Dow will now start "investing heavily in R&D innovation platforms".

Shah notes that 2010 will see Dow "spending more R&D dollars globally than in manufacturing and engineering". And he sums up by noting that "what got us here over the past 130 years is not going to get us through the next 100 years".

The global economy and the chemical industry have been boosted, since the Crisis began in 2008, by massive government stimulus programmes in areas such as autos and housing. Now the International Monetary Fund (IMF) has released a new report, focusing on what happens next.

It warns that "general government debt is expected to rise by 36% in developed countries between 2007-14". And it notes that their costs for health and pension expenditure will rise by 4-5% of GDP by 2030, due to the aging population. It adds that most emerging economies also face the need for significant cut-backs, although their outlook is more favourable.

The IMF chart above shows the relative position of some major countries:

• The horizontal axis shows average GDP % "adjustments" ie cuts needed
• The vertical axis shows the additional costs of age-related expenditure

Top-right countries the USA, UK, Spain, Netherlands, Australia, are in worst position overall. Top-left Germany, Russia, Turkey, face lower cuts but high age-related costs. Bottom right Japan faces the most cuts, and its age-related spending rises by 3% of GDP. Even bottom left China and Italy need 4% cuts. Bulgaria and Indonesia are best-placed overall.

The IMF suggests governments might need to "freeze spending in real per capita terms for the next 10 years", whilst also introducing "bold reforms" to reduce age-related spending, as well as ending their stimulus spending.

This is further support for the argument that we face a 'New Normal' of lower growth rates and de-leveraging in coming years, rather than a quick return to the Boom years before the Crisis.

On 6 May, the blog warned that "it would be very nervous indeed about holding a long position" in crude oil. And as the chart shows, its fears were well-founded. Since 4 May:

• WTI has fallen 19%, and $16/bbl, from its $86/bbl peak
• The euro has also fallen 8%, and 6c, versus the US$

The suddenness of the change highlights the extremely short-term nature of today's financial markets, where so-called 'high-velocity trading' now accounts for up to 75% of daily trading volumes.

This trading often has an average holding period of just 11 seconds, and makes no effort to understand market fundamentals. Instead, it uses high-speed computers to capture fractional changes in bid-offer spreads. And, of course, it creates the potential for extreme volatility, when markets suddenly readjust to the real world.

For months, markets have been trading positively on the assumption of a V-shaped economic recovery. This has focused on perceived strong growth in China, and led to expectations of a tight oil market. In turn, as noted in the blog, this has driven the 'correlation trade' where the US$ weakens as the cost of its oil imports increases.

Now, the basic flaw in this assumption has begun to appear. China's growth is slowing, whilst Europe is heading for budget cutbacks and austerity. Key elements of the US recovery, such as housebuilding permits, are also looking less than certain. If markets had focused more on fundamentals, none of this would have come as a surprise.

Instead, the chemical industry, and others who live in the real world, will be left to pick up the pieces. The rise of the US$ is already causing concern in China, as it makes its exports less competitive. Equally, falling oil prices may well encourage destocking down the chemicals value chain, just as we come into the seasonally weak Q3 period.

The blog has sometimes despaired of the cheer-leading and wishful thinking of too many leading policy-makers. As I argued in the Financial Times in March 2007, before the Crisis began, "they seem to confuse being market-friendly with being friendly to markets".

It therefore welcomes the realism being shown by the UK's new coalition government. Today, David Laws, Chief Secretary in the Treasury, argues that "we are moving from an age of plenty to an age of austerity in the public finances". And coincidentally, Nobel Prize-winning Paul Krugman suggested yesterday that most Western countries aren't really like Greece, but "are looking more and more like Japan".

The blog's own chart above, showing the relative movements of the US S&P 500 index, and Japan's Nikkei 225, illustrates Krugman's point:

• The black line and axes show the % monthly changes (basis September 1985) in the Nikkei 225, to 2004
• The red line and axes show the % monthly changes (basis September 1995) in the S&P 500, to today

The chart shows the parallel market tops in November 1989 for the Nikkei, and in August 2000 for the S&P 500. It highlights a remarkable parallel, first noted by market guru Alan Shaw in Barrons in July 1998, and this continued until early 2003.

The parallel then disappeared, before re-emerging briefly last year. And the recent market falls may well be a first sign that the two lines are reconnecting again. The rationale for the parallel is simple, that Japan and the West both face the problem of an aging population, with Japan's demographics being some 10 years ahead of the West's.

The difference since 2003 can also be explained by this "cheer-leading" by Western policy makers, who have tried to maintain perpetual growth in their economies. Every time markets dipped, their response has been to cut interest rates and inflate speculative financial bubbles,.

With a G7 government instead now talking about an expected 'Age of Austerity', chemical company Boards will clearly want to revisit their planning Scenarios. They need to ensure their strategies are robust enough for them to be confident of surviving a continuing Downturn.

April 2009 wasn't a great month for EU auto sales. Volumes (red line) were down 11.6% versus April 2008. But sales were starting to benefit from the introduction of government scrappage schemes.

A year later, as the above chart from ACEA (the European auto manu-facturers association) shows, this support has begun to fade:

• April 2010 sales were 7.4% below April 2009 levels
• This was the first fall for 10 months
• Germany, the largest market, saw a 32% decline

ACEA are not optimistic about the outlook for the rest of 2010. They note that "government support has ended or begun to fade out and the economic situation remains difficult".

The problems in US housing remain a major cause of concern for global chemical markets. As the above chart shows - from the American Chemistry Council (ACC) weekly report - housing starts (blue line) and building permits (red) are still at very low levels.

April's housing starts were up 41% versus 2009 to 672k. And this was the highest monthly figure since the Crisis began in October 2008. But they were still 15% lower than seen in any previous downturn, since records began in 1959. And building permits were down 12% versus March, as contractors foresaw a slower market now the $8k tax credit has expired.

Equally, as the Mortgage Bankers Association reported:

• 14% of all households with a loan are at least one payment overdue
• 4.63% of all loans are in foreclosure, up from 3.85% in Q1 2009
• States such as Illinois and Michigan are now seeing the highest increase in seriously overdue payments, as their local economy hits problems.

As the ACC note, "the housing sector is recovering slowly, but remains depressed as foreclosures continue to saturate the market".

A month ago, Nigel Davis called attention in his ICIS Insight column to the alarming fall taking place in US ethylene values. He noted that "inventories seem to have filled", and presciently concluded that "buyers have been on the look-out for the turn and, by all accounts, expect any downward movement to be swift and deep".

He suggested it meant companies should remain "cautious about the continued strength of the chemicals recovery". And as the above chart from the excellent ICIS Weekly Margin report shows, Asian prices for major ethylene derivatives such as high density polyethylene (HDPE, red line) are now also falling quite steeply.

As always at turning points, the picture is still mixed:

• Lower feedstock costs, due to the plunge in oil prices, have enabled integrated producers to retain good margins (yellow block) so far.
• But a warning sign can be seen in the standalone margins for Asian HDPE producers (red block), which have remained negative.
• And my fellow blogger Malini Hariharan notes that China's polymer stocks are reportedly "close to record levels".

The blog's White Paper, Budgeting for a New Normal, has proved extraordinarily popular since it was published earlier this year. As a result, ICIS have asked me to produce a mid-year Update, to review developments over the past 6 months. This will appear shortly.

In the meantime, ICIS' Will Beacham interviewed me in London's Trafalgar Square, on the implications of recent falls in chemical prices and other key issues. Please click here for the highlights, and on the screen above for the full interview.

China's Dalian futures market has been the global centre of speculative polymers trading for over a year. It traded an amazing 80 million tonnes of LLDPE in April 2009, as excitement built. And volume (blue line) remained positive on a year-on-year basis until January. But since then, comparisons have been negative:

• February's volumes were down 50% versus 2009; March was down 38%; April was down 74%; and now May was down 46%.
• Volumes on the new PVC contract are also lower, at just 7 MT in May versus 44 MT in December.

Equally, pricing (red line) has been on a declining trend since February, even though crude oil prices rose strongly until April. This divergence is also a warning sign, as it suggested traders were beginning to question the physical market's ability to pass-through ever higher prices.

For the moment, both the bulls and the bears can still present an argument for their case. But the bulls need a quick recovery in volume, if prices are not to remain under pressure.

A year ago, the blog launched its IeC Boom/Gloom Index. This was based on the concept that markets are driven by both sentiment and fundamentals. And whilst fundamentals can be understood by analysing hard data (eg auto sales, housing starts), it is equally important to understand sentiment, and what markets think will happen next.

Analysing the Index's performance (blue column) over the past year, it seems to have done its job. It has certainly reflected the positive sentiment that propelled most financial markets into major rallies. Equally, its inability to regain pre-Crisis levels since October 2008, indicates that some investors remain more doubtful.

It has also tracked mood swings. A year ago, many in financial markets were focused on signs of the 'green shoots' of recovery, and were expecting government stimulus programmes to create a quick V-shaped recovery to the levels seen in the 2003-7 Boom period.

The 'green shoots' measure (green line) captured this mood. Since then, worries that we might face a more 'frugal' world have surfaced, and these have now led to a fear that we may be moving to a world of 'austerity'. The blog's dictionary defines this as "severe simplicity, lack of luxury".

Austerity has therefore being added to the chart (red line), replacing frugal. This sentiment increased dramatically during May, as sovereign debt problems grew in Southern Europe. It will be interesting to see whether it proves to be just a temporary concern, or longer-lasting.

The blog's White Paper, 'Budgeting for a New Normal', proved enormously popular when it was published earlier this year. ICIS therefore suggested that it would be useful to update it, 6 months later.

This Update is now published. It looks at the current state of the global economy, six months on, and then covers the outlook for key chemical markets such as construction/housing and autos, as well as the latest views expressed by chemical companies themselves on the outlook.

Please click here if you would like to download a free copy.

Every day, the word "unexpected" appears next to a downbeat economic report. The latest example was yesterday's US employment report, where the consensus forecast was for a jobs gain of 180k. Yet it has been clear for months that this has been a 'jobless recovery', and so the actual figure of only 41k new jobs should not have been a real surprise.

This chart above, from thechartstore, shows US payrolls from 1939, and highlights how:

• Payroll growth was very steady until 2001, through wars and recessions
• The recovery from the 2001 downturn was followed by only a slow, and relatively small gain in payrolls
• The current downturn has taken payrolls back below the 2001 level
• 1 in 6 Americans is currently unemployed according to the U6 measure

Equally worrying is that the average jobless person is now unemployed for 34 weeks. This is the highest level seen since records began in 1950. The previous high was just 22 weeks, in 1984.

70% of US GDP comes from consumer spending, and it is a key driver for global chemical demand. Unemployed people don't have much money to spend, whilst fear of unemployment makes others more cautious.

Sadly, nothing is likely to change for the better, whilst policymakers and analysts continue to fool themselves that every piece of bad news is "unexpected".

6 months ago, the blog suggested that normal seasonal demand patterns could resume in 2010. And it optimistically forecast "a strong H1", on the basis that "consumers should need to restock ahead of the usual Q2 demand peak in autos/construction".

This optimism was based on the American Chemistry Council's excellent analysis of polymer demand, which indicated a likely turn in the inventory cycle. And the ACC's latest report (above) shows inventories (red line) have indeed risen sharply, ahead of demand (blue line). In turn, of course, this has led to a welcome improvement in company results.

The blog also suggested that we would then see a "slower Q3 holiday season", and this still seems a likely outcome. But it also worried about the risk from crude oil pricing, and the 'correlation trade'. And this has become a greater worry in recent weeks, as prices have tumbled.

The problem is that too many pension funds have rushed to invest in crude oil, based on a belief in an eternal boom in China. This has led to bumper profits for the trading and storage community, as storage tanks around the world have been filled with oil and oil products.

But now prices are beginning to fall. And worries are appearing about the pace of growth in China, as the government seeks to cool overheated housing and construction markets. There is therefore a real prospect that prices could continue to fall to $60/bbl, as the funds realise their mistake.

If this happens, then we may well see an element of destocking down the value chain, in addition to Q3's seasonal weakness.

For the past 20 years, the chemical industry has been making steady progress in improving its environmental, health and safety performance. More recently, security has been added to the list of key items covered by the voluntary Responsible Care initiative, which covers c90% of chemical production.

Now, however, this enormously important activity has moved into the political spotlight, following the attack by President Obama on BP's CEO, Tony Hayward, where he said he knew "whose ass to kick" and added "He wouldn't be working for me".

In the public mind, of course, oil and chemicals are closely linked. Even more unfortunate is the connection being made with the problems in the banking sector, with 'self-regulation' seen as the underlying cause in both areas. So it is most unlikely that vote-seeking politicians, or nervous regulators, will seek to draw distinctions when legislating in response to the Deepwater Horizon disaster.

It is almost inevitable, therefore, that we will see greater regulation on chemicals manufacture as a result of Deepwater Horizon. This will impact innovation, as well as increasing costs.

China is a very difficult country for foreigners to understand. The blog suspects that the best approach is to apply Winston Churchill's insight on Russia, namely "I cannot forecast to you the action of Russia. It is a riddle, wrapped in a mystery, inside an enigma; but perhaps there is a key. That key is Russian national interest."

Looking at China in this light suggests that social stability is the key national interest at present. In turn, this means that policymakers at the Commerce and Finance Ministries have difficult issues to resolve:

• The Commerce Ministry has to deal with increasing labour unrest. As the Financial Times notes, "Signs are emerging that the labour protests in China are far more widespread and co-ordinated than previously thought".
• The Finance Ministry has to cool a speculative boom, which is pushing up inflation and causing problems in the property sector. China's home prices rose 12.4% in May, whilst inflation rose above target to 3.1%.

These two concerns are, of course, connected. Rising inflation and house prices naturally cause workers to demand higher pay, to maintain their standard of living.

Policymakers cannot afford to inflame further discontent. So they have to reduce lending from last year's peaks. As the above chart shows, this is now down 31% by comparison with the first 5 months of 2009. Equally, there is increasing reliance on exports as a source of growth, with May seeing a 48.5% rise versus 2009 - a 6 year high.

But this focus on domestic issues risks increasing friction with the USA, where US Treasury Secretary Tim Geithner, told Congress this week that "China's exchange-rate policy prevents a balanced global recovery". US politicians cannot afford to seem uninterested in trade issues, with mid-term elections due in November and 1 in 6 Americans out of work.

US legislation in reaction to China's exchange rate policy therefore looks increasingly likely. If this happens, the chemical industry, which has relied on exports to Asia over the past year, risks being caught in the cross-fire.

The blog has been out and about in recent days, visiting some of the major European chemical companies. Most continue to see strong order books. In normal circumstances, this would lead to considerable confidence about the outlook for the rest of the year.

However, there are increasing fears, as Nigel Davis has noted in ICIS Insight, that underlying growth may already be slowing. One tangible example of this slowdown is the chart above, showing that EU auto sales fell a further 9.3% in May.

Last year, of course, Europe was the world's largest auto market, with sales of 14.4m. And volume continued to be positive versus 2009 until March, helping to boost chemical and polymer demand. But few expect H2 to be as strong.

ACEA (the European auto manufacturers association) note that the sales decline reflects both "the end to government support schemes and the further challenging economic situation". In turn, this reinforces the blog's New Year worries that Restocking is not the same as Recovery.

Spring should be a boom time for building new homes in the USA. But in fact, May's single family housing starts (bottom chart) fell 17.2% versus April, as the $8k tax credit ended. Yet affordability should be high, with prices down 30% from the peak, and mortgage rates at the lowest levels for decades.

This picture mirrors yesterday's news on European autos. As many feared, the stimulus programmes have not created new demand, but merely brought forward existing demand, with buyers taking taxpayer's money whilst it lasted.

The top chart, also from the Wall Street Journal, also confirms how industrial production (and chemical demand) has rebounded under the influence of seasonal factors and stimulus incentives. But although May's 1.2% rise is welcome news, it means the index is still only just above 2002 levels.

This week's data thus confirms the blog's fear that although we are seeing relative improvement, this is from a low base in absolute terms. And if autos and housing demand stay depressed, this must feed through into slower chemical demand in the seasonally weaker Q3 period.

The blog is delighted to see that Ineos is to build its first European BioEnergy Process Technology plant at Teesside, UK.

The £52m ($75m) plant will produce 30m litres (24 million tonnes) of bioethanol, and 3MW of electricity on start-up in 2012. It will fuel 250k autos running on E10 blend, and provide electricity for 6000 homes.

Feedstock will be c100KT of biodegradable household/commercial waste.

This is one of the first investments under the UK government's £60m scheme to equip Teesside to become a centre of low carbon technology. It is excellent to see the process engineering skills of the chemical industry being used to develop the technologies of the future.

The chemical industry can be very proud of what it has achieved with the Responsible Care programme since 1985. But it may need to consider how this develops, in the light of the Deepwater Horizon disaster.

One key question emerged from this week's US Congressional hearing with the heads of ExxonMobil, Chevron and Shell. It seems they all disagreed with BP's drilling practices:

• EM's CEO Rex Tillerson said "We would not have drilled the well the way they did".
• Chevron chairman John Watson noted "It certainly appears that not all the standards that we would recommend or that we would employ were in place".
• Shell's president Marvin Odum added that "It's not a well that we would have drilled in that mechanical setup".

And according to the New York Times, "The executives of the other companies asserted Tuesday that they believed BP was an outlier, cutting corners to save time and money in ways that they would not tolerate".

As far as the blog knows, there is no equivalent of Responsible Care in the oil industry. But this does not mean that the chemical industry couldn't find itself in a similar position. Compliance with the Global Charter has always, for very understandable reasons, been mainly based on a company's own interpretation of the programme.

So what would happen if a serious incident were to occur, on the scale of Deepwater Horizon, and it became clear that this was due to poor practice at a company signed up to Responsible Care? Could we see the same process taking place in Congress, with other companies blaming the supposed "outlier" for not using best practices?

But by this stage, as with deepwater drilling today, the issue might well have already become one of 'licence to operate' for all those involved, not just the offending company.

The above chart is the blog's best effort to correlate the change in China's bank lending with the real economy. It shows electricity consumption (blue line) and lending (red column) since July 2008.

Electricity consumption is an excellent proxy for the real economy, and probably more reliable than GDP figures, which are widely believed to be manipulated by regional governments to meet central targets:

• Electricity consumption fell 14% from Q3 to Q4 2008, and then a further 3% in Q1 2009, as China's exports collapsed due to the financial crisis.
• Bank lending was also falling until November 2008, along with exports. But it then revived dramatically, as government introduced new targets.
• Lending jumped to $70bn in November from October's $27bn, and more than trebled in Q1 2009 versus Q4 2008.
• This increased lending then stimulated the real economy. Electricity consumption rose to record levels, with Q2 2009 up 12% versus Q1, and Q3 up a further 16% versus Q2.

What happens next is, of course, the key question? From the petchem viewpoint, the main issue is the likely impact from the government's $580bn stimulus programme, which aimed to ramp up output in key growth sectors for employment such as refining and petchems.

This is clearly now happening. Refining runs are expected to be up 8% in June, versus 2009. And average naphtha yields are up from 10.9% to 11.3% over the same period. So feedstock volumes into petchems, and hence petchem production, have risen 12% since June 2009.

This is a massive increase in petchem output, especially when economic growth (as measured by electricity consumption) is now stabilising. So the pressure will come on import volume into China. In addition, this weekend's currency revaluation will probably add to pricing pressures, as China seeks to ensure its higher volumes remain competitive.

The blog is in gloomy mood today, in spite of last night's England World Cup win. Not because Wall Street 'analysts' maintained last month's 33% drop in US new home sales was 'unexpected'. Nor even that the consensus forecast is still for 700k housing starts this year, when current data suggest that last year's 560k total may actually prove hard to beat.

Its gloom is due to its perception that most policymakers seem totally unprepared for the possibility that things might get worse in H2. Of course, its good to be optimistic and hopeful. But after the events of the past 2 years, it would surely be only prudent for them to consider a Downside scenario?

Hopefully, chemical companies have not fallen into the same trap with regard to contingency planning, given the importance of housing to overall sales. To help with this process, the blog strongly recommends the above CNBC interview with Meredith Whitney, the only US bank analyst to correctly forecast the downturn.

She may not be right with her forecasts of a further decline in housing markets and consumer spending, and an increase in bank write-offs. But, like the ECRI indicator, her track record is hard to beat.

At the mid-year point, its interesting to look at the performance of the total chemical industry, including pharmaceuticals.

The chart, from the American Chemistry Council, shows global demand has now recovered to 2008 levels. Pharma is more recession-proof than other parts of the industry, as people still become ill and need treatment.

In terms of Regions, N America remains the weakest performer:

• N America was up 5% in May versus 2009, with the ACC noting that "activity in the US softened". Weakness was centred on petchems, organic intermediates and polymers.
• W Europe was up 12%, and growth seems to be peaking.
• Asia was up 12%, with earlier sharp gains now slowing.
• Middle East was up 13%, maintaining its performance as new plants come online.
• CEE was up 20%, as it benefits from the W European recovery.
• Latin America was also up 14%, helped by demand from China.

The Baltic Dry Index of freight costs (for iron ore, grains and coal) follows changes in global demand for bulk shipping. As such, it is an important leading indicator of future economic activity, and chemicals demand.

The blog first noted Index movements in October 2007, when this was accurately forecasting the H1 2008 boom. In May 2008, the Index then began a 90% fall that preceded the H2 collapse. Now, as shown in the chart above from Bloomberg, it is again flashing a warning light.

The Index bottomed last October, as companies cut back on inventories ahead of year end. But it then moved up sharply, before the seasonal weakness in Q1 (when shipping conditions are poor). But in the last month, its rally since March seems to have collapsed. The Index is now back at the October lows.

The FT notes that "the fall in freight rates reflected a gloomier outlook for the global economy". An analyst with ICAP, the broker, added that in their view "the Chinese are tightening seriously. We're not very positive on the short-term global outlook".

The blog continues to go from strength to strength.

It is now read in 130 countries and 3680 cities, up from 111 countries and 2088 cities a year ago. Its readership is truly global, with the Top 10 countries including Benelux, China, France, Germany, India, Italy, Singapore, Turkey, UK and USA.

It has also expanded its activities. ICIS has hosted two successful webinars, whilst the American Chemical Society now offers webinars every 6 months to their 100,000 members. Blog readers can join the next one on Thursday (they are free), by registering here. The introduction of YouTube interviews with ICB's Will Beacham has also proved popular.

Another exciting development has been the White Papers launched with ICIS. Over 2000 copies of the 1st White Paper were downloaded in 24 hours after its publication. The Mid-Year Update, just released, seems to be equally popular. Click here if you have not yet got your free copy.

In addition, the blog has been invited to speak at a number of major company, industry and sector events.

Thank you very much for your continued support.

The blog is a great believer in the retail sector's ability to help us forecast chemical industry trends.

McBride is Europe's leading 'own brand' in the household and personal sector. Its profit warning on Thursday of "weak retail sales across Europe", therefore rings alarm bells. The sector is a large outlet for chemicals, and has recently seen BASF pay €3.1bn ($3.8bn) for the Cognis business.

'Own labels' have generally done very well in the downturn, with consumers focusing on price and value. McBride is a well-managed company, and as recently as February was forecasting continued good earnings. Now it says the current quarter will be 3% below 2009 levels.

The warning was a shock to investors (as shown in the Yahoo chart above), with the shares falling 40% after the news. And the Financial Times adds that McBride is facing "a fightback by brand owners" that includes price discounts. Clearly, the rollout of more Basic brands by majors such as P&G over the past year, is now having a serious impact.

In turn, this is going to put pressure on chemical industry volumes and margins, just as we enter the seasonally weak Q3 period.

When the G-20 met in London in April 2009, they produced a Communiqué containing just 688 words. And as the blog noted in conclusion, there was "no sign of a 'Plan B' being developed", in case the Stimulus measures failed to work.

This was still the case last September in Pittsburgh, when the Leader's Statement had grown to 9292 words. Now, after this weekend's Toronto summit, the Declaration's word-count has risen still further, to 10713 words and 27 pages.

This highlights a sense of drift and ineffectiveness within the G-20. The key output required in a report are answers to the questions 'Why?, What?, When? and How?' But these questions, let alone their answers, are sadly lacking. There is no clear action plan to address the key issue of how the G-20 will help to return the global economy to a growth path.

And yet, by its 4th point, the leaders recognise that "serious challenges remain". And they add that "while growth is returning, the recovery is uneven and fragile, unemployment in many countries remains at unacceptable levels, and the social impact of the crisis is still widely felt."

This is quite a shift in mood from the "It worked" comment in Pittsburgh. And it is accompanied by an acceptance that "those countries with serious fiscal challenges need to accelerate the pace of consolidation". This group, of course, includes much of the European Union, which accounts for 28% of global GDP - a larger share than the USA.

If nearly a third of the world economy is now in "consolidation" mood, then it is wishful thinking to imagine that the other 2/3rds can effectively compensate. Plus, of course, once we are past the mid-term elections, no doubt the USA will formally join the consolidators camp.

Deflation and protectionism are becoming bigger and bigger risks for the chemical industry as the Crisis continues.

Each US auto sale is worth $2973 to the chemical industry, according to American Chemistry Council research. And as the chart above shows, current sales remain well below the levels seen in the Boom years.

In June 2007, for example, 1.5m autos were sold (black line), in line with 2006 and 2006 performance. They were worth $4.5bn in chemical sales in today's money. Even in 2008, as the Crisis developed, 1.2m were sold. Yet although June 2010 saw a welcome improvement to 983k sales (versus 859k in 2009), the chemical sales value was still only $2.9bn.

June also saw a continuing swing towards smaller, cheaper, vehicles, with Hyundai volumes up 35% at 51k. And sales to private buyers slowed, with volume supported by lower margin sales to government and companies. This will keep pricing pressure on parts suppliers, already struggling to pass on the impact of higher oil and polymer prices.

Overall, annualised sales dipped to 11.2m, compared to the 15m-17m level seen between 1995-2007. The auto companies still expect a rebound when new models are launched, but with US employment numbers very weak, H2 could easily disappoint.

Two months ago, on 8 May, the blog suggested that 'Sell in May and Go Away" was likely to prove good advice this year. Since then, most major stock markets have fallen dramatically, with the S&P 500 down by 9%.

The proximate cause of the blog's pessimism then was the onset of the Greek/eurozone crisis. And this, of course, is still getting worse not better. But from a chemical industry viewpoint, it is the chart above, and its implications for H2 demand, that is the real worry at mid-year.

China has been the mainstay of chemical industry demand for over a year. Now, it appears that both of its key drivers are reversing:

• The government is cutting back on its stimulus programme, with lending down 31% versus 2009 levels, as it worries about soaring property prices and social unrest
• Speculators are slowly realising that oil markets are over-supplied, and crude oil prices are now off 12% from their early May peak.

In turn, these two events have caused problems for Asian polyolefin markets. Speculators had taken full advantage of China's lax lending policies to invest in oil-related product areas. As a result, trading in linear low density polyethylene (LLDPE) had soared on the Dalian futures market.

This can be seen in the above chart. It highlights how WTI crude prices (blue line) and LLDPE (red dotted line) had, most unusually, been trading virtually in parallel. Now, however, this relationship has broken down.

And now it is emerging, as long feared by the blog and other observers, that polyethylene (PE) inventories have indeed been driven by this speculation in crude. As my fellow blogger, John Richardson, notes this week, "Sinopec's stock levels are reported to be at 700,000-800,000 tonnes compared with the usual 500,000 tonnes".

He adds that this is due to Q1's high level of PE imports, which reached 865KT in March, versus a 2009 average of 610KT. And this was in spite of a 100KT increase in China's domestic production to 800KT.

With China's auto sales falling 5% in June versus May, it seems unlikely that the torrid pace of stimulus-inspired demand growth will continue into H2. Equally, even the doziest pension fund will start to ask itself whether its 'investment' in crude oil futures has really provided the hoped-for diversification versus equity markets, when both are down similar amounts.

Some Iranian PE has already been re-exported from China, as the smarter traders seek to cut their losses. And if crude oil continues to fall towards the blog's expected $60/bbl, then a further slowdown in demand can be expected, as the value chain destocks. As they say in football, 2009 could then easily become a 'year of two halves', where the seasonal upturn in H1 gives way to a much more difficult H2.

Coal was the original source of most chemicals.

It was then replaced in the 1960's by oil-based feedstocks. Their lower cost of manufacturing led to the boom in applications and volumes seen over the past 50 years.

More recently, biomass' potential is now being explored.

At the same time, major companies such as BASF, Dow, TOTAL and Eastman, as well as engineering company Uhde, have been looking again at using coal or natural gas as sources for olefins and polymers. Whilst Shenhua Baotou Coal, in China, plan to produce 300 KT of ethylene and propylene from coal, along with PE and PP, later this year.

This week, ICIS news report that TOTAL's Methanol to Olefins (MTO) process, developed with Hydro and UOP, is working well at pilot stage. Based on the Feluy, Belgium site, the 45KT plant converts methanol into ethylene, propylene and heavier olefins. The UOP/TOTAL Olefin Cracking Process (OCP) then converts the heavier olefins to propylene.

TOTAL have produced on-spec polypropylene from the propylene, and plan to produce polyethylene over the next few months. And they add a key benefit of the process is that "more than 85% of the carbon entering the unit will come out as ethylene and propylene".

TOTAL will now start to "develop MTO/OCP projects with potential partners in coal or gas rich countries that are looking for developing their petrochemical industry based on their own raw materials," according to Francois Cornelis, TOTAL VP responsible for the area.

Unprecedented changes are taking place in the relative prices of the main 'building block' petrochemicals. In turn, these could have major implications for downstream users, all along the key value chains.

Today's post looks at the changes taking place in ethylene's relative price to the other olefins, propylene and butadiene. On Monday, the blog will look in more detail at ethylene pricing versus propylene. On Tuesday, it will look at benzene, and at paraxylene on Wednesday.

3 months ago, the blog highlighted that for the first time ever (as the chart above shows), ethylene prices (blue line) had dipped below propylene (red) and butadiene (green). This is due to a number of different factors:

• Ethane-based crackers are now coming online in the Middle East. This, together with the shift to lighter feeds in the USA and Europe, is reducing operating rates for liquids-based crackers. These, of course, are major sources of propylene, butadiene and benzene. And so the volume of these 'co-products' is reducing.
• Separately, declining gasoline demand in Europe and the USA, caused by the shift to diesel in Europe, and the higher use of ethanol in the USA, is reducing refinery operating rates. Refinery volumes are an order of magnitude larger than chemical volumes. And so in turn, this is also reducing propylene, benzene and paraxylene production.

This combination has created a counter-intuitive result. During a downturn, one would normally expect petchem supply/demand balances to weaken. This is happening to ethylene, although it is being mitigated by lower liquids-feed availability from refineries.

But for propylene, butadiene and benzene (and paraxylene to some extent), supply has reduced ahead of demand. The most extreme example is butadiene, where markets have become extremely tight, in spite of the downturn in the key demand area of autos, due to its lack of alternative production routes.

Our forecast, as originally set out in our 2008 Feedstocks for Profit Study, is that butadiene will see an extended period of tightness. It suggested that a Global Downturn scenario would lead to a tight supply position as Europe's steam crackers "will turn down relatively harder than auto production, due to Middle East production taking a relatively higher share of C2 demand, and thus reducing the supply of butadiene".

As promised on Saturday, today's post looks in more detail at the major change taking place in the relationship of propylene to ethylene prices.

When the blog joined the chemical industry in the 1970's, propylene was often regarded as a disposal problem by many cracker operators. They ran their plants to produce ethylene, which was both the highest volume and the highest priced product.

Accurate historical pricing data only goes back to 1978, and is European-based. The chart (based on the annual average propylene price versus ethylene) shows that then, propylene was only priced at around 60% of the ethylene price. This value-leakage led producers to focus development effort on propylene derivatives, particularly polypropylene.

Their effort paid off in the 1980's. The combination of propylene's lower price relative to ethylene, and its increasingly higher quality, led to better volumes. And so propylene was normally able to sell at between 70% - 85% of the ethylene price on an annual average basis.

But in the mid-2000s, propylene's relative price increased again. This was due to increasingly tight ethylene and benzene markets, which prompted some converters to seek alternatives to polyethylene and polystyrene. In turn, this helped propylene's growth rate to move to 1.2 x global GDP, versus the 1.0 x level of ethylene.

Now 2010 has seen propylene move to parity pricing with ethylene. This raises important questions for both producers and consumers:

• Should producers invest in more on-purpose production, such as metathesis and propane dehydrogenation? Some major volumes are now coming online in the Middle East and Asia, but perhaps more is needed.
• What will happen to refining rates? Around 30% of propylene is currently produced from this source, and so volumes have been reduced by the reductions in operating rates discussed on Saturday. Will these volumes return? And what might be the impact of China's heavy investment in new refinery-based propylene production?
• Will propylene derivatives be able to compete successfully at today's higher prices? Moves to higher auto efficiency in the USA, for example, will mean replacing steel and glass with lighter weight products - so perhaps polypropylene and polycarbonate won't need to be very price-sensitive in such applications?
• Can converters afford to change their machinery to use less propylene? Undoubtedly the new Polymer Parks in the Middle East will focus on polyethylene, as this is the main product from the local crackers. But with today's lower margins, the financial basis for a purchase of new equipment may not be sufficiently robust for current users to justify a move.

As noted on Saturday, this is an unprecedented situation, and we have no guide from history as to how these issues will resolve themselves. But the blog believes it would be very dangerous for companies to ignore them, and simply assume that the world will soon return to the pricing basis of the 1980s - 90s.

As promised, the 3rd of the blog's series on the changes underway in the pricing of the major 'building block' chemicals, looks at benzene.

The chart above shows its 'spread' versus naphtha, the key dynamic from a price and margin perspective. As can be seen, this was normally in the $80/t - $200/t range until the early 2000s.

This was because considerable on-purpose capacity existed in the form of HDA (hydrodealkylation) units. And when the price of toluene dipped, or benzene's price rose, these units stabilised supply/demand balances.

But since then, refining dynamics have increasingly come to dominate benzene markets. In 2000-1, they had caused benzene to go into surplus, and the spread to dip towards zero, as European refiners extracted more benzene from gasoline to meet new regulations.

Then in 2004, the removal of MTBE in the USA led to an extreme tightness, as toluene was sucked into the US gasoline pool. On-purpose HDA became very expensive. Equally, paraxylene's growth (PX) meant more MSTDP plants (disproportionation units) were built, with an increasing bias to PX output rather than benzene.

The spread jumped to a record $700/t level, and product remained tight until 2008. But in a dramatic reversal, spreads then fell to a negative $40/t level, as petchem demand slumped at the start of the Crisis, whilst refining rates proved more robust due to refiners' need to extract benzene to meet gasoline regulations.

Similarly, recent lower refinery operating rates have reduced benzene supply from this important source, even though demand has been supported by government stimulus programmes. Spreads thus jumped again, to the $300/t level. And this increasingly volatile behaviour raises a serious issue for buyers. It demonstrates that there is really little flexibility for benzene supply to balance demand.

When benzene demand is low, this means they benefit from lower spreads. But as with propylene and butadiene, lower upstream operating rates will not increase merely because benzene demand improves. The blog therefore believes there is a clear need for consumers to examine their sourcing strategies, to cope with this potentially difficult situation.

Paraxylene (PX) has been a great petchem success story over the past 30 years. This 4th post in the blog's series looks back at its history, and discusses how its future may develop.

It is hard to remember that back in the 1970s, DMT (dimethyl terephthalate) was the main polyester material. But the superior properties of PTA (terephthalic acid) led to dramatic growth for polyester and hence in PX demand. More recently, major growth in the use of PET (polyethylene terephthalate) for bottles has further increased demand.

This growth was even more remarkable when set against the sourcing problems associated with PX. It required xylene (or toluene for MSTDP), to be 'bid away' from gasoline, and the octane pool. This was very difficult, as refiners would never allow gasoline stations to run short, whatever the alternative value into PX.

The blog spent several years experiencing these problems at first hand with ICI, then the No 2 PTA producer - first in the UK and then in Houston, Texas. A period of low prices often meant refiners simply stopped xylene extraction. This led to PTA producers placing a high priority on security of supply issues, rather than absolute price.

More recently, however, the blog suspects that markets are moving more in favour of PX producers. As the chart above shows, PX normally trades at a spread of $200/t - $350/t versus naphtha. And whilst the spread continues to have 10 year 'peaks', it has recently been far less volatile than benzene.

Lower Western gasoline demand should lead to improved toluene and xylene availability. And so, whilst benzene is becoming less of a genuine market, PX is moving in the opposite direction. It may, after all these years, finally develop a genuine supply/demand balance of its own, only partially related to gasoline.

The blog's major series this week has focused on the changes that seem to be taking place in markets for the petchem 'building block' products, particularly ethylene, propylene, benzene and paraxylene.

These changes in relative price and availability are of vital importance to a wide range of downstream chemical products. They may well prove to be secular in nature, rather than cyclical.

If so, they would fit with the blog's belief that we are in a transition to a New Normal, as set out in its recent White Papers, rather than a quick return to the high demand levels seen in the 2003-7 Boom period. They can be summarised as follows:

• Lower growth rates for refined products such as gasoline, diesel etc could dramatically change supply/demand balances for the building block products.
• These changes may be accentuated for some products by the move to lower output from liquids-feed crackers, and higher output ex-gas feeds.
• As a result, ethylene and paraxylene may become more freely available than in the past.
• Equally, propylene and benzene may become more difficult to source.

Changes of this magnitude present great challenges to both producers and consumers. We certainly cannot be sure that they are happening, and it will take time for their full impact to become apparent - maybe 3 to 5 years. In this timeframe, temporary reversals back to the previous status quo are almost certain, making firm forecasts even more difficult.

The blog therefore suggests that prudent buyers and sellers might want to develop a Scenario-based approach, that includes further development of the analysis set out this week. This need not be a central Base Case, but could be used to provide a suitable way of testing current strategies on a "what if?" basis.

The blog will be happy to support you in this process, if this would be helpful. And, as always, it will welcome your comments, either privately or in the Comments section.

The latest in the American Chemical Society's 6 monthly 'Chemicals and the Economy' webinar series took place last week. It was moderated by former ACS President, Bill Carroll, of Occidental Chemical, and again proved very popular.

ACS reported high levels of satisfaction from participants. Comments included: "This speaker is one of my favorites." "This was a very useful topic!" "Very informative, very interesting, very sobering, very good presentation. " "Presentation had great depth, in short time. Easy to understand graphics w/ presenter's help." "Excellent seminar, very up to date. Thanks!"

If you would like to view the 1 hour webinar (you can fast-forward!) please click here.

The US Institute for Supply Management (ISM) has also released an article summarizing the content of the latest White Paper for their chemical industry members. Please click here to read it.

The US Federal Reserve and the American Chemistry Council (ACC) have joined the blog in expressing concern about the outlook for the US economy. And as the chart above of the US S&P 500 shows, financial markets have continued to weaken since the blog's advice on 8 May to "sell in May and go away".

The latest minutes from the Fed's monthly meeting show it worries that the economy may take up to 6 years to fully recover:

"Participants generally anticipated that, in light of the severity of the economic downturn, it would take some time for the economy to converge fully to its longer-run path as characterized by sustainable rates of output growth, unemployment, and inflation consistent with participants' interpretation of the Federal Reserve's dual objectives; most expected the convergence process to take no more than five to six years."

It also highlighted the real risk of deflation emerging:

"Some participants judged the risks to the outlook for inflation as tilted to the downside, particularly in the near term, in light of the large amount of resource slack already prevailing in the economy, the significant downside risks to the outlook for real activity, and the possibility that inflation expectations could begin to decline in response to low actual inflation. A few participants cited some risk of deflation."

As Al Greenwood notes in ICIS news, this week's data also showed that "US capacity utilisation for manufacturing fell to 71.4% in June, down from 71.7% in May. From 1972-2009, the average was 79.2%."

The American Chemistry Council has also raised a yellow warning banner in its latest weekly report. Chief Economist Kevin Swift notes:

"The economic reports were generally negative this week. Retail sales, industrial production, trade, and the regional business surveys all disappointed. There was potentially good news, however, in that initial claims for unemployment insurance fell to a two-year low."

"Overseas, the recovery of industrial production appears to be slowing, with the year-earlier comparisons in the Eurozone, China and India, for example, still strongly positive but moderating. This confirms earlier signals emanating from the purchasing manager reports and composite leading indicators. A second half slowdown or soft patch is clearly in order. It's not clear yet if this is a metamorphosis into a double-dip or not. The risks, however, are clearly rising."

The blog would strongly advise Boards to consider developing a Downside Scenario in respect of their Budgets for H2. It hopes, like the ACC, that the economy will maintain H1's improvement. But there are growing signs of renewed economic weakness in all major Regions. Companies without a detailed contingency plan could be badly hit.

China's chemical demand is clearly starting to slow, as my fellow blogger John Richardson has been reporting recently. This has big implications for the global chemical industry, which has relied on China to balance declining sales in the West.

The slowdown comes as the government rolls back the stimulus measures introduced in Q4 2008, when 23 million Chinese lost their jobs as exports collapsed. These measures have done the job in terms of creating employment, by subsidising domestic demand and financing major infrastructure investment.

But they have come at a cost in terms of rising asset prices, particularly in housing. Labour unrest has also increased, as workers find themselves unable to afford apartments. In turn, this has led to outspoken criticism by young writers such as Qing Tong, whose book 'From the Wolf's Burrow into the Tiger's Den' became an instant bestseller last month.

The result is shown in the chart above. Bank lending (red column) fell 37% in H1 versus 2009, and is on course to meet the annual target of a 21% decline. And power consumption (blue line) probably peaked in May, as China Daily reported it "rose at a slower pace last month because of weakening demand from heavy industries".

Chemical companies face a clear risk of a synchronised slowdown in demand in all 3 major Regions during H2.

• The US is hitting a 'soft patch' at best, if not a full 'double dip'
• China's demand seems to have already slowed.
• Europe, sadly, seems to be following the same path.

Not only are its governments increasingly focused on austerity measures and reduced spending. But fear of unemployment is making consumers nervous about major expenditures (autos and housing), which drive chemical demand.

EU auto sales (red line) fell again in June, for the 3rd month running, as shown in the above chart from ACEA (Europe's Auto Manufacturers Association). France joined the list of declining markets, whilst Germany was down 32% and Italy 19%.

The UK (up 11%) and Spain (up 26%) were therefore 24% of total EU sales in June. But this support seems unlikely to continue, as their major government stimulus programmes are replaced by austerity measures. In Spain, for example, the €100m ($130m) scrappage scheme is now out of funds, and the sales tax on autos rose 2% on 1 July.

The business climate for Western firms in China is getting worse.

2 weeks ago, the CEO of General Electric, Jeffrey Immelt, caused a stir when he told a private dinner that "I really worry about China. I am not sure that in the end they want any of us to win, or any of us to be successful."

Today, BASF CEO, Jürgen Hambrecht, has publicly hit out at restrictions on foreign business. In a meeting with Wen Jiabao, China's premier, he complained about "foreign companies being forced to transfer business and technological know-how to Chinese companies in exchange for market access", and concluded "that does not exactly correspond to our views of a partnership."

Replying, Wen apparently told Hambrecht to "calm down", and went on to add, "currently, there is an allegation that China's investment environment is worsening. I think it is untrue."

Hambrecht has been a staunch defender of China in the past, even criticising German Chancellor Angela Merkel for her meeting with the Dalai Lama in 2007. His public concern is therefore a clear sign that China's relationships with Western firms are deteriorating.

As the chart above from Petromatrix shows, total US stocks of crude, gasoline, distillate and jet kero this year (red line) remain very over-supplied in the short term, by comparison with previous years.

A major reason for this is the move by pension funds to adopt long-only positions in the commodity future markets, in the belief that crude markets are fundamentally tight.

However, this week the Financial Times summarises a timely new study of commodity markets, by Prof Joelle Miffre of Edhec Business School. This argues that investors need instead to understand the difference between:

o Backwardation, "when commodity producers are more prone to hedge than commodity consumers", and the future price is lower than today's
o Contango, "when commodity consumers outnumber commodity producers, leading to excess demand", and the future price is above the current value

They recommend that "to earn a positive risk premium, investors should take long positions in backwardated markets and short positions in contangoed markets".

The team's research suggests this strategy would have earned the investor a commodity risk premium of 12% a year between 1992-2008. Whereas the long-only strategies currently followed by pension funds earned only 2% a year. Edhec therefore concludes that "passive long-only strategies as advocated by traditional indexers perform less well".

Our 9th European Aromatics and Derivatives Conference will be held in Berlin on 23-24 November. Co-organised as always with ICIS, it features a strong line-up of industry speakers including:

• Shell Chemicals, Sven Royall, VP Intermediates on 'What next for Aromatics'?
• Ralf Kuhlmann (former Business Director, ExxonMobil Chemicals and APPE Chairman) on 'European petrochemicals: on the right track for the future?'
• Dow Chemical, Andrew Jones, Global Business Director Aromatics and Derivatives, on 'The changing landscape in aromatics'.

In addition, there will be important presentations from companies including TOTAL, Polimeri Europa, Equipolymers, Wood Mackenzie, Nexant and China's National Petroleum and Chemical Planning Institute. The blog will also be presenting its thoughts.

Please click here for further details, and 'early bird' registration.

Over-capacity is going to be a major issue for the petchem industry over the next few years.

Asian producers, in particular, are likely to be worst impacted. The reason is that they have relied on exports to China taking up to 50% of their production.

But now China's own production is ramping up, reducing the potential for these imports. And, of course, Middle East exporters to China will have a clear cost advantage in gaining the remaining volumes, versus most Asian plants which run on liquid feeds.

Asian producers therefore only only two alternatives, to attempt to:

• Export to the West or
• Close other regional competitors

The third alternative, of course, would be to shutdown themselves. But this is likely to be a last resort given the social implications on employment, and the impact on associated refineries and customers.

Exporting to the West is also likely to prove difficult, due to logistic costs and the close linkage between local producers and their customers. It will undoubtedly happen as the downturn continues, but at this stage it makes good sense to focus on inter-regional opportunities.

Equally, attack is often the best form of defense. And the new move by S Korea's Honam to acquire Titan in Malaysia is clearly based on this strategy, as Honam seeks to realise their Vision of 'global leadership'. Titan will provide them with a strong local base from which to attack SEA markets. And as my blogging colleague Malini Hanrahan notes today, they are losing no time in considering major expansion of Titan's facilities.

Singaporean producers will be tough competition, given their close links with China. But other SEA producers will quickly find themselves in the firing line. They urgently need to update their own strategies for the future, in the light of Honam's move.

"There are 64.5 million empty apartments and houses in China's urban areas", according to Barrons, the US investment magazine.

The figure comes from a survey of the country's electricity meters, undertaken by China's Academy of Social Sciences.

To date, China's homebuyers remain convinced that home prices cannot fall, as shown by their willingness last year to buy apartments in the empty city of Ordos. But as Barrons notes, the empty stock is 5 times the current total in the USA, where prices have now fallen over 30%.

China's auto markets are also showing signs of weakness. Inventories rose to 55 days in June, from 41 days in February, according to the China Automotive Technology & Research Center (CATRC). And H1 production exceeded sales by 1.29 million vehicles.

As a result, price wars are beginning to develop. Bloomberg cites a Zhengzhou dealer offering 21.5% discounts on the cheapest autos, such as Matiz's $6k compact. It says luxury autos are holding their prices better, but 7% discounts are common on $15k autos.

And whilst manufacturers are still pushing sales, the head of the CATRC has suggested "automakers should reduce supply rather than getting into a price war". This may become inevitable in H2. Bloomberg notes that both Credit Suisse and IHS Automotive expect demand to actually drop in H2 compared to 2009 levels.

Last year, governments focused on stimulus measures, to support the global economy.

Now Jean-Claude Trichet, head of the European Central Bank (ECB), says that "with hindsight, we see how unfortunate was the oversimplified message of fiscal stimulus given to all industrial economies under the motto 'stimulate', 'activate',' spend'!"

Writing in the Financial Times, he is effectively calling for a 180° change in policy. Instead of providing further support for auto and house sales, he wants governments to cut expenditure, and focus on "fiscal sustainability".

He forecasts that Eurozone government debt will rise by 20% between 2007-11, and by 35%-45% in Japan/USA, and warns that "the economy may be close to...a rapid deterioration of confidence among broad constituencies of households, enterprises, savers and investors", due to:

• Lower tax revenues as a result of the downturn
• The cost of the recent spending increases
• The "volume of taxpayer risks" created by the need to prevent financial sector collapse.

He warns that potential liabilities in this latter area are now 27% of GDP in the Eurozone and the USA.

Trichet concludes that the ECB "expects governments to confirm their determination to consolidate their public finances". It is hard to under-estimate the potential significance of his comments for chemical industry demand in H2 and 2011.

There are mounting signs that 2010 could prove a Year of 2 Halves in terms of economic growth.

Interviewed by Bloomberg last month, the MD of the Economic Cycle Research Institute (ECRI), Lakshman Achuthan, warned that their indicators showed "A real global downturn in the industrial sector is starting right here and right now". They saw Chinese exports looking particularly weak in H2, closely followed by industrial production.

Now the ECRI Index for the USA (above) is clearly forecasting a renewed downturn, with a reading of -10.5. As Dave Rosenberg of Gluskin Sieff notes, "its never been here before without there being a recession". And the indicator itself is very credible, having only once produced a false forecast in the past 40 years.

Whilst their colleagues head for the beach and a well-deserved summer break, prudent CFOs will be developing their contingency plans to ensure H1's gains are not lost during any H2 downturn.

India's economy continues to impress. It has been largely unaffected by the global economic crisis, due to its relatively 'closed' nature. This gives its central bank a more traditional role - reducing interest rates when economic activity slows, and increasing them as it recovers.

Currently, it is on the latter course, increasing rates to 5.75% this week. Its problem, unlike much of the developed world, is rising inflation, which is now around 10%. Thus the Governor of the Reserve Bank, D Subbarao, has made it clear that "we expect credit to be dearer, as credit demand picks up, we expect lending and deposit rates to go up."

The Bank also increased its GDP forecast to 8.5%. A good monsoon season, unlike last year, is helping the important agricultural sector. Whilst India's major companies remain full of confidence, given their low-cost position. Reliance's Jamnagar refining/petchem site is one of the world's largest and lowest cost, after its recent expansion.

The news reminded the blog of a slide (above) shown by its long-standing friend, R D Udeshi, President of Reliance's polyester chain, at our 2004 European conference. His argument was that China's economic development would have to change course in time, as it moved from primary production to labour intensive manufacturing.

The slide tracks 'years from beginning of economic progress' along the bottom, versus 'GDP per capita' on the vertical axis. And its analysis has stood the test of time, with China's labour costs increasing 25% in key regions such as the Pearl River delta in H1.

It suggests that, whilst there will be bumps along the road, India has a few more years of solid growth ahead before it reaches China's current turning point.

LinkedIn, the online network for chemical and other professionals, was valued at $2bn this week.

Reid Hoffman, its founder, gave a brilliant description of what is was like to be part of a technology start-up: his parallel was
"throwing yourself off a cliff and trying to assemble a plane on the way down".

As chairman of an excellent technology startup, NiTech Solutions, the blog recognises the description.

Force majeures can be very costly in a downturn, as they enable competitors to gain market share, whilst the business suffers a loss of revenue and earnings. Yet maintenance spend on plant and equipment, and training, is always a soft target for cutbacks when cash is tight.

The blog also knows from its own experience of the 1980s and 1990s downturns, that continued deferral of required spending creates future problems. Thus it has become concerned by the increasing number of times that 'force majeure' is being mentioned in ICIS news reports.

The chart above summarises the global position on a monthly basis, from January 2008 to July 2010. It shows that mention of force majeures declined sharply as the Crisis hit in Q4 2008 (even though September/ October 2008 data reflected Hurricane Ike problems in the USA).

But mentions have recovered sharply in 2010. Is this a statistical anomaly? Or is it due to the impact of deferred spending in 2009? It is impossible to be sure. But the blog is very aware from its contacts in the insurance community that underwriters are increasingly concerned.

Equally, when talking last week to George Pilko of Pilko & Associates (global EHS advisers), it discovered that buyers are increasingly focusing on Operational Excellence issues, including maintenance spend, during due diligence processes in M&A.

Hopefully, H1's better earnings will now encourage companies to reinstate any spending deferrals that have been made.

The blog is awarding itself a pat on the back this morning. Last December, it made the bold forecast (given the widespread gloom at the time), that chemical companies would see "a strong H1". Today's regular snapshot of Q2 chemical company results certainly seems to confirm its optimism.

Almost all companies reported stronger revenues and earnings. But there is an interesting divergence in outlook between those companies focused on solutions and innovation, and those where low-cost leadership in commodity markets is essential.

Thus Bayer claimed that "MaterialScience has left the crisis behind", whilst the new management at Clariant worried about "a weaker economy". BASF, the industry No 1, was relatively cautious, forecasting the recovery would "continue at a moderate pace".

One interesting juxtaposition of views (given alphabetically as always) contrasts Celanese's upbeat assessment of H2 demand, versus that of the China Petroleum and Chemical Industry Federation, which expects a slowdown.

Air Products. "Operating leverage across the company would continue to drive margin improvement".
Albemarle. "Global economic indicators, industry trends and customer order patterns pointed toward a strong Q3 with a typical seasonal contraction in Q4".
Ashland. "Expected sustained, gradual growth of the overall economy".
BASF. "Expected the economic recovery to continue at a moderate pace in the second half of 2010. We expect our sales to grow in 2010 and outpace global chemical production."
Bayer. "MaterialScience has left the crisis behind and saw business expand more strongly than expected. Volumes have returned to the pre-crisis level"
BP. "Chemicals production increased to 3.92m tonnes in Q2 from 2.83m tonnes in Q2 2009, and 3.81m tonnes in Q1 2010".
Celanese. "Optimism came from Celanese's order book in China, which was 'strong and stable'".
China Petroleum and Chemical Industry Federation. Demand was "expected to slow down in the second half of the year amid a deceleration in China's economy."
Clariant. "We predict a softening in demand compared to H1 as a result of a weaker economy and the traditional seasonal effects of our businesses."
Croda. "It was difficult to predict whether the trend would continue. We would normally expect to see volumes in the second half below those seen in the first half due to holiday shutdowns in our customers' operations".
Cytec. "Sales revenue grew among all segments as the company focused on higher profit-margin business. The company also benefited from the cost reduction plan which laid off 600 workers, shut plants and froze salaries."
Dow Chemical. "Expects a sustained global recovery led by Asia, which would be slowly helped by the US recovery, but with Europe lagging".
DuPont. "H2 growth rates would slow down from strong year-over-year growth in H1."
Eastman. "Expected volumes would reflect typical seasonal declines in the second half of the year and that raw material and energy costs would be less volatile."
ExxonMobil. "Prime chemical product sales were 6.5 million tonnes, up 3.7% from Q2 2009".
WR Grace. "Grace is well positioned to succeed in this challenging environment."
INEOS. "The Group has continued to focus on cash management and liquidity. Demand for olefins was strong, resulting in improved margins in the quarter, particularly in butadiene. Polymer margins also experienced some improvement from the first quarter."
Johnson Matthey. "Expect results will be lower than Q1 due to normal seasonal factors, an expected end to recent stock building by the car companies and the potential impact on consumer confidence of economic uncertainty, particularly in Europe".
Kemira. Expects "demand to develop favourably" this year.
LG Chemical. "Expected a positive Q3 result due to strong seasonal demand and an increase in sales due to product expansion in petrochemicals".
Lubrizol. "Further recovery in demand, underlying market growth and favourable order patterns".
Mitsubishi Gas Chemical. "Increased sales of methanol following the start-up of a new plant amid improved market conditions."
Mitsui. "Improved demand for PE and PP helped the company raise its petrochemical product prices which offset high feedstock costs."
Petro-Rabigh. "Total sales for June 2010 have significantly increased compared to previous months".
PPG. "Demand levels are more than 10% below 2008 pre-recession levels. We anticipate a continued, gradual, global economic recovery."
Quaker. "Earnings will continue to be strong but will be below the first half due to a softening in demand and the lag effect on margins as we recover higher raw material costs".
Rhodia. "A positive contribution of €66m from "strong pricing power".
Shell. "Saw higher volumes, margins and operating rates".
Sherwin Williams. "Remained "cautiously optimistic" about the stability of end market demand".
Sigma-Aldrich. "Market conditions were expected to continue the "modest improvement" seen in H1".
Solvay. "Saw better utilization rates in the context of a more sustained global activity than last year".
Sumitomo. "Increased sales due to improved market conditions overseas had allowed the company to raise the prices of its petrochemical products which offset the high costs of naphtha and other feedstocks."
Syngenta. "Demand for our products has increased significantly in 2010, following a 2009 season characterised by low pest pressure and credit constraint."
TOTAL. "An overall improvement in market conditions and benefits realised through cost-cutting measures".
Trelleborg. "Overall demand expected to remain in line with or "slightly better" than Q2".
Wacker. "Robust sales across all its business segments".

"China's future economic growth will definitely gradually slow down. The issue for China's economy is the quality of growth, which is why we now have to carry out structural adjustment and transform our development model. The true meaning of this is raising the quality and efficiency of growth. So we should change our attitude, and be calmer."

The above quote is from deputy Chinese central bank governor, Yi Gang. He is the latest Chinese leader to highlight that China's economic model is changing from export-driven development. It corresponds with a note from IMD, the leading Business School, that points out 2010 represents the peak year in demographic terms for China's working population.

In business, as in war, defence can often be the best form of attack. This seems to be the principle behind Ineos's announcement that they intend to build a 1 million tonne deep-sea ethylene terminal to feed their 340KT ethylene oxide/glycol business near Antwerp, Belgium.

The glycol business is clearly under threat from the massive volume of new low-cost capacity now coming online in the Middle East. Already Dow have closed their 275KT plant in Wilton, UK.

But Ineos' move is a potential game-changer for plants situated along the ARG ethylene pipeline. It will be the first terminal owned by a company structurally short of ethylene, and will also provide Ineos with a valuable link between the ARG and its US, UK, Norwegian and N German plants.

Until now, it has been relatively difficult for ethylene to be imported into Europe. Not only is it expensive to transport. But there has also been a shortage of terminal space linked to the ARG pipeline. This latter constraint will now change. Rightly, Ineos describe it as being likely to "significantly change the shape of the ethylene market in Europe".

Of course, the cost of the terminal will be high - probably around $80M. And Ineos will have to absorb a $200/t or more freight penalty when importing product. But once it opens in 2012, older, inefficient, crackers along the ARG will effectively find themselves in competition with ethane-based Middle Eastern ethylene having a $200/t cash cost of production.

Ineos' move is therefore likely to open up a major debate about the likely future of Europe's petrochemical assets.

Undertaking fundamental analysis of a market can be a tedious business. You have to try and understand what uses the product might have, and the alternatives for the feedstocks. You might even have to look at inventory, and forecast future supply/demand levels.

Luckily, however, for the modern financial investor, these sad disciplines have been resigned to history. Instead, one merely has to look at the 'correlations' with designated key markets. And, of course, a helpful figure from one of the major investment banks is always on hand to provide guidance and support.

Nowhere are the benefits of modern trading more evident than in China's Dalian future exchange, on the linear low density polyethylene (LLDPE) contract. Players there have no need to read boring stories in ICIS news about inventories being 30% - 50% above normal. Or to study purchasing manager reports that suggest demand is slowing.

No, they simply need to understand that the crude oil price is going up, along with the US S&P 500. Then, as shown in the above chart, they can pile in with their orders and take monthly volume (blue line) to an all-time record of 92 million tonnes - a mere 4 times annual global production. 'Sentiment Rules OK', as the graffiti used to say.

Trust the boring old blog to have to point out a potential flaw in the argument. As its friend, and Asian expert, John Richardson notes, "there is now a significant gap between (prices of) more expensive domestic material and cheaper imports".

He also quotes a leading industry figure as warning that "It used to be that we had two markets in Asia - China and the rest of Asia, but now we have three - Dalian, China and the rest of Asia, which is causing a lot of confusion." And this party-pooper adds that he is "really worried about the 100 KT of LLDPE that is in Dalian warehouses right now."

This producer is clearly of the old school, who worries about such minor details as who is going to buy high-priced product when demand is slowing?'. Luckily for the new style of investor, and the profits of the investment banks, nobody listens to such boring stuff on Dalian any more.

The blog is delighted by the interest being shown in its White Paper 'Budgeting for a New Normal' and the recent Mid-Year Update. Almost 7000 copies have now been downloaded.

Discussions are also underway with ICIS about producing a new White Paper in Q4, to accompany the blog's annual Budget Outlook post in October.

If you would have not yet seen a copy of the Mid-Year Update, please click here to download a free copy.

The blog is a great fan of Pimco, the world's largest bond fund managers.

They were the first people to spot the housing bust developing in the USA, and to suggest the scale of the damage it might cause. More recently, they have pioneered the concept of the 'new normal'.

Thus a new analysis by their CEO, Mohamed El-Erian, is worth taking very seriously. His key point is that increasing volatility in financial markets makes forecasting the future much more uncertain:

• Traditionally, likely outcomes have clustered together, in a bell-curve.
• But increasing volatility means that we are seeing "a much flatter distribution of outcomes"

This has enormous implications for chemical companies. We have become used to a world where most reasonable people could agree on a consensus viewpoint, and they would normally be proved right. Now, however, El-Erian argues that 'rules of thumb' regarding the evaluation of risk are becoming "less useful, if not dangerous".

By coincidence, an example of El-Erian's argument has just appeared in the USA.

James Bullard, a Federal Reserve Governor, is warning that he may have been completely wrong to worry about future inflation. Instead, he has converted to the blog's view that Japanese-style deflation is a real risk.

If this happened, it would turn upside-down a whole range of current assumptions. Demand, for example, might well reduce, as it would become sensible for companies and consumers to delay purchases for as long as possible, whilst prices fell.

El-Erian has been right before, when the consensus was over-optimistic. As we come into Budget season, CFOs might find it useful to circulate his article around their colleagues. Forewarned, as they say, is forearmed.

There was good and bad news from the latest IeC Boom/Gloom Index.

The good news was that the Austerity reading fell quite sharply. Markets have moved on from the Greek crisis. And confidence seems to have been restored, at least temporarily, by the results of the 'stress tests' on the major European banks.

But the bad news was that the Index itself fell back to the 4.0 level that described the downturn period in financial markets from November 2008 - April 2009. This is worrying, as most markets staged an impressive rally during July, with the US S&P 500 rising 7%.

However, these rallies took place on low volume. Whereas a strong market should see rising volumes, as new investors join the rally. August's Index will therefore be critical. If it stays low, then the next stage of the downturn may well be close at hand.

Anyone who followed supply/demand balances might look at the above chart from oil analysts Petromatrix, and conclude that crude oil markets should be relatively weak today. It shows that US oil stocks are only 2.2mb below the record level seen in September 1990, and have grown by 83mb since March.

But this is not the view taken by those operating in financial markets. They see a bullish story, and oil prices actually rose on the news. Amrita Sen, of Barclays Capital, was typical in telling clients that "the long wait for oil prices to break past $80 has finally come to fruition, as sentiment aligns with fundamentals".

Sen also claimed that "actual demand data had finally started to perform strongly and consistently". But the blog is slightly puzzled as to how an 83mbd rise in inventory in the world's largest market could be viewed as bullish, especially when other markets also seem to be slowing. China's oil imports, for example, fell by 150kbpd in July versus 2009.

Petromatrix also report that tanker "rates in crude oil are at the lowest level of the year". Rates on the major Arabian Gulf - Japan route have fallen 50% since June, and are now at, or below, operating costs. And whilst tanker rates can fall for many reasons, they don't usually crash 50% when demand is strong.

The only rational explanation is that oil markets are in a speculative mania. This, as we saw during the US housing mania in 2006/7, means that players become blind to the underlying state of demand. Instead, they focus on what other traders are doing. And in oil markets, as Mike Fitzpatrick of MF Global notes, "upward momentum is still vibrant".

One day, maybe soon, fundamentals will burst the bubble. And the blog's worry is that when this happens, and the momentum players finally panic and try to sell in a falling market, it will be the users in the chemical industry who have to pick up the pieces.

Yesterday, the blog worried that oil prices were well out of line with fundamentals. It argued that momentum trading, highlighted by MF Global's energy VP, Mike Fitzpatrick, had created a speculative mania.

Today, it looks as though Fitzpatrick might agree. Quoted in the Financial Times, he notes "As fundamentals come more into focus, it would suggest that there is less real support for oil prices than recent valuations would imply".

The blog couldn't have put it better.

An interesting opinion piece in today's China Daily suggests the concept that "the next few years will see a dramatic acceleration in the shift of global economic powers eastward" is "at best, a half-truth".

Yu Zhongwen notes that this theory has gained ground in recent years, as the media have speculated that "with a combined population of some 2.4 billion at present, China and India, the two vast countries of the East, will reclaim their positions as economic giants in this century".

However, he goes on to argue that the theory ignores the "obvious fact that the two Asian countries are only developing nations, with their per capita GDP lagging developed countries". He notes that China's $3687/ capita and India's $1122/capita ranks them "103 and 140 in the world", versus the USA at $46436/capita.

Yu suggests that "the significance of China's and India's soaring GDP should not be exaggerated, considering the real scenario where a large proportion of the populace in both nations is leading a relatively poor life."

This argument, of course, has major implications for chemical industry sales. Until now, Asia's economic boom has been based on supplying manufactured products to wealthy Western consumers. But this export boom is now ending, as N America/Europe move into an age of austerity.

Chemical and polymer demand are very closely linked to high levels of GDP/capita. Villages without electricity, for example, don't need to buy many 52 inch HD televisions. Asian chemical industry growth rates could therefore slow quite sharply over the next few years, as countries make the transition from export to domestic demand.

Who now remembers the stock market rally that followed 1929's initial collapse? By November 1929, the US Dow Jones Index had fallen to 195 from its September high of 386. But by April it had rallied 52% to 297.

At the time, this seemed as sensational as the Dow's recent rally, which took it up 74% from March 2009's low of 6469, to peak a year later at 11258. And it occurred without any co-ordinated G-20 stimulus packages around the world. It just happened.

But when the famous English poet (and former bank clerk) TS Eliot published in 1936 the first part of his major work 'The Four Quartets', quoted above, his tone reflects the weariness of the subsequent Downtrend, not the euphoria felt during the Rebound.

The chart above captures the textbook path of a major financial crisis, as first described by Merrill Lynch's guru, Bob Farrell. There is an initial Sharp Decline, as seen this time from September 2008. Then there is a Rebound. And finally, the Drawn-out Downtrend.

The chart also adds the 'Paradigm of Loss' model developed by famous psychologist Elizabeth Kübler-Ross. As first noted by the Financial Times last year, her model is potentially an excellent guide to the stages through which the current Crisis will likely pass.

The FT suggested that the world was slowly moving from Denial into Anger. Clearly some policy makers, and many bankers, still remain in the Denial phase. But the rise of the Tea Party protest movement in the USA, as well as the riots in Greece and elsewhere, supports the FT's argument.

This emphasises that after 2 years, we are still towards the beginning of the Crisis. Only a relatively few consumers or companies have moved towards the Bargaining phase, to focus on saving rather than borrowing. Most are convinced any cutbacks will impact others, and not themselves.

Equally, we are nowhere near the Depression and Acceptance stages, which would indicate that the world was getting ready to move on to accept the world in its post-Crisis form.

The blog hopes that its analysis is wrong, and that in a year's time it will be able to eat humble pie and admit it was too pessimistic. But if it was still running a major chemical business, it would by now have ensured that a detailed contingency plan was ready, in case its fears come true.

The blog has come across a useful new tool for global brainstorming, run out of San Francisco by DiscoveryCast.

They have recently organised a major event with Paris-based SpecialChem to review the current state of play in bio-based initiatives.

This involved a group of 550 experts from 400 companies (including 3M, Dow, Michelin, DuPont, Arkema, Dow Corning, Bayer, DSM, BASF, P&G and Unilever), pooling ideas online.

The conclusions provide a fascinating snapshot of developments in this key area:

• Bio-based initiatives are more technology-driven than market-driven
• There is no clear vision about where the first breakthroughs will occur
• Areas of current study include lignin for PF resins, and a possible role for fermentation to develop oxygenated and di-acid intermediates
• Key technology trends in the use of genetically engineered organisms (eg bacteria, algae, or plants) are still in their infancy.
• The development of enzymes and catalysts to efficiently transform sugar-based feedstocks is attracting widespread interest.

Significant resources are being invested in bio-based materials, and current thinking is focused on developing business models that aim to replace oil-based chemicals by copying or mimicking petrochemicals.

Bio-based aliphatic systems are likely to be an earlier market than aromatics, as the latter don't currently exist on a commercial scale. Equally, participants appeared realistic about the multiple hurdles that still have to be overcome (e.g. the food vs. chemicals debate, lack of consistent "green labelling" for consumer products).

Overall, brainstorm participants expected a number of niche opportunities, and some medium-sized opportunities, to develop over the next few years. But understanding the market drivers for these new products will be key to success.

Consumer spending is 70% of US GDP. And because US GDP is so large, this means the US consumer is 17% of global GDP. This is the same as the combined GDP of China and Japan, who rank 2 and 3 after the USA.

So a change in US consumer spending matters. And it particularly matters to the chemical industry, as our products are focused on consumer needs. Thus the blog is taking very seriously indeed comments from major US consumer companies, who suggest we can no longer rely on the "shop-till-you-drop American consumer" to support global demand. For example:

• Wal-Mart, the world's leading retailer, has seen its US same store sales drop for the last 5 quarters. This has not happened before. Wal-Mart also warned they expect consumers to "remain cautious about spending".
• Target, the leading discount store, confirmed the blog's view that March was the peak of the cycle, with CEO Gregg Steinhafel saying "its clear Q2 marked a change in trend. GDP growth softened considerably, and our sales trends levelled off as well".
• Procter & Gamble, the world's largest consumer products company, gave the same message. "Consumers day-to-day spending reflects an entrenched frugality that often means leaving P&G's relatively inexpensive products on the shelf."

This is serious stuff. And it links with major demographic changes taking place in the USA. The boom in chemical demand over the past 40 years is closely tied to demand from the 'baby boomer" generation (born between 1946 - 1964). They now own 80% of all US personal financial assets and are responsible for over 50% of discretionary spending power.

But they are getting closer to retirement, with a median age of 54 years. And so their need for 'new things' is reducing, as is their ability to afford them. Equally, as the above chart from thechartstore.com shows, their savings rate is starting to shoot up. They were let down by the stock market after the dot-com boom; then the housing market disappointed.

So now we seem to be seeing the start of a generational switch from spending to saving in the world's most important market. From close to zero, the savings rate has already jumped to 6%, as baby-boomers worry about how to afford their retirement, especially as they can expect to live longer than any generation in history.

Of course, if stock market and housing prices began to recover, then this trend might reverse again. But there is clearly a danger of a vicious circle developing, where fear replaces greed as the prime driver in financial markets, and drives a growing demand for yield.

The back-to-school season, now underway in the USA, is the second most important shopping period of the year. It will therefore be even more critical than usual for those wishing to forecast chemical demand.

If Wal-Mart, Target and P&G are right, then the US economy could easily see US GDP growth of below 2% in Q4.

This would not be good news for everyone in the chemical industry, dependent on the US consumer to drive future demand.

Oil markets are an accident waiting to happen for the chemical industry. Oil inventories around the world are close to record levels, with the IEA (International Energy Agency) reporting they are over 61 days of demand. Equally, as the Petromatrix chart above shows, they are at record levels in the USA (the world's largest market), and still climbing.

The major investment banks, of course, are still able to make easy money by selling the story of "demand from emerging markets and limited growth in supplies" to gullible pension funds. So it is no surprise that sentiment in the futures market continues to ignore the fundamentals.

But the risk/reward ratio for a bet on oil at $90/bbl in Q4 is starting to look pretty thin. Prices peaked at $83/bbl in early August and in spite of another bullish report last Monday, were down $9/bbl (11%) by the end of last week. So the risk of a price collapse to $60bbl or lower is clearly increasing, and is certainly now above 25%.

If it happened, then clearly OPEC would quickly cut production again. But this would be shutting the stable door after the horse has bolted. So destocking, as we saw in Q4 2008 - Q1 2009 and in 1980, could again become a serious problem for the major chemical industry value chains.

Thus, if the investment banks lose their battle to support oil prices, then the chemical industry may well be left to pick up the pieces.

Sometimes every cloud does have a silver lining. And that's currently the case with the fall in demand for oil products.

The European petchem industry is based on feedstock from refineries such as naphtha and LPG. And as the chart above from the IEA shows, German refinery runs, like others elsewhere in Europe, are down 15% due to lower demand for most oil products.

This has proved very supportive for petchem margins. As the second chart shows, based on APPE data , European operating rates for ethylene were only 82% in H1. Back in the Boom period between 2004-7, H1 rates averaged 89%.

Producers have done a lot in terms of self-help to reduce fixed and variable costs. And the monthly contract price certainly gives more flexibility versus the old quarterly system.

Even so, an 82% rate would have normally hit petchem margins, as producers fought to maintain market share. But instead, the 15% cut in refining rates meant cracker feedstocks were also reduced. So effective operating rates were much higher than 82%.

Thus producers were able to pass through H1's higher oil prices, and spreads for ethylene versus naphtha actually increased to €422/t. Whilst lower overall production rates sent co-product prices for both propylene and butadiene above those for ethylene, for the first time in history.

How long will this silver lining last? The blog's friends in the refining industry suggest that poor competitiveness will remain a problem for the European refiners, and they do not observe great optimism amongst leading players that might suggest a quick recovery.

However, it is also clear that petchem consumers are finding it increasingly hard to pass on the higher prices to their customers.

But in the meantime, EU petchem producers have their silver lining.

Registrations are already building for our 9th European Aromatics and Derivatives Conference, to be held in Berlin on 23-24 November. Co-organised as always with ICIS, it features a strong line-up of industry speakers including:

• Shell Chemicals, Sven Royall, VP Intermediates on 'What next for Aromatics'?
• Ralf Kuhlmann (former Business Director, ExxonMobil Chemicals and APPE President) on 'European petrochemicals: on the right track for the future?'
• Dow Chemical, Andrew Jones, Global Business Director Aromatics and Derivatives, on 'The changing landscape in aromatics'.
• China, Yu Jing from China's National Petroleum and Chemical Planning Institute, on 'Developments in China's aromatics and derivatives markets'.

In addition, there will be important presentations from companies including TOTAL, Polimeri Europa, Equipolymers, Wood Mackenzie and Nexant. The blog will also be presenting its thoughts.

The 'early bird' discount expires next week, so its worth registering today if you can. Please click here for further details of the agenda and registration.

The blog is delighted to have been invited to address two important industry events in coming months:

Washington DC. It will be presenting a Global Outlook to the Coatings Summit, alongside CEOs including Andrew Liveris of Dow Chemical; Christopher Connor of Sherwin Williams; Hans Wijers, AkzoNobel; Kenji Sakai of Nippon Paint, as well as senior figures from consumers in the aerospace and auto industry. The Summit is hosted by the International Paint and Printing Ink Federation.

Bahrain. It will be delivering a Keynote address to the World Refining Association's Petchem Arabia conference, alongside leading industry figures from SABIC, Saudi Aramco, Borouge, Tasnee, TOTAL, Lanxess, Egypt Basic Industries, Jubail United, NatPet, Qatar Petroleum and McBride.

Please click Coatings Summit and WRA for more details of each event.

Recycling may not be reducing carbon emissions as much as had been hoped. This seems to be the finding of an interesting new report from consultants SRI on recycling of PET bottles.

It looks at the benefits of recycling 1.5 litre carbonated beverage bottles made from PET (polyethylene terephthalate). Stricter legislation has led to many European countries collecting 80% of these bottles. The blog, along with its neighbours, dutifully puts its bottles into a green bin every week.

Yet the study finds that such 'kerbside' collection leads to only 45% of PET actually being reused. The other 35% somehow gets 'lost' in the cleaning and sorting process. This is perhaps not surprising given the difficulties of separating PET from other polymers, especially when the initial sort is done in cold and wet conditions on the road.

It concludes that this inefficiency means that recycling PET at the kerbside 'is no better than land-fill' in reducing carbon emissions. And it suggests that if politicians are really serious about reducing emissions, they should focus on improving the yield when sorting and reprocessing PET.

This would likely involve more effort by consumers. The best model is apparently Switzerland's, where bottles are returned to supermarkets. This leads to a 70% yield, and a clear benefit in terms of reducing carbon emissions.

With the Chairman of the US Federal Reserve saying the outlook is "unusually uncertain", its time to summon the chemical market genie.

Of course, rubbing the lamp is not always successful. And if the genie does arrive, one can only ask 3 questions.

So rather than risk wasting them, the blog has learnt to spend the first question in asking him to decide the other two questions.

And this is what the genie said:

"They should be obvious, even to you, blog. Ask me what is happening to the US economy? It dominates the global economy, as you have written many times".

So I asked, and the genie answered, laughing:

" You have wasted a question. You already know what is happening to the US economy. It is heading back into the downturn, now the stimulus programmes are ending.

"In Q3 last year, GDP grew by 1.6%, and by 5% in Q4. But then it slowed in Q1 to 3.7% and now Q2 is estimated at just 1.6% again. But I can understand that you have been hoping a proper recovery might be underway, particularly after the industry has had such a strong H1."

Thank you, O genie, I replied, and so what should be my second question? The genie sighed, and I thought for a moment he was going to disappear back into his lamp.

"Ask me about the US housing market? You surely know that this used to be a $35bn chemical market in 2006, when there were 2.2m housing starts? But you can start by answering my two-part question:

"So, said the genie, the rich aren't buying. And as 23% of all homeowners owe more on their mortgage than the home is worth, and sales in July were an all-time low of just 276k annualised (worth just $5bn), then this major market will provide little support for future chemical sales"Chastened, I waited for him to reveal my 3rd question.

"Again, it is obvious", he replied. "Even you have been writing about it since February 2009. Ask me about the potential impact of deflation."

"But if I can interject, O genie, all the commentators suggest that we are in a 'bond market bubble' and that we should really worry about inflation?"

At this, the genie laughed for a very long time.

"You amuse me, blog", he finally replied. "So I will allow you this extra question. Ask all of your friends if they have read an article about this so-called 'bond market bubble'? And then ask them if their own pension fund is now even 50% in long-term G7 government bonds? You will find there is indeed a bubble in articles about a 'bond market bubble', but very few people actually own them".

So the genie then answered his 3rd question, reminding the blog of an analysis in Barrons, the US investment magazine.

"Today, if you're a Western baby-boomer (born between 1946-64), you now need to save $1.42 if you want to have $2 in 10 years time, with interest rates at 3.5%.

But when rates were at 7%, you only needed to save $1 to achieve the same result.

"Now, blog", he then added. "You wrote about the baby-boom generation only last week. You can surely see why they are beginning to panic about their future income level in retirement?

"If their baby-boomers stop spending and start saving, which they must do to protect their retirement income, then clearly global chemical market growth rates cannot go back to the levels seen before 2008."

And with that, the genie disappeared back into his lamp, leaving the blog to ponder on the implications of his answers for chemical sales in the rest of 2010, and in future years.

Many readers have been taking a well-deserved break over the past few weeks. As usual, therefore, the blog is highlighting key posts during August, to help you catch up as you return to the office.

August has been surprisingly busy:

Force Majeure reports show worrying increase highlighted the worrying rise in force majeures, which may be linked to cutbacks in training, and maintenance spend.

US consumer demand growth stalls. The US economy seems to be heading back into the downturn, as the stimulus programmes end, with unemployment still high, housing starts at all-time lows and GDP slipping.

5 tips for surviving a period of deflation covered advice from the Wall Street Journal on managing a personal investment portfolio.

Speculative mania continues to drive oil markets. The impact of futures market trading disguises the weak fundamentals of the oil market, and has also been driving speculative activity on polymers in China.

US junk bond issue hits record as GDP slows worried that investors were piling into high-yield corporate bonds, just as the slowing economy was increasing their risk.

Lower refining rates support EU petchem margins described how lower oil product demand, and hence refining rates, was reducing naphtha availability, and so helping to keep petchem markets tight.

The" real bottom line" in the Financial Times featured the blog's letter to the FT.

Anyone running a chemical company knows that the benefits of certain key decisions can take years to develop. Many companies had to support their nascent pharma businesses for 20 years, before steady profits began to flow. Whilst major complexes can easily take 10 years from inception to completion.

Yet in recent years, investors have become more and more impatient for quick results. We can see this in the above chart, from Andrew Haldane of the Bank of England, which shows that US investors' average holding time has reduced since the mid-1970's from 7 years to less than 7 months. Equally, the Financial Times has recently noted that:

"Today's markets are dominated not by long-term investors, but by speculators so busy with "burn and churn" buying and selling, that they have lost interest in what is surely the fundamental reason for owning shares: the fact that they either produce, or are expected to produce, an income."

The FT adds that "dividends have accounted for 90% of total return in the US market since 1871", and suggests that investors seeking to fund pension promises would do well to focus on companies whose future earnings will support steady dividend growth.

Haldane, in a very thoughtful and well-researched paper, goes on to question whether the West's financial system has been on the right track in recent years. He worries about its "tendency towards impatience and a demand for immediate gratification", and warns that "just as patience can ward off great disaster, impatience can ruin a whole life."

Coincidentally, this message is also supported by the Bank for International Settlements (BIS), the central bankers' bank, in its latest Quarterly Review. Its study of 20 recent financial crises leads it to conclude with the simple truth that "what goes up, tends to come down".

It goes on to argue that today's short-termist policies will only prolong the pain of the current Crisis, as was seen in Japan in the 1990's. Instead, it says the prime need is to "fix the banking system" via "the early full recognition of losses and the restructuring of bank balance sheets".

With shareholders seemingly ever-more short-term in their outlook, the blog will not be holding its breath for this to take place any time soon.

Oil markets are now in their longest-ever period of contango. This is when prices for future months are higher than current levels. According to Bloomberg, they have now been in contango for a record 656 days.

Keeping a barrel of crude in a tank on land costs 60 - 70 US cents/month, whilst hiring a supertanker costs $1.50/month.

So this is clearly excellent news for the blog's friends in the storage and shipping industries, as well as in the trading community.

But a comparison with the previous record period of contango (640 days between October 2005 and July 2007), reveals the lack of logic behind the current speculative mania. Then, global crude oil consumption was rising rapidly from 82.2mbd in 2004 to peak at 85.6mbd in 2007, according to BP's authoritative Statistical Review. But last year, demand was back at 84mbd, and is clearly still being hit by today's high prices.

Where is the need to store record levels of oil and oil products, with this level of comfort in supplies? Especially as in the short-term, oil inventories are already rising still further as Western refineries shut for routine maintenance before the winter arrives. US operating rates are already down to 87% from July's 91.5%, for example.

In addition, in terms of petchem feedstocks, OPEC has been rapidly increasing its NGL output. The International Energy Agency estimates this will rise 600kpd in both 2010 and 2011, to total 5.9mbd. It notes this volume will represent "7% of global oil output, up from negligible levels in the early 1990s".

One day, crude oil markets will shift their focus back to these fundamentals of supply/demand. The blog used to think this correction could see prices slip back to $60/bbl. But now, with the mania having lasted so long, it is beginning to fear they could easily fall back to $40/bbl. This would be very painful for those in the real world of the chemical industry.

The blog's 6 monthly survey of major stock markets, now including the US 30 year Treasury bond, shows mixed performance since March:

• The worst performers have been Shanghai and Tokyo, down ~12%. They are also the worst performers since the pre-Crisis peak, down ~50%.
• In the middle are the US, UK, Russia and Brazil, down ~2%. Since the peak, Brazil is down 9%, UK down 18%, US down 29% and Russia down 40%.
• The positive performers are Germany, up 6%; India up 11%; and the US 30 year Treasury bond, up 15%. Since the peak, however, Germany is still down 23% and India down 10%, but the Treasury bond is up 20%.

Whilst there is a lot of talk about a bond market bubble, as discussed recently in Questions to the chemical market genie, there are also a number of quite rational reasons why investors might focus on long-dated bonds issued by major governments.

Monday's Financial Times will feature the blog's analysis of this issue.

The ICIS Top 100 listing of the world's major chemical companies has just been published, and provides its usual store of data and insight.

In his summary, editor Nigel Davis notes that 16 of the Top 100 reported a net loss in 2009, with LyondellBasell, PEMEX and INEOS the largest at $2.9bn, $1.5bn and $0.9bn respectively.

Davis also notes that "In a world cautious in the extreme and armed against the impact of a further downturn, it is predictable that Top 100 analysis for 2009 records much lower capital spending (capex) across the sector. The average fall for the Top 100 that disclosed capex was 16.5%." The data is summarised above, by reporting company.

Davis also notes that "the average decline in R&D spending was 4.4%, with 37 companies making cuts of more than 5%". Equally, he reports that "11 companies cut employee numbers by more than 10%."

A full copy of this year's report can be downloaded free by clicking here.

The summer has seen several reports of reductions in ethane availability to Saudi petchem plants.

This seems to have been due to two causes:

• Saudi has cut back oil production by a third (4mbd) in order to comply with its 8.3mbd OPEC quota at a time of reduced global demand. This has also reduced the production of associated gas, including ethane.
• In addition, gas has had to be used to supply growing demand for power generation, which has also required the use of 750kpd of oil, according to International Energy Agency estimates.

Now Aramco's CEO, Khalid al-Falih, has signalled that the company's $130bn exploration plans are focusing on unconventional resources such as shale gas.

In an interview with the Financial Times, he notes that 4.3bn cubic feet has been added to Saudi's gas reserves in the past 5 years. And he suggests Saudi could double current gas reserves via unconventional sources.

Shale gas exploration has, of course, already delivered major new feedstock availability for US petchem producers, with US natural gas prices at their lowest level for 7 years. Now al-Falih is suggesting the Kingdom will harness the expertise generated by the international oil companies (IOCs) in order to boost its own production in this area.

He also confirms that Aramco remains "enthusiastic" about its current JVs in refining and petchems with partners such as Sinopec, Sumitomo, Dow, ExxonMobil, Shell and TOTAL. Increased gas availability would certainly go a long way towards enabling higher petchem production levels in the Kingdom over the medium term.

The past fortnight has confirmed the strong linkage between Dalian futures trading, and financial market speculation.

Dalian prices (red line) for linear low density polyethylene (LLDPE) rose steadily in early September, as traders bet on higher crude prices. They had gained RMB 600/t ($90) by last Wednesday.

But then rumours began flying that China's interest rates would be increased at the weekend, to help curb rising inflation. Prices immediately dropped RMB 305 ($45/t), as traders dived for cover, mirroring Thursday's 1.5% fall on the Shanghai stock market.

Dalian's trading volume (blue line), over 6 MT/day at this month's peaks, gives it major influence on physical market pricing. Yet, now the excitement has died down, it is clear that nothing much had changed in the fundamentals of the polyethylene market to justify either its earlier rise in prices, or the sudden fall.

It has become, as my fellow-blogger John Richardson noted recently, an Alice in Wonderland market where financial speculation rules.

China's leadership seems to be increasingly confident about its ability to redirect the economy towards more domestic consumption over time, and away from the previous over-reliance on exports.

As the above chart shows, bank lending (red column) is well on track to meet the $1.1trn target set for 2010, down 21% from 2009's high. In turn, given the close historical correlation, this should mean that electricity consumption (blue line) starts to stabilise, along with industrial production.

This also explains the government's reluctance to raise interest rates, even though inflation moved well above target to 3.5% in August. And it suggests premier Wen Jiabao was serious when warning last week that:

"It is the key responsibility of all levels of governments to stabilise housing prices and to guarantee housing availability. The issue is not only an economic problem but also an issue of people's livelihood that affects social stability."

With China Daily reporting that rising property prices are causing rents for small Beijing apartments to rise by up to $150/month, the risk to social stability is clearly rising. And so it was clearly no coincidence that Ma Jiantang, head of China's Statistic Bureau, told the Summer Davos forum that "China's tightening measures on the property market will not throw a major impact on the country's economic growth".

Ma said real estate was only 20% of China's total investment, and only a "small share of GDP". He was followed by Xia Bin, of the Bank of China, who noted that investment in the sector had "surged 37% in August versus 2009", in spite of "the government's tough measures to curb excessive growth".

Xia warned that it might take 2 to 3 years to restore normality to housing markets, due to "China's complicated economic condition and difficulties in its economic restructuring." But in the meantime, it looks as though this key sector for chemical demand might be in for a bumpy ride.

ICIS' Mark Victory wrote a interesting article this week, in which he tried to relate differing views of the economic outlook to auto demand, the area in which he specialises. The underlying issue, of course, is the complexity of the value chain, where supplies are often ordered months in advance, whilst most data will only appear weeks after the event.

His analysis concluded that the indicators, good and bad, "give a snapshot of the market at the time they are compiled, but they do not offer a crystal ball view into the future".

In uncertain times, the blog believes that raw data on auto sales is our best guide as to what is really happening. Last year, the EU was the largest auto market in the world, thanks to the various stimulus programmes. But no longer.

As ACEA (Association of European Automakers) note in relation to the above chart, auto sales in July and August "continued the downward trend seen in Q2". One can't get clearer than that about the direction of a market. The Big 5 markets in terms of volume were also all negative versus 2009: France -8%; UK -18%; Italy -19%; Spain -24%; and Germany -27%.

The trend is also worsening, now that all stimulus programmes have ended. Q1 sales were up 9% versus 2009, with stimulus programmes still underway in the Big 5 with the exception of Germany. But they were down 8% in Q2, as these came to an end. So far, sales are down 16% in Q3.

Increasing demand for greater fuel efficiency will continue to support chemical and polymer sales, as manufacturers replace steel and glass. But European consumers are providing fairly clear evidence of dramatic falls in auto demand itself, as austerity programmes begin to bite.

The blog remains very concerned that, overall, the economic policies adopted during the current Crisis are leading the world economy to the worst possible outcome. This outcome is totally predictable. Indeed it has been predicted by reputable experts for some years. Yet most policymakers still seem intent on dealing with symptoms rather than causes.

As evidence for this argument, the above chart first featured in the blog 18 months ago. It was developed by Comstock Partners, but many others identified the same logic. And sadly, we continue to move through exactly the cycle it defines:

• Originally, China/Asia boosted savings and investment, whilst the West ran up huge debts in creating demand to utilise this investment eg in housing, autos.
• Equally, the West created huge over-capacity in services, particularly financial services, in order to recycle Asia's savings into Western debt.
• Inevitably, the world then reached a position where this excess capacity led to growing weakness in pricing power - causing the Crisis which is now with us.

Did Western policymakers stop at this point, and ask themselves what was happening? Not as far as the blog has observed. Instead, they focused on short-term measures such as stimulus programmes to boost demand, in the mistaken belief that the problems were caused by a lack of market liquidity, rather than solvency.

The EU's efforts to avoid debt default by Greece are just one example of this. Equally, Germany's weakening of the new Basel bank capital rules to avoid problems for its bankrupt state banks. Or, indeed, the Obama administration's apparent belief that their stimulus programmes would produce 'escape velocity', with the US consumer quickly returning to full spending mode.

Meanwhile in Asia, China has begun quietly devaluing versus the trade-weighted average of partner currencies, spending $1bn a day in the process. It has also been forcing up the value of the Japanese yen, buying $12bn of government bonds in June-July.

China's premier, Wen Jiabao, has also ruled out any "drastic appreciation of the renminbi" against the US$. Noting that China's factories receive only $6 for each $299 iPod sold, he warned, "you don't know how many Chinese companies would go bankrupt. There would be major disturbances. This is the reality."

Yet in the USA, the administration seems increasingly keen on a 'weak dollar' policy, to support its desire to double US exports over the next 5 years.

Now, Japan has publically signalled the move to the next stage of the Crisis, with its decision to competitively devalue, to try and maintain its exports. Its export-driven economic model simply can't survive with the yen above ¥95: $1.

As before, this short-termism clearly cannot work long-term. With world trade no longer expanding, nobody is now able to take on the role of 'importer-of-last-resort' that has been adopted by the USA and Western Europe in recent years. Instead, the politicians are all mindful of the increasingly protectionist mindset of their electorates, with unemployment at high levels.

So the stage is now being set for the next phase of the Crisis, namely protectionism and tariffs. The first signs are already beginning to appear. And they will undoubtedly increase in volume next year, if the major developed economies (Europe, N America and Japan) continue to stagnate. These regions, after all, do account for two-thirds of global GDP.

In the meantime, more and more governments are planning to further reduce demand by imposing austerity programmes, in the mistaken belief that their previous policies have delivered economic recovery. The outlook therefore does not seem very optimistic, even to the blog.

Peter Lynch, who managed Fidelity's Magellan Fund in its great days, once remarked that "the futures and options markets are a giant transfer payment from the unwary to the wary".

This has certainly been the case in oil markets over the past 18 months. The sale of futures contracts to pension funds and others, has taken prices far above anything justified by fundamentals, and made a considerable profit for those selling these contracts.

The issue, of course, from the chemical industry viewpoint, is whether this situation will change any time soon?

To answer this critical question, we probably have to turn to so-called 'technical analysis', which is widely used by those trading both commodities and currencies. It focuses on trying to identify behavioural patterns, not supply/demand fundamentals, and then applies these to current conditions.

Thus the above chart, from Petromatrix, is a warning that a possible major price move lies ahead. It charts the weekly range of WTI in recent months. And it shows a 'triangle' is being formed, highlighted by the red 'resistance line' at the top, and the green 'support line' at the bottom.

The triangle has been building since May, and suggests that 'bulls' have run out of steam in trying to push prices higher, whilst 'bears' have not gained sufficient momentum to take them lower. Quite often, the end of such a tug-of-war produces a major price move, up or down, as one side capitulates.

The blog will therefore keep an eye on developments, to see if the triangle pattern helps forecast future price movements on this occasion.

Last year, the US administration spent $2.85bn on supporting the sale of 360k autos, by paying owners of older vehicles to destroy them with sodium silicate.

At the time, most people in the chemical industry, and many experts, regarded this 'cash for clunkers' programme as being a complete waste of money. And they became even more concerned when European governments followed with similar programmes.

Now a new study for the US National Bureau of Economic Research finds that it "had no long run effect on auto purchases". Their analysis suggests it increased sales by 360k in summer last year, "but then quickly hurt sales by about the same amount, in effect stealing sales from the future".

Of course, they can't also measure the negative impact on chemical companies and converters of suddenly having to ramp up production, only to then see it collapse again. But this clearly happened, causing major disruption to the supply chain. Equally, all the anecdotal evidence suggests the same pattern occurred in Europe.

The underlying problem is that many politicians simply fail to accept that short-term fixes, such as the clunkers programmes, housing tax credits etc, cannot provide 'escape velocity' to overcome the real issues underlying the current Crisis. Vast sums of money, and time, are being wasted whilst they remain in this state of denial, as the blog will discuss in more detail at the weekend

Major changes are taking place in US retailing. They echo the changing focus of emerging Asian markets. Taken together, these must have important implications for chemical demand.

US retail markets have been evolving over the past 3 years, as the Crisis began to hit, and the baby-boomers moved beyond the peak 25 - 54 age group of maximum consumption:

• Back in 2007, the major retailers began to report that consumers "appreciate the opportunity to save on everything" (Wal-Mart) and "are more focused on value-for-money" (Tesco).
• Then this trend spread to impact the major consumer products companies. Even Procter & Gamble was forced to respond, after its sales were hit by competition from low-cost 'own brands'. They introduced the Basic range, with lower performance and price.
• Now, the New York Times is reporting that "Dollar stores have shown the biggest gain in shopper visits over the past year". These are stores where most products sell for $1 or less. In turn, manufacturers are starting to produce "smaller packages that cost less".

The implications are obvious. The richest consumers in the world are no longer focused on buying more of everything. Instead, they are beginning to redefine purchases into 'needs' and 'wants'.

This trend is now spreading across all categories. Large so-called McMansion homes are definitely out of fashion, as are large Hummer vehicles. Equally, of course, the emerging economies of Asia are increasingly focusing on the vast untapped markets on their doorsteps, such as China's rural population, rather than 'aspirational' consumerism for the lucky few.

India, for example, is successfully introducing the nano car, priced at $2k, aimed at providing an alternative for families using a two-wheeler. Whilst Unilever's Shakti project is aiming to sell single items of toiletries etc to 600m people who cannot afford to buy western-style volumes.

Richard Brasher, Tesco's commercial director, warned 3 years ago that "Coming down the road is a tougher time." He announced that Tesco was changing its focus from affluent shoppers because "if you don't have the basic things right, you will be talking at the edge rather than at the centre".

Today, as chemical companies focus on their 2011-13 budgets, these comments seem more insightful than ever in terms of likely future demand patterns.

This week's ICIS Chemical Business includes the blog's article on the changes taking place in global markets for ethylene, propylene, butadiene, benzene and paraxylene. These have a potential impact on buyers and sellers all the way down the various value chains.

The article updates the blog's major series on these issues in the summer, and also links to the demographic changes now underway in the West. It suggests that "prudent producers and consumers might want to develop a Scenario-based approach to future planning, that includes further development of the analysis set out".

Please click here to download a free copy of the article. And please click here to see the YouTube interview with Will Beacham, ICB deputy editor, which explores some of the key issues in more detail.

Global chemical production seems to be "slowing", according to latest data from the American Chemistry Council (ACC). They note that total chemical output, including pharmaceuticals, rose just 0.7% between July and August, against a 9.4% rise versus August 2009.

The good news is that the ACC believe "at the headline level, the previous peak has been reached, turning global recovery into expansion." But they warn that output performance is uneven - "some nations and regions lag, and have yet to reach the prior peak." The blog will look at this in more detail next weekend.

The ACC has also introduced the above new chart, showing capacity utilisation in the global industry (again including pharma), since 1989. This shows the clear improvement since the bottom of the crisis, with utilisation rates at 86.9% in August versus 80.9% in August 2009.

Utilisation is well down, however, versus the 2007 peak of 93.5%. It is also down versus the 1995-2007 average of 90.1%. Demand grew by 80% over this period, from 56.7 on the ACC's Index to 101.8. But since 2007, demand has only risen 8%, whilst capacity is up 26%.

The risk for pricing and margins is that demand growth now disappears, as the stimulus programmes end, whilst more Asian and Middle Eastern capacity continues to come online. This would inevitably lead to a new decline in the utilisation rate.

As promised last week, the blog has undertaken its usual 6 monthly analysis of global chemical production, excluding pharma, by major region.

The data comes from the comprehensive American Chemistry Council (ACC) report. It shows global production (blue diamonds) was 4% above the previous peak in H1 2008. But there is a considerable variation in Regional performance:

Asia-Pacific. Output (blue line) was up 17% versus Q1 2008, due to China's lending and stimulus programmes.
Middle East/Africa. Output (orange) up 16%, due to advantaged feedstock.
Latin America. Output (green) was at Q1 2008 level, due to Asian demand.
W Europe. Output (purple) was down 4%, with stimulus programmes ending.
CEE. Output (green) was down 5%, after a strong rise in Q2 2010.
N America. Output (red) was down 8%, with Q2 2010 static vs Q1.

This highlights the industry's clear dependence on Asian demand.

Western stimulus programmes were supposed, by now, to have provided 'escape velocity' from the Crisis, and encouraged consumer confidence to return. Instead, after the initial excitement, they seem to have led to a period of doubt, where people worry about how the cost of them will be repaid.

The battle lines are definitely being drawn up in South East Asia, following Honam's July move to acquire Malaysia's Titan.

The context for this is Asian producers need to develop new strategies, as export opportunities to China dry up. China's ethylene production grew 26% in H1 versus 2009, with Sinopec increasing its output by 41%. And, of course, there is further expansion in the pipeline, well ahead of likely demand growth.

The news this week is that moves are finally being made to sort out the long-standing problems at Chandra Asri in Indonesia. As my blogging colleague John Richardson notes, this has made the country one of the world's largest importers of ethylene, with an expected deficit of nearly 600kt in 2013.

Joint owner Barito Pacific will end up with 71.6% of the new company in January, when TriPolyta Indonesia merges with Chandra Asri. The aim must surely be to increase olefin capacity, whilst properly integrating the cracker with downstream polymer production.

If this doesn't happen, then Honam will have an open goal, once its Titan acquisition goes through. Honam has already announced its intention to expand olefin production in Malaysia, whilst its acquisition brings with it the PT Titan polyethylene plant in Indonesia.

Singapore's new strategy shows its Economic Development Board is well aware of the risks of standing still whilst the world changes. But Thailand's PTT seems in danger of falling behind, as M&A goes on around it. It is burdened with a complex ownership structure, and must have inevitably been distracted by the long-running environmental issues at the Mab ta Phut site.

Business models have been changing over the past decade in the chemical industry, as illustrated in the above chart.

Initially, the dotcom era began to put pressure on former 'specialty businesses', as customers discovered they were paying over the odds for technical support that was no longer required. The internet made it much easier to obtain low-cost supplies (often from Asia) of the molecules they required.

Then high oil prices pressured the former 'commodity' businesses, as it became more difficult to pass on these higher costs down the various value chains. And in turn, this has led the majors to implement strategies that prioritise site and business integration as a way of mitigating the problem.

Thus Steve Pryor, ExxonMobil Chemicals president, told EPCA last year that businesses need to be "tightly integrated to maximise the value of every molecule and minimise costs". And now Shell's Ben van Beurden, Shell's chemicals EVP, has told ICIS's Nigel Davis that even the phrase "refinery/chemicals interface" represents an out-of-date concept.

Van Beurden went on to explain that in Shell's view, "as long as you have an interface, you have a problem". And thus the chemicals business needs to focus instead on becoming the "highest profitable hydrocarbon upgrader". By this, Beurden said its role was to enable the company to "capitalise on low-value and other refinery streams and add value to the whole".

These are major changes in business models, which take time to implement. But as they become more apparent, so it will become clear that the chemicals landscape is undergoing a profound change from that which has applied over the past 30 years.

The World Bank have kindly sent the blog a copy of their new handbook "The Day After Tomorrow: A Handbook on the Future of Economic Policy in the Developing World".

It describes the impact of the Crisis on the emerging economies and summarises the challenges ahead, by individual region.

You can download a free copy by clicking on the copy of the book cover.

Warren Buffett, the legendary US investor once cautioned that "over time, markets will do extraordinary, even bizarre, things."

We are certainly living through such times today.

In August, the US S&P 500 Index fell 5%, as investors worried about the end of stimulus packages, and the return of banking problems in Europe. The IeC Boom/Gloom Index mirrored this fall, sinking back to its post October 2008 lows.

These fears came true came true last month, as the weaker European economies faced record levels of interest rate spreads; Ireland warned the rescue of Allied Irish Bank might cost a third of GDP; and the US Federal Reserve said it might resume Quantitative Easing (QE2), due to its worries about the US economy.

In response, the US S&P 500 rallied 9%, with the Boom/Gloom Index (above) tracking it once again as sentiment turned bullish.

"Extraordinary, even bizarre", might seem a good description of events.

The issue is our old friend, liquidity. As the SEC report into May's 'Flash Crash' shows, the high-speed traders who now dominate financial markets couldn't care less about underlying economic reality. To them, as BofA Merrill Lynch commented, "QE2 = the Bernanke Lifeboat for the equity market". All the boys with the big computers care about is that the US Federal Reserve might soon sponsor another tidal wave of liquidity.

They expect this to trigger renewed fears about the potential for rising inflation. In turn, they hope this will drive the value of the US$ lower, and cause renewed buying of commodities such as crude oil. Its the perfect opportunity for them to max out on bonuses in time for Xmas.

But once the party has ended, and the computers have been shut down for the night, it will be the real world of the chemical industry that will have to pick up the pieces.

The blog's former ICI colleague, Tom Crotty, aptly summarised the mood of most petchem players at this week's meeting in Budapest, Hungary, when telling ICIS' Nigel Davis that "2011 is a very tough call to forecast".

Crotty is this year's president of EPCA (European Petrochemical Association), and it was clear from the blog's discussions that uncertainty is the key factor in current petchem markets. In particular, people have different viewpoints based on their geographic location:

• Asian, Middle Eastern and Latin American players have had a good year, supported by China's demand. They hardly recognise that a recession has been underway, but worry China may slow next year.
• European players have seen tight markets, with feedstock supply limited by refinery cutbacks, as I describe in the above interview with ICB's Will Beacham. But they worry that government cutbacks and austerity programmes will hit demand next year.
• US players have also been supported by Asian demand, and domestic stimulus spending. But the upcoming mid-term elections, and lack of clarity over future economic policy, create their own uncertainty.

In addition, there is the strange case of crude oil prices.

Petchems always do well when these rise, as players build inventory down the value chain (as in 2007-H1 2008). And as in 2008, the blog fears that today's high prices will also choke off demand, as they reduce discretionary spending.

Equally, oil prices have not been supported by tight supply conditions. Inventories of crude and oil products are at near-record levels. It is only the efforts of financial players, selling the US$ and buying commodities such as oil, that has led to today's $80+ levels.

Scenario planning seems essential when looking forward to the 2011-12 Budget period, with companies faced by extreme levels of uncertainty over future demand levels, government actions, currency movements and feedstock prices.

The blog will take up this issue in more detail, when presenting its annual Budget outlook later this month.

Regular readers may remember that the blog is also non-exec chairman of NiTech Solutions, a technology spin-out from the chemical engineering department at Heriot Watt University in Scotland.

They will therefore understand its delight that NiTech have won this year's ICIS Innovation award in the SME (Small/Medium size Enterprise) category.

The picture above shows the plant that won the award - installed with Genzyme, the leading biotech company. The technology offers a major cost reduction (both capex and opex) for those currently using stirred tank reactors, as well as better product quality, lower carbon footprint and waste reduction.

NiTech's technology is particularly strong for mixing and crystallisation applications, where a number of chemical/pharma majors have already begun feasibility studies. Hopefully the Award will encourage other companies to investigate its potential for their businesses.

It is not easy being an SME in the current economic climate. The blog therefore congratulates its NiTech colleagues on this major success. The full ICIS report is available by clicking here. A short video demonstrating the technology can be seen by clicking below.

More evidence is emerging of the major changes taking place in Western retailing as we transition to the New Normal. Last week, my fellow blogger Doris de Guzman reported from the World Detergents conference that:

• P&G's CEO Robert McDonald noted that in "the last 18 months, 60% of all new laundry and detergent products came from lower-tier segments".
• Henkels's SVP Thomas Muller-Kirschbaum, emphasised "there is current hyper-competition when it comes to product pricing".

This trend was also evident when the blog returned recently to the IMD business school in Switzerland for an alumni event. One featured case study on 'marketing in the new normal' came from Peter Yorke, P&G's global marketing director for Pampers, the leading diaper brand.

Yorke explained that P&G had traditionally resisted competing in the lower price, own-label market, for fear of cannibalising its sales in the upper and mid-tier. But the advent of the Crisis had caused this philosophy to be revisited, and the new lower-cost brand was now making an major difference to the bottom line.

"Most importantly", he said, it has created a belief that "P&G could win" against the own-labels. This, of course, is why P&G, like other major consumer products companies, is now focusing on the area as a source of growth for the future.

This new focus on the value sector has important implications for all the chemical companies who supply raw materials into the consumer products market. Lower price, rather than technical innovation, is increasingly going to be the key to success.

Natural gas markets, so important in relation to chemical feedstock availability and pricing, are undergoing major change as we transition to the New Normal.

The Middle East, which had been in surplus, is now moving to a more balanced position in some countries, such as Saudi Arabia. But the USA, which had expected to need increased imports, may instead become a major exporter.

Middle East. The blog was speaking at the World Refining Association's annual conference in Bahrain earlier this week. And it was clear from its discussions with leading players that Saudi Arabia is having to re-evaluate gas usage strategies, to take account of competing end-user demands, as well as overall energy supply balances.

The supply position has thus changed significantly since the blog first visited the region in 1996. Then, everything was in surplus, and multiple investment objectives could be achieved, such as providing good financial returns whilst also adding value to a natural resource and providing local employment.

Today, as noted by McKinsey's Christian Gunther in Bahrain, choices will have to be made between competing priorities. Should gas replace diesel as a power station fuel, for example? Equally, should gas users pay the exploration costs for finding non-associated gas?

USA/Global. Meanwhile, over in the USA, "a supply revolution" has taken place, according to Shell CEO, Peter Voser. Voser told a London conference yesterday that a much more favourable global picture is emerging for gas reserves, due to shale gas and liquefied natural gas (LNG).

He noted that the US now has "over a century's supply" of natural gas at current consumption levels. Yet, just a few years ago, it was thought that "domestic gas production would decline". And including LNG supplies, the International Energy Association estimates the world has enough "gas in the ground for 250 years at current production rates".

In turn, of course, changes of this magnitude create both problems and opportunities for the chemical industry. Shell VP, Jeremy Bentham, spelled out some of the opportunities at last week's EPCA meeting in Budapest:

• He noted it was now economic to produce US shale gas at between $3 - $5 MMBtu, compared to the previously assumed minimum cost of $6 MMBtu.
• He also revealed that US producers were "queuing up" for export licences, based on using the terminals recently constructed for LNG imports.

Working through these issues will be a complex process. And it is made no easier by the current divorce between oil and gas prices. Oil has 6 times the energy content of natural gas and, as the chart above shows, the two normally track each other quite closely, with oil 6x gas prices.

But with financial markets currently powered by liquidity rather than fundamentals, oil prices (blue line) are now 20 times US gas prices. Does this mean gas prices (red line) might treble to $12/MMBtu? Or might oil fall back to $24/bbl? Or will current relationships continue?

The honest answer, is that nobody knows. We have simply never seen conditions like this before.

Greater use of electric autos is a win-win for the chemical industry. They will not only reduce competition with gasoline for feedstock, but also increase polymer demand - to replace steel and glass. So China's entry into the market could be very important.

As always, the blog has been brought up to date by its friend Pedro Spohr of GALP, who keeps a close eye on developments. He notes that China has recently sold its first all-electric auto (see picture), 4 months ahead of Nissan's planned Leaf debut in the USA.

China is also following the USA in offering enormous subsidies to buyers, in a pilot programme covering 5 major cities:

• Central government subsidies are up to 60k yuan ($9k)
• Many of the local governments offer similar amounts in addition.

China's subsidies work via direct government allocation to manufacturers, in order to reduce list prices. Government is also funding the construction of charging stations and battery recovery networks.

Meanwhile in the USA, 20,000 people have already reserved the all-electric Nissan Leaf, which goes on sale in 5 states in December. And the New York Times reports they are also being given lots of incentives:

• $7.5k federal tax credit
• Cash rebates from state governments eg $5k in California, $2.5k in Tennessee
• Free or subsidised $3k home-charging units from the Energy Department
• Charging stations are being built by the $230m nationally funded EV project

The blog will continue to follow developments with interest.

The blog's argument that oil prices are now being entirely driven by financial market speculation has won support from one of the main state oil trading companies.

ICIS news reports that the CEO of SOCAR Trading (State Oil Company of Azerbaijan Republic) claimed that the "rise in crude and other commodity prices, resulted principally from the speculation of banks". And he went on to argue that "fundamentals would indicate that the price of crude should be around $30/bbl."

Speaking at the Asia-Pacific Petroleum Conference, he justified this claim by pointing out that "paper trading on the NYMEX and ICE exchanges in 2010 was worth $25,000bn, compared with just $2,000bn for physical oil". And he noted that "although crude prices had risen, OPEC spare capacity still stood at around 6m bbl/day".

Azerbaijan produces 1mbd of oil, and SOCAR believes that today's high oil prices are positive for the world economy, as they "cushioned resource-rich developing countries, including Azerbaijan, from the worst effects of the crisis". The blog strongly disagrees with this view, which ignores the impact of high oil prices in reducing discretionary spending (and therefore chemical demand) in the rest of the world.

But SOCAR's clear statement does give a clear indication of the downside risk to oil prices, should the QE2 lifeboat party ever end.

The blog will publish its annual Budget Outlook for 2011 next weekend. And so as usual, its now time to review last year's Outlook. Past performance may not be a perfect guide to future outcomes. But it is one of the best that we have.

The 2010 Outlook was titled 'Budgeting for a New Normal', and it argued that over the next few years:

"We will start to see a rebalancing of the global economy. The West will see lower consumption, as people rebuild their savings, and borrow less. In turn, this will mean lower export demand for the emerging economies. The outcome will be a more sustainable world economy, but it will be a difficult journey."

Today, this still seems to be an accurate view, particularly the sense that it will be a "difficult journey".

The blog's 2008 Outlook 'Budgeting for a Downturn', and its 2009 'Budgeting for Survival', meant it was one of the few to forecast the Crisis. Last year, however, the blog was more positive about the outlook than most forecasters, expecting that "2010 should be a better year for the chemical industry, as demand grows in line with a recovery in global GDP".

It also correctly balanced this optimism by warning that there would be no "quick V-shaped return to the 2003-7 Boom years", and suggesting that:

"Governments will worry about budget deficits, and may well scale down support for critical end-uses such as autos and housing. Equally, major amounts of new capacity, planned during the Boom years, will start to come onstream in the Middle East and Asia."

This led it to fear that "unemployment is set to become a key political issue in the West". Unfortunately, this has also been proved correct. So have its concerns that the expected recovery in demand would put "great strains on cash-flow", and that speculative bets on "oil prices linked to traders' bets on the US$'s value will continue".

However, although it identified this latter factor, it clearly underestimated its likely longevity, with oil so far averaging around $75/bbl versus its suggestion that "$50/bbl might be an average price". The blog will keep this lesson in mind when posting its Outlook next weekend.

The blog's aim is to 'share ideas about the influences that may shape the chemical industry over the next 12 - 18 months'. It hopes that its 2010 Outlook again helped readers to better prepare for today's more difficult economy.

If you only read one newspaper article this year on the economic outlook, then the blog would recommend Martin Wolf's recent analysis 'Why America is going to win the global currency battle'.

Wolf is a former EPCA speaker, and he sets out very convincingly the rationale for the US Federal Reserve's planned move to restart printing money again (the QE2 Lifeboat policy). As he says:

"To put it crudely, the US wants to inflate the rest of the world".

Wolf argues that the Fed's QE2 policy will encourage asset price inflation in financial markets (stocks, commodities etc). The belief is this will spur US consumer spending and promote growth in the real economy. Higher US inflation will also devalue the US$, thus reducing the 'real' value of the US's enormous debt.

Equally, of course, the article highlights Fed's real fear that the USA may be following Japan's deflationary path since its financial and real estate bubbles burst 20 years ago. The chart above shows this danger very clearly:

• The bottom axis is the percent change in the Nikkei 225 Index (purple line) from September 1985
• The top axis is the percent change in the S&P 500 Index (red line) from September 1995
• The S&P line is lagged by 8 months, so that it peaks in 2000 in line with the Nikkei's all-time peak in 1990.

It shows how the Fed began inflating like mad in 2003 - focusing on the housing market - as the S&P followed the Nikkei's downward path after the dot-com bust. The resulting Crisis, however, then brought the two lines perilously close again in 2009. Thus the Fed is clearly very worried that this summer's 'soft-patch' may signal that the USA is reconnecting with Japan's fate.

The blog, does, however, disagree with Wolf's overall conclusion, that the Fed will inevitably win this battle. Wolf believes that its policy will force China and other emerging economies to allow their currencies to rise sharply, or risk higher inflation and over-heating in their domestic economies. This will then allow the US to increase its exports, and also help to rebalance the US economy.

But he overlooks the impact that the lower US$ and higher commodity prices will have on US domestic demand. Higher oil and food prices, brought on by the 'QE2 Lifeboat party', are just as likely to cause further declines in US consumer confidence, and cut into the discretionary expenditure that drives growth in the real economy.

The problem, of course, is that the Fed is certainly powerful enough to engineer a short-term boom in asset values. This is what we have been seeing with the 15% rise in the S&P since August, when the Fed began briefing on its proposed policy. But can it really 'win', as Wolf believes?

In the blog's view, this just adds to the general uncertainty over likely future demand levels, that was so evident earlier this month at EPCA. And it is therefore yet another reason why the blog plans to title its Budget Outlook this weekend, 'Budgeting for Uncertainty'.

EU auto sales were better in September than in either July or August. But 'better', of course, is a relative word these days.

As the chart shows, they were only down 10% versus 2009 levels, whereas July and August were down 19% and 13% respectively. But in terms of absolute volume, sales at 1.2m were well short of the average September figure of 1.4m between 2003-7.

The figures also confirm that the earlier 'cash for clunkers' programmes were a complete waste of money. As in the USA, these only brought forward sales, and didn't create sustainable new demand. Thus ACEA (European Automobile Association) report that in September, "all major markets contracted, by 8% in France, 9% in the UK, 18% in Germany, 19% in Italy and 27% in Spain".

Now, austerity programmes are replacing stimulus. And with major markets such as France in the middle of major strike actions, it seems likely that Q4 demand trends will continue to weaken.

The Bank of England has become the first major central bank to endorse the argument that we are moving towards a 'New Normal'.

In an important speech this week, its Governor Mervyn King, set out the argument that we can look forward to:

"a SOBER decade - a decade of Savings, Orderly Budgets, and Equitable Rebalancing".

And he contrasted this with the recent past:

"the Non-Inflationary Consistently Expansionary - or 'NICE' - decade from the early 1990s to the early 2000s".

This is very much in line with the arguments put forward in the blog's White Papers on 'Budgeting for a New Normal' this year.

A similar message has come today from the USA, where Treasury Secretary Tim Geithner, told the Wall Street Journal that "The rest of the world wants us to save more--and that means less U.S. demand for the rest of the world. Demand is going have to come from other sources."

This transition to the New Normal is not going to be easy. Chemical companies now preparing their Budgets for 2011, should expect plenty of bumps in the road.

When elephants fight, those around them need to be cautious. And this is the prospect for 2011-13, as the Western countries try to force the BRICs (Brazil, Russia, India and China) to export less and import more, the so-called 'rebalancing' strategy.

Thus Budgeting for Uncertainty seems the right title for the blog's annual Outlook for the chemical industry.

Key factors that will contribute to this uncertainty include:

• The USA is aiming to rebalance the world economy by forcing the BRICs to reduce exports and instead focus on expanding domestic demand. This proposed rebalancing represents a major change from the past 20 years of export-driven development by the emerging economies, and will not be achieved overnight.

• Europe is making a 180 degree shift in policy, by abandoning previous efforts to stimulate its economy. It is instead planning to achieve budget balances by reducing spending and increasing taxes. It is also lining up alongside the USA in hoping to increase its exports to the BRICs, whilst reducing imports from them.

• The BRICs themselves are between a rock and a hard place. They were not the cause of the financial Crisis, but they are the ones on whom the major burden of adjustment may fall. The principal instrument of change will be the exchange rate, as the West aims to force China and others to revalue their currencies quite sharply.

These macro factors clearly raise more questions than answers. Even the issue of timescale is unclear, with the US suggesting it might take a full Budget cycle of at least 3 years for real changes to be observed. Plus, of course, there is absolutely no guarantee that the West will get its way, or that the whole exercise may not end in tears.

On the other hand, everything might go extremely well, with a renewed burst of co-operation as seen immediately after the Lehman collapse in Q4 2008. If the G20 Group of the major economies really worked together, then chemical demand could easily be stronger, rather than weaker.

The blog's view is that Scenario planning is the only solution when faced with so many different variables. The idea is to establish a Base Case, and then develop Upside and Downside Cases which are reasonable projections of what might happen if everything went very well, or very badly.

The blog's own effort to help kick-start this process is shown above:

BASE Case. This suggests we will see global GDP growth of 3%, with oil staying in the $60 - $80/bbl range of the past 18 months. We will still see financial market volatility, but no major collapses. It is the classic 'muddle through' type of Scenario.

UPSIDE Case. This assumes that the G20 achieves a 'grand bargain' to rebalance the world economy, allowing GDP to grow at above 3.5%. Inflation would probably become a major issue under this Scenario, causing oil prices to move above $80/bbl.

DOWNSIDE Case. Instead of increased international co-operation, countries put their own interests first and adopt beggar-my-neighbour policies. GDP growth would probably fall to 2.5%, and the oil price below $60/bbl, with the banking system under major strain as Deflation took hold.

The slide also suggests a number of 'Jokers' that companies may want to consider. These include changing demographics, such as the ageing of the Western baby-boomers. And, of course, one can never ignore the potential impact of geo-political events, such as a bombing of Iran's nuclear plants, or new tensions with N Korea.

Of course, it would be possible to simply adopt a Base Case Scenario, and assume that this will work out. But the chances of this occurring are probably less than 50%, so it would be highly risky. Instead, the blog would strongly recommend businesses to adopt a version of the above framework, using their own ideas for Base, Upside and Downside Scenarios.

By adopting this process, businesses can then test out key assumptions in advance. They can also develop mitigation strategies, in case events begin to diverge from the Base Case view. As always, the blog will be very happy to advise on the process, if this would be helpful.

2010 has been a suprisingly good year for many companies. We can certainly hope that current performance will continue, but hope is not a strategy.

Scenario planning will give businesses the chance to adopt the wisdom of the Scouting movement. Its motto, 'Be Prepared', seems the best possible approach in today's increasingly uncertain New Normal environment.

The above chart, from the excellent American Chemistry Council (ACC) weekly report, shows how Operating Rates (OR%) have changed in the global chemical industry since 1989.

From 1994 - 2003, they were broadly in an 87% - 93% range. They then moved up to a seemingly stable 92% - 94% range until 2008, before crashing down to an all-time low of 77% in December 2008.

Since then, they have recovered well. But they are still only back to 2003 levels, at 87.4%. And as the ACC note, production in important markets such as the USA, excluding pharma, has been "essentially flat" over the past year. Whilst in Asia, "the upward gain has moderated".

This highlights the uncertainty over the Outlook for 2011-13, as discussed in the blog's newly published 'Budgeting for Uncertainty'. And so the blog has therefore added 3 arrows, to illustrate the different Scenarios it has identified:

• A Base Case, where OR% maintain the improvement since 2008.
• An Upside Case, where they continue to improve and deliver a full recovery.
• A Downside Case, where they fall back again as demand growth stalls.

The blog has been recognised in the Financial Times and elsewhere as being one of the very few forecasters to correctly warn of the global downturn, and then highlight the recovery seen this year.

But it feels no such certainty about the Outlook for next year. It therefore hopes its Scenario analysis is helpful to companies, as they grapple with this key issue.

This is Budget Outlook week in the blog. And for the rest of the week, it is looking at a key issue in a major Region. Today, it highlights the US housing market. This used to be a $35bn market for chemicals, with up to 2.2m housing starts a year, each worth $16k in sales. Now it is worth just $10bn, with recent starts only ~600k.

The above chart, from thechartstore.com, highlights the key issue. A year ago, it was widely assumed that starts would soon recover from these 50-year lows (green and orange lines), as low interest rates and tax credits stimulated demand. But clearly this didn't happen. Instead, many now worry that rising numbers of foreclosures may lead to further falls in house prices.

Equally, there is increasing evidence that consumer trends have changed from those seen over the past 20 years. Large McMansions are no longer fashionable. And underlying demand growth for new housing has slowed, as lack of cash and fear of unemployment forces families to share homes again.

This suggests that US housing has been one of the first major markets to enter a New Normal environment, as Western societies start to save more and spend less. Tomorrow, the blog will look at similar trends that seem to be developing in Europe.

As promised, the blog is today looking at a key European consumer trend, as part of its Budget Outlook week. 70% of chemical sales are consumer-related, so changes in these trends are very important.

Earlier this month, it shared a platform in Bahrain with Thibaut Eissautier, Chief Procurement Officer of McBride, Europe's leading own-label producer of household and personal care products. 81% of his purchases relate to chemicals, from packaging materials through to the actual ingredients.

He noted that Europe has the highest global penetration of own-label goods (those supplied to supermarkets under their own label). And it has risen 10% since 2007, with one in six products now own-label in the household care sector. He outlined 5 key trends driving this trend:

• Value for money. "Consumers are more price-sensitive than ever".
• Simplicity. They "want less complicated life-styles".
• People, not things. They increasingly "prioritise what is important in life, such as family and friends", and often only "enjoy small moments of indulgence", which they prefer to achieve via "bargain-hunting".
• Values. Sustainability, carbon footprint, trustworthiness and performance are key for many consumers.
• Local. Convenience/express stores and online options are therefore gaining ground versus hypermarkets.

Most of these trends are quite different from those of the past 20 years, when affluent European consumers often defined themselves by the car they drove, or the house they owned. They therefore add a further element of uncertainty, when it comes to forecasting future chemical demand patterns.

In the last of its Budget Outlook analysis, the blog today looks at the major changes underway in China. These are typical of many emerging economies, including India, and could potentially have a big impact on chemical demand.

The key issue is that China's leadership has recognised the current export-driven development model no longer works. As Yi Gang, deputy central bank governor noted in July:

"China's future economic growth will definitely gradually slow down. The issue for China's economy is the quality of growth, which is why we now have to carry out structural adjustment and transform our development model."

China's export-driven development model meant investment in factories and urban infrastructure 'crowded out' personal spending. Over the past decade, it has grown at up to 30% a year, twice that of retail sales. Thus personal consumption is now only 30% of GDP, compared to 70% in the USA.

This has also led chemical companies to focus sales within China on the relatively well-off. But even in 2015, only 6% of China's forecast 280 million households will have incomes of >$12.5k. The real mass-market will be the 73% of households with projected incomes of <$5.2k.

This market will include most of the rural population, who have been left behind over the past decade. As the chart shows, their disposable incomes today at $672/capita (red column) are only 1/3rd of those in urban areas (blue). The needs, and aspirations, of these 700m people will provide the major growth area for consumer spending.

The magnitude of this change highlights a further aspect of the uncertainty underlying the Budget Outlook this year. We do not know whether we will see global co-operation on currencies, or a collapse into protectionism. Nor do we know exactly how far, and how quickly, changing consumer trends in the USA, Europe and China will impact chemical demand.

This is why the blog believes that Scenario planning is essential this year. It is also convinced that the rewards over the next few years, for those who do it well, could be very good indeed.

An unnatural calm continues to dominate crude oil trading. Prices may move up or down by $2/bbl or $3/bbl a day, but then they always return to where they started, between the upper red line and the lower green one.

The blog has kept its promised eye on developments, since this trend of 'trading in a triangle' was spotted by Petromatrix last month. It also applies, as the chart above shows, to trading in the Brent oil contract in euros/bbl. And it has continued even with the US Fed's QE2 Lifeboat policy about to start.

Thus there is still the potential for the sharp move, up or down, that technical theory would suggest, if either bulls or bears finally come out on top.

One of QE2's major aims is to drive down the value of the US$, and increase inflation. And in turn, of course, this is supposed to force investors into chasing so-called 'riskier' assets. Thus they should buy commodities such as crude oil, as a supposed 'store of value'.

The interesting thing, however, is that this promised vast flow of liquidity has indeed pushed up equity markets, and some commodities. But as the triangle shows, its positive impact on oil has been balanced by others' sales.

Crude oil prices were already far too high, of course, relative to either today's supply/demand balance, or natural gas prices. But they could still have gone higher. After all, as the eminent economist Keynes warned, 'markets can remain irrational, longer than you can remain solvent'.

So today's unusual calm in global oil markets, is perhaps trying to send us a message about future developments. The blog will continue to watch, with interest.

In the Boom period, it was the investment bankers who used to walk away with telephone number fees, after convincing a CEO to go after an acquisition 'opportunity'.

Now, in another sign of the New Normal, it is a former quality control manager who has become $96m richer, after making a 'whistleblower' call to GlaxoSmithKline's (GSK) then CEO, JP Garnier.

Her call, in July 2003, was not returned. And this proved a costly mistake. She was trying to warn him, after failing at lower management levels, that quality in the Puerto Rico factory which she had been auditing, was not up to standard.

The result, 7 years later, is that she will now get a $96m share of the $750m settlement made between US regulators and GSK. As The Guardian newspaper notes, this is "an extraordinary sum, but the failings in GSK's factory were also extraordinary".

DuPont taught us all, back in the 1980's, that safety was the top priority for management. The arrival of the New Normal, with fines like this, will no doubt help to remind us.

China's Dalian futures market has been attracting world headlines recently, with its status as China's leading market for chemical futures being confirmed. As such, one would expect its pricing for the two major polymers traded, LLDPE (linear low density polyethylene) and PVC, to follow similar patterns.

But this seems not to be the case. The LLDPE contract has boomed recently, offering punters a chance to bet on the direction of oil prices in high volume. It traded 46 million tonnes last month, around twice total annual global output.

Yet PVC, a higher volume product globally, and in China, traded just 1/10th of this volume. And as the chart shows, its price (red line) actually fell last month, as the physical market failed to pass through higher oil prices (blue).

This highlights, of course, the more speculative nature of the LLDPE contract. Anyone using it as the basis for pricing physical product, therefore needs to keep a close eye on what happens next to crude oil prices.

The US is 25% of the global economy, and its performance matters enormously to the chemical industry. So it was good news that US GDP growth stabilised at 2% in Q3, versus the 1.7% level of Q2. But the underlying trends during 2010 are worrying, as the above chart shows:

• Sales growth (blue line) has been slipping, and was only 0.6% in Q3.
• Inventories (red column) have been growing, and rose $110bn in Q3.

This is clearly the wrong way round.

Personal consumption is 70% of GDP, and should be rising by 5% at this stage in a normal recovery. Retailers and manufacturers clearly anticipated this outcome, and increased their orders in advance. But instead, this volume went into inventory, accounting for 72% of Q3's total GDP gain.

What happens next, is therefore the key question?

Will US consumers remain nervous about the economic outlook? Or will they re-open their wallets over Thanksgiving and Christmas, and return to Boom-year spending habits?

If they spend, then the inventories will soon reduce. But if they don't, then domestic producers, and foreign exporters, will need to prepare for major destocking in H1 2010.

Later this month, Berlin hosts our annual European Aromatics & Derivatives conference, held as usual with ICIS. It has one of our strongest-ever speaker line-ups, and covers a number of important areas:

What next for aromatics? Sven Royall, Shell's VP Intermediates, will present his view of the outlook for the value chain. Ralf Kuhlmann, formerly ExxonMobil's Business Director Hydrocarbons, will question whether Europe is on the right track for the future.

The future for styrene: Andrew Jones, Dow's Global Business Director for aromatics, will be outlining his ideas on the major challenges ahead, along with Jeff Denton, Feedstocks VP for Styron, who is kindly flying in from the US to present an overview of this major new player, and Piet Vermeersch, TOTAL's Business Manager for styrene.

Paraxylene and PET: Gianluca Girardi, Polimeri Europa's Sales Manager, will look at the outlook for PX and the C8 chain. Whilst Antonello Ciotto, Equipolymers' Commercial Director, will highlight the developments underway in recycled PET.

Refining and the gasoline interface: Matt Chadwick, from our partners Wood Mackenzie, will focus on changes taking place in the European refinery system, and the opportunities for advantaged cost feedstock into aromatics.

LyondellBasell: Hans van der Kaaij, Business Director, will talk about the Chapter 11 experience, and outline the 'new beginning' now underway.

China. Yu Jing from China's Chemical Planning Institute will present an informed view of plans for new production, and give her views on the 2011 outlook.

In addition, the blog has been preparing a special paper to mark '50 years of benzene production from oil'. It will challenge benzene's current by-product status, and suggest ways in which companies can build competitive advantage for the future.

As always, of course, the Conference will also provide an excellent opportunity to network with industry colleagues. It is being held in Berlin on 23 - 24 November, and registrations are already going well. Further details on the agenda, and how to register, can be found by clicking here.

So now its official. This week, the US Federal Reserve confirmed it was launching its 'QE2 Lifeboat'. It will inject $600bn into the US economy, in yet another bid to kick-start full economic recovery.

Clearly, this is a major initiative by the world's most important central bank. Will it work? And what might it mean for the chemical industry?

The answer to the first question is uncertain. Martin Feldstein, the blog's favourite economist and one of the very few to correctly forecast the start of the downturn, says it is a:

"Dangerous gamble with only a small potential upside benefit and substantial risks of creating asset bubbles that could destabilise the global economy".

Feldstein is Harvard's Professor of Economics, and so his views carry weight.

So what about the 2nd question? Here, markets have already given their answer, pushing the price of crude oil above $87/bbl. They expect QE2 to weaken the US$, and so they see commodities as a 'store of value'.

This cannot be good for the chemical industry. Rising oil prices will encourage inventory-build, just as we saw in 2007 - H1 2008, and 1979 - 1980. They will also reduce discretionary purchasing power, vital for chemical consumption, as consumers still have to purchase gasoline and heating fuel, even if prices rise.

All in all, therefore, the Fed's move simply creates more uncertainty, confirming the blog's fears when it published its recent Budget Outlook.

The US Fed's move to launch its QE2 Lifeboat continues its policy of focusing on measures to boost liquidity. Yet as the blog has long argued, today's problems are based on a lack of solvency not liquidity. Therefore it worries that the Fed's efforts are likely to miss the mark, again.

The above slide, based on US government data, highlights this key issue. It shows that 'real' median US wages* (eg after adjusting for inflation), have hardly increased over the past 10 years. In fact, they are at almost the same level as at the end of 1979, when the data starts.

This confirms that the consumption binge of the Boom years between 2003 - 7 was based on borrowed money, rather than income growth. It also highlights that the continuing aftermath of this binge, the 35% drop in average US house prices, is a solvency problem. And it suggests that the current total of over 2 million homes in foreclosure is more likely to rise than fall.

One would have hoped that the Fed would have learnt from its previous mistakes, particularly after inflating the housing bubble with low interest rates in the early 2000s. This was done to counter the dot-com crash, but provided only temporary support for the economy.

Injecting $600bn of extra liquidity into the US economy will not change real incomes, and so it will not create new demand. Equally, by raising inflation concerns, it has already succeeded in raising long-term mortgage rates, the last thing that was required.

* Median wages give a clearer picture than average wages. These are distorted by the dramatic rise in incomes of the richest 1% of the population, from $800k to $1.8m between 1990 - 2007 in real US$, meaning that their share of total income rose from 12% to nearly 20%. Chemical demand depends on trends amongst the 99%, not the 1%.

Last week, the blog repeated its warning that crude oil was preparing for a big move, either up or down. And prices then jumped 7%, to a two-year high of $87.49/bbl. So the 'triangle formation' proved its predictive power again.

As the above chart shows, from Petromatrix, the driver behind the move was the Large Speculators on the Futures markets (ICE and NYMEX). In anticipation of the US Fed's QE2 Lifeboat programme kicking off, they:

• Bought a further 12.5m bbls, about 15% of total daily consumption
• Took Speculative length to an all-time record high

2010 (blue line) has seen more Speculative buying than any previous year. Net length is now ~150mbbls, versus March 2008's peak of 115mbbls (green line).

At the same time, of course, the world is seeing near record levels of physical stock. And OPEC's own forecast last week suggested global demand in 2011 would only equal 2007's level. Even in 2014, OPEC expects to have over 6mbbls/day of spare capacity.

In the short-term, however, the Speculators rule, not these fundamentals. So the most likely outlook for chemical markets for the rest of Q4 is that:

• Speculators will continue to buy oil futures and sell the US$
• In turn, this will force chemical company purchasing managers to buy forward
• CFOs will probably allow inventories to increase, given good cash-flow

In turn, this should lead to a strong end to the year, as far as chemical volumes are concerned.

Of course, it is possible that the US Fed will be proved correct. It might happen that a lower US$, and higher commodity prices, will restore Western consumer confidence and banish current debt worries. But the blog would not invest its own money on this basis.

It fears it is far more likely that we are in the middle of yet another speculative bubble. Whilst oil prices are rising, underlying demand is almost certainly weakening. Once again, as in the mid-2000's, the Fed's misguided policies are treating symptoms, rather than causes.

US Fed Governor Kevin Warsh is one of the few policymakers to focus on reality rather than wishful thinking.

He pointed out nearly 3 years ago that liquidity should not be mistaken for capital, although others continue to ignore this uncomfortable fact.

Now, in advance of tomorrow's G-20 meeting of the world's richest economies, he delivers a stinging critique of current policies and argues, in the Wall Street Journal, that the key issue is the need to "improve our policies".

"Broad macroeconomic policies have not changed direction in the past several years. But change they must if we are to prosper. We can no longer afford to tolerate economic policies that are preoccupied with the here and now. Chronic short-termism in the conduct of economic policy has done much to bring us to this parlous point.

"The U.S. and world economies urgently need stronger growth, and the adoption of pro-growth economic policies would strengthen incentives to invest in capital and labor over the horizon, paving the way for robust job-creation and higher living standards."A year ago, after the G-20's last meeting in Pittsburgh, USA, the blog took strong issue with the self-congratulatory mood. This time, it fears 'beggar-my-neighbour' policies are inevitable, if participants don't raise their game.

Or, as Warsh warns, "heightened tensions in currency and capital markets could result in a more protracted and difficult global recovery."

The UK housing market has presented a confusing picture over the past 2 years. Unlike Spain, Ireland, or the USA, the lax lending conditions of the Boom years did not seem to lead to major price falls. In fact, along with Australia (benefiting from China's commodity boom), UK prices even appeared to recover.

This was due to a mix of exceptional circumstances:

• Most UK mortgages are on variable interest rates, so the drop in official rates meant many homeowners saw their monthly payments fall to near zero
• The continuation of bankers' bonuses, plus the arrival of wealthy foreign buyers, meant London houses in the GBP1m+ bracket were in great demand
• Outside London, stricter lending conditions meant total sales were down by 50% versus the 2003-7 period, causing average UK prices to be over-influenced by higher London levels

Now, however, there are signs that confidence is leaving the broader market. The chart above shows a correlation first developed by the Bank of England, to forecast likely prices. It shows the Nationwide's historical house price series adjusted for inflation (green line), versus the monthly sales to stock ratio produced by the Royal Institute of Chartered Surveyors (blue).

This shows an extremely good correlation since records began in 1978, confirming the Bank's rationale for its use as a forecasting tool. And now, the indicator is beginning to slip. This week's RICS report pegs it at 0.23, equal to annual price falls of 5%.

Underlying fundamentals for the market also seem to be weakening, with the coalition government proposing over 0.5 million job losses, in its efforts to reduce the deficit. Given the importance of housing to the UK economy, any major fall in prices could also have a major impact on chemical demand.

It would also impact overall EU demand, as the UK's $2.2trn economy is the 6th largest in the world. This therefore adds another element of uncertainty for companies as they complete their Budget process.

The blog's regular review of quarterly company results presents a mixed picture.

Compared to a year ago, some have certainly become more optimistic - Dow, for example, are now "confident in a sustained global recovery", whereas in 2009 they did "not count on material improvements in market conditions". But others, whilst pleased with current results, remain cautious: BASF expects growth "to decelerate, but do not foresee a double-dip recession", much in line with 2009's view of "an uneven recovery".

Equally, companies in different parts of the value chain see recent crude price rises differently: Borealis notes that "better than expected pricing for crude had supported polyolefin prices", whilst both Akzo Nobel and Sherwin Williams are more negative on its impact.

The blog was also interested to see LyondellBasell focus on "operating issues among competitors" as a contributor to margins. This confirms the blog's own fears earlier this year, about the rise in force majeures due to reduced maintenance budgets.

The one constant versus 2009 is that Asian companies remain optimistic. Korea's LG sees "strong growth" ahead, whilst Sinopec focuses on "on-going tight supply". However, Reliance's reference to "margin reduction" in key business segments perhaps indicates this key Region may be at a turning point.

Akzo Nobel. "Reason for caution in mature markets, due to continued softness in construction and housing".
Arkema. "Revenue was boosted by 10.5% increase in sales volumes."
Ashland. "A very challenging quarter. Despite double-digit sales growth, raw-material cost pressures continued to temper margins."
BASF. "Economic growth is likely to decelerate, but do not foresee a 'double-dip' recession".
Bayer. "Significantly higher demand in our main customer industries. Selling prices also rose."
Borealis. "The global economy was still volatile and the positive trend in the polyolefins business would not be a steady upswing. Better-than-expected pricing for crude had supported polyolefin prices."
Braskem. "Brazil remains one of the best-positioned countries in the current economic scenario."
Bunge. "Price volatility was expected to persist in the near term due to the tight supply environment."
Celanese. "Expected continued healthy demand in the fourth quarter".
ConocoPhillips. "Ethylene industry cash margins more than doubled versus 2009".
Croda. "Continued strong progress in Q3".
Dow. "Confident in a sustained global economic recovery. Robust growth in emerging economies will continue, with improved growth in North America and Europe."
Dow Corning. "Strong global demand for our silicon-based products amidst this uncertain economic environment".
Eastman. "Improved end-use demand in the packaging and durable goods markets."
ExxonMobil. "Improved margins increased earnings by approximately $1.7bn while higher volumes increased earnings about $370m."
Henkel. "Strong contributions from adhesive technologies business."
Huntsman. "A continuous recovery in global demand for all of our products and margins are increasing in most product lines."
INEOS. "Demand for polypropylene continues to be strong and domestic demand for polyethylene continues to recover."
Kemira. "Short-term risks and uncertainties were connected to raw material availability and prices."
Kronos. "Demand rose in all market segments, the result of a strengthening economy".
LG Chem. "Expected the strong growth in product prices to continue on favourable supply and demand conditions."
Lanxess. "Higher volumes in key customer industries, positive currency effects and price increases, which fully-offset higher raw material costs".
Lubrizol. "Steady improvement for the markets and applications we serve".
LyondellBasell. "Much of the company's strong olefins margins this year were due to operating issues among competitors."
Marubeni. Increased sales and higher petrochemical prices".
Mitsui Chemicals. "Increased sales from its functional polymeric materials business."
Mitsubishi Gas. "Increased sales volumes and higher market prices".
Nalco. "Particularly strong sales to Brazil, Russia, India and China (BRIC), which were up by more than 40%."
Olin. "Chlor-alkali earnings were likely to decline sequentially in the fourth quarter as weaker seasonal demand was expected to offset improved pricing."
Orlen. "Stable sales growth of olefins and polyolefins and higher demand for fertilizers."
Polimeri Europa. "Recovery in product margins, cost efficiencies and a 1.6% sales volumes increase."
PotashCorp. "Rapidly rising prices for a number of key crop commodities pushed our industry past the inflection point."
Reliance. "Margin reduction in polypropylene-propylene and most of the products in polyester and ethylene chain had offset the positive impact of margin improvement in PVC."
Rhodia. "Markets we serve continue to display favorable dynamics".
SABIC. "Improvement in production and sales, as well as better prices for most products."
Shell. "Improved realised chemicals margins, higher chemicals sales volumes and lower operating costs."
Sherwin Williams. "Cautiously optimistic about the stability of end-market demand and was working hard to mitigate the effect of rising raw material costs."
Showa Denko. "Profit almost halved, due to the impact of high feedstock costs."
Sinopec. "Strong demand for ethylene, benzene and polymers amid an ongoing tight supply would boost earnings in Q4."
SK Energy. "Expect the company's performance to be further driven by favourable market conditions."
Solvay. Chemicals businesses excluding soda ash had shown an improvement".
Syngenta. "Improving conditions in the crop protection market and significant advances in its seeds technology."
TOTAL. "Increase was driven essentially by an improvement in the petrochemicals; the specialties continued to show solid performance."
Wacker. "Even if demand edges down over coming months, which seems likely, market conditions will remain favourable."

The blog has a simple measure for the effectiveness of international meetings. It counts the number of words in the communiqué.

The logic behind this is that when people are really focused, they get down to business. When they waffle, then you know nothing will happen.

The history of the recent G-20 meetings seems to support this analysis:

April 2009 688 words, focused on stimulus measures
September 2009 9292 words, full of self-congratulation
June 2010 10713 words, 27 pages, complete waste of time

Sadly, the Seoul meeting goes overboard on words, to try and disguise its lack of content. We have a Leaders Declaration of 1503 words, plus a Summit Document of 6579 words in 17 pages, 3 Annexes, a Supporting Document, and a Key Outcomes document that, ironically, doesn't download.

The problem goes back to the first G-20 meeting in April 2009, when the blog highlighted the lack of a Plan B, as a "contingency plan in case the global economy does not begin to recover". As a result, the G-20 leaders now have no shared view of what to do, even though Point 7 of the new Declaration highlights this as the key issue:

"Risks remain. Some of us are experiencing strong growth, while others face high levels of unemployment and sluggish recovery. Uneven growth and widening imbalances are fuelling the temptation to diverge from global solutions into uncoordinated actions. However, uncoordinated policy actions will only lead to worse outcomes for all."

As the Wall Street Journal comments, all we then get is "platitudes".

Perhaps the most significant moment came after the meeting finished, when President Obama told a news conference that China's currency was "undervalued. And China spends enormous amounts of money intervening in the market to keep it undervalued." If this isn't a green light to the new Congress to start talking about trade sanctions, then its hard to know what is.

China's export-led economy was badly hit when the financial Crisis began in Q4 2008. In response, the government moved quickly to stimulate domestic consumption, in order to keep people employed. It doubled bank lending overnight, and introduced a $580bn stimulus programme. Worth 13% of GDP, this alone was far larger than any seen elsewhere.

Doubling bank lending to $1.4trn, equal to 1/3rd of GDP, carried its own risks, of course. Inflation is now rising quite sharply, with a jump to 4.4% last month. Whilst premier Wen Jiabao warned in September that stabilising house prices was the "key responsibility of all levels of government".

Now the government has moved to stop all further bank loans to the property sector until the end of the year. According to the Housing Ministry, "China's four biggest State banks have used up their full-year credit quotas for property developers and will stop extending new loans to them".

Originally, the government had set a lending target of Rmb7.5trn ($1.1trn), down 20% from 2009's record level. But as the chart above shows, lending had already reached Rmb 6.9trn by the end of October. So the halt is clear evidence of its mounting concern. It is also apparently discussing a further 20% cut in 2011's lending, to Rmb 6trn ($0.9trn).

Rapid expansion of credit usually seems to work well at first in stimulating demand, as we saw in the USA in 2003-7. But as Warren Buffett warned in 2008, "you only see who's been swimming naked, when the tide goes out".

China's leadership has a difficult balancing act ahead, as it seeks to stabilise inflation and housing markets whilst maintaining economic growth.

The US Fed's new QE2 Lifeboat programme designed to raise asset prices got off to a bad start last week, with most stock markets falling, rather than rising. It has also begun to run into major opposition from advisors to the new Republican-dominated Congress, with an open letter published Monday in the Wall Street Journal and New York Times that suggests:

"We believe the Federal Reserve's large-scale asset purchase plan (so-called "quantitative easing") should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed's objective of promoting employment."

Equally, the above chart from the American Chemistry Council (ACC) weekly report shows diverging patterns of economic growth across the major economies. It notes that the OECD's main Leading Indicator for the world economy (blue line) is now slowing quite fast. And the ACC add that the leading indicators for

"Brazil and China continue to point strongly downwards, edging below the long‐term trend and implying that the level of industrial production will fall below its longer‐term trend in these two economies."

Creating more liquidity, as the Fed plans, does not do anything to tackle these key issues. In the meantime, by having caused oil and other commodity prices to soar, it has created added uncertainty as regards chemical industry prospects for 2011.

All is clearly not well with the Western consumer. The stimulus programmes have not given them renewed confidence about the future. Instead, they are focused on the prospect of higher taxes and rising unemployment.

Two examples make this mood change very clear:

• As the above slide shows, EU auto sales are falling off the charts. They were down 17% (red line) in October, normally a strong month. Equally concerning were the massive declines in the 5 major markets: France down 19%, Germany down 20%, UK down 22%, Italy down 29% and Spain down 38%.

• In the USA, Wal-Mart, the world's largest retailer, saw its same-store sales fall for a 6th consecutive quarter, down 1.3%. This is unprecedented. In response it is launching what promises to be a bitter price war, declaring that it intends to "be the price leader this holiday season". Similarly, US housing starts fell to just 519k, back to April 2009 levels, in spite of record low interest rates.

The blog fears that the consensus Base Case Scenario for 2011 is already starting to look quite optimistic. If it was still running a major business, it would be strongly tempted to revisit the Downside Scenario outlined last month in its Budget Outlook, and re-check how this might impact expected performance.

In one of its first posts, at the time of the ill-fated Access deal for Lyondell in July 2007, the blog highlighted the strange divergence that had developed between the front pages of the newspapers, and their business coverage:

"If you read the financial pages of your newspaper, everything sounds rosy. But if you turn to the news section, its all gloom. Both views can't continue to exist alongside each other for ever. Whichever scenario comes out on top, will have major implications for the chemical industry. My own view is that this week's Access deal for Lyondell will be seen, in hindsight, as marking the top. "

Today, the same disturbing trend has returned.

• The €90bn ($125bn) Irish bailout, for example, is very clearly bad news. As the blog noted back in May, Europe's banks have lent $495bn to Ireland, more than twice the €182bn at risk in Greece. And, of course, next in line are Spain (€792bn) and Italy (€961bn).
• Equally, the US housing markets remains very difficult. Already the government has committed $188bn to keep the two main lenders (Fannie Mae and Freddie Mac) alive. And there are few signs of any real improvements as we head into the seasonally difficult winter months.
• Plus, most importantly of all for chemical demand, China's economy is moving into an enforced slowdown, as the government worries about soaring inflation - up from 3.6% to 4.4% in just one month. Price controls are likely on key foodstuffs, whilst interest rates have already begun to rise to cool the real estate bubble.

Yet the financial pages are full of optimism about the economic outlook. Most remarkably, there seems a consensus that interest rates will need to rise dramatically. Almost all commentators warn that inflation is about to soar, due to the strength of the economic recovery now underway.

As in 2007, the blog begs to differ. The chart above, from the New York Times, shows the parallel between Japan's core inflation rates (green line) after its housing bubble burst in June 1991, and US inflation (blue line) since its housing market peaked in June 2006.

October's US core inflation was a record low of just 0.6%. The previous low was 0.7% in February 1961. And, as always, the blog believes that the major retailers are a far better indicator of what is happening in the real economy, than financial markets. Thus it believes Wal-Mart's announcement that it intends to follow a "price-leadership" strategy virtually guarantees US inflation rates have further to fall.

If Wal-Mart are right, then financial markets must be wrong in their assessment of the underlying state of the US economy. And in turn, this has critically important implications for chemical companies. Lower oil prices, and destocking down the value chain, are serious risks if today's sunny optimism in financial markets starts to be seriously challenged.

China's government tends not to like surprises. Its usual tactic is therefore to talk about policy changes well in advance. And this is what seems to be happening with regard to the real estate bubble.

Back in September, premier Wen Jiabao said it would probably take 2 - 3 years to cool the bubble properly. Now a new report from Beijing's Renmin University of China, prominently reported in the national media, warns property prices will "decline almost 20% next year, due to continuous government cooling measures on the nation's red-hot real estate market".

Talk has also been accompanied by action in terms of rises in bank reserve requirements and an interest rate rise. More measures are undoubtedly on the way. Equally, the central bank clearly warned back in July that "China's future economic growth will definitely gradually slow down", as it moves to "carry out structural adjustment and transform our development model".

Already, as the chart above shows, the impact of existing government measures has caused the OECD's leading indicator for China to forecast growth will go below its long-term trend (100). Those hoping for continued high growth rates next year are therefore effectively arguing the government will fail in its central policy objective. To the blog, at least, this looks an unlikely outcome.

The obvious is rarely a winning strategy in commodity markets. Too many players have inside knowledge to allow anyone to profit from their own position.

But now and again, interesting trends do emerge from following how the major players are positioning themselves. Thus the above chart from Petromatrix provides a valuable insight into the different views being taken on oil markets by the Swap Dealers and the Large Speculators.

As it shows, the net length taken by Swap Dealers (green line) is now at a record low. These are the commercial dealers (eg Goldman Sachs), who have recently been producing daily reports forecasting $100/bbl crude. But they also act for the commercial players - the major oil companies. And so it seems most likely that it is these who have been hedging forward their positions.

Thus almost uniquely, the Large Speculators (red line) now hold all the net length on the US futures markets. These are hedge funds, who have been busy buying crude oil on the famous 'correlation trade', arguing that a lower value for the US$ means higher commodity prices as a store of value.

Initially, their buying caused the recent 7% rise out of the 'triangle shape'. But prices then drifted lower, as producers decided to lock in $80/bbl. And as Petromatrix note, this could cause problems for the Speculators, as producers may not simply close winning positions for a small gain.

The Speculators will clearly continue to try to push prices towards their beloved $90 - $100/bbl range. But if they fail, and prices start to move towards $70/bbl, then there is a clear risk the hedge funds will panic, and in so doing take prices down towards $60/bbl.

Attendees had a fascinating two days at our annual European Aromatics & Derivatives Conference in Berlin this week. As always, it was co-organised with ICIS, and featured a strong list of speakers:

Sven Royall, VP at Shell Chemicals, put forward an optimistic outlook for benzene derivatives. He argued that substitution of PS by PP had plateaued, which should encourage styrene volumes, whilst EPS and polycarbonate should continue to do well.

Ralf Kuhlmann, formerly ExxonMobil Business Director, Hydrocarbons, argued that Europe still had a good future in petrochemicals, but needed to adapt its plants to cope with more volatility in market conditions. The ability to run profitably at lower operating rates would be a critical success factor in future.

Matt Chadwick, managing consultant with Wood Mackenzie, said the 'golden age' of refining had now passed, with Europe now likely to have an advantage over refineries in the USA due to its greater focus on diesel.

A number of speakers focused on the problems facing the styrene business:

• Andrew Jones, Dow's global business director for aromatics, explained how they had come to the decision to sell their styrene business, whilst Jeff Denton, VP feedstocks for Styron, highlighted the key strategies being implemented by the new company.
• Piet Vermeersch, styrene business manager for TOTAL, explained that integration would be key for future styrene profitability, as current production economics were not sustainable.
• Hans van der Kaaij, co-products director with LyondellBasell, argued that producers needed to take on more of an advocacy role with regulators.

In the C8 area, Gianluca Girardi, sales manager with Polimeri Europa, discussed the constraints involved in running the business in Italy. Alastair Hensman of Nexant put forward an optimistic overview of the global outlook for the polyester chain. Antonello Ciotti, commercial director of Equipolymers, outlined the issues with recycled PET and the need to work closely with the brand managers in consumer products companies.

Finally, Yu Jing of China's National Planning Institute, discussed the major new aromatics capacities planned for the 2011-16 period, and said the government's aim was to balance supply and demand, and to expand further into downstream derivatives. This clearly has major implications for current exporters to China.

The chemical industry has been one of the great beneficiaries from globalisation over the past 25 years.

Today, it is hard to remember just how restricted markets used to be. Tariffs often applied within Regions, as well as between them. In his early years as a product manager, the blog would often spend days trying to find the optimal cost and routing for a shipment.

Sadly, the continuing economic downturn is starting to take us back to those times. Many major countries are now trying to depreciate their currencies against each other, to gain export business. This is disruptive on its own, as it makes planning very difficult. Equally, duty barriers have begun to reappear.

Last year, China imposed duties on US nylon suppliers. Then, in the summer, it imposed them on long-standing suppliers of PTA in S Korea and Thailand. And just to prove this is part of a trend, India has now confirmed its decision to impose 6.5% duties on Saudi polypropylene.

Most governments have now moved away from the stimulus programmes agreed at the G-20 Summit in April 2009. Instead, Western economies are more worried about rising debt levels, whilst emerging economies are concerned about rising inflation and asset price bubbles.

The leadership of the chemical industry, with the exception of the Gulf Petrochemical Association, has been strangely quiet on this key issue. The blog hopes they will begin to raise their voices, before the trend becomes irreversible.

Its now 18 months since Jack Welch publicly abandoned his views on the importance of shareholder value, and said it was "a dumb idea for executives to focus so heavily on quarterly profits and share price gains". This was very significant, as Welch was generally credited with popularising the idea in a 1981 speech, when head of General Electric.

Since then, a growing number of companies have followed his lead. DSM were one of the first, 6 months ago, when they launched their 'value creation for people, planet and profit' strategy. Now Unilever, the global consumer products giant, with a market capitalisation of $35bn, has taken the concept a step further.

Interviewed in the Financial Times, CEO Paul Polman noted they have stopped giving earnings guidance for the next quarter. And he added that "we certainly don't want to attract the investor base that wants higher and higher and quicker results against targets that we put out every 90 days."

This is a quite striking reversal of previous priorities. Polman went on to put forward a radical alternative statement of the basis for investment in Unilever:

"Unilever has been around for 100-plus years. We want to be around for several hundred more years. So if you buy into this long-term value-creation model, which is equitable, which is shared, which is sustainable, then come and invest with us. If you don't buy into this, I respect you as a human being, but don't put your money in our company."

This sounds very close to the outlook that helped to build the world's major chemical companies in the first place. The blog will continue to follow developments with interest.

The styrene business has been increasingly difficult in recent years:

• CD and video sales went online, removing the need for polystyrene (PS) packaging
• Prices for the main feedstock, benzene, leapt in the mid-2000's, due to US gasoline market changes, forcing convertors to look at alternatives such as polypropylene
• Recycling became an essential part of the packaging 'offer', leaving PS behind
• Increased POSM/SMPO capacity meant styrene prices came under pressure

And one could go on.

The result has been, as discussed at our Conference last week, that the two 'inventors' of styrene, BASF and Dow, felt forced to establish new business models. Dow sold Styron to Bain Capital for $1.6bn earlier this year. BASF announced it would 'carve-out' its business as Styrolution from January 2011. And separately last month, Nova announced they would sell their share of the current INEOS Nova styrene joint venture to INEOS.

Now comes news that Styrolution will become a BASF/INEOS joint venture. Unlike Styron, it will not include the 'sexier' parts of the portfolio - such as expandable PS (widely used in insulation). Nor will it own the Nanjing activities in China. But, assuming anti-trust clearance, it will still be a €5bn ($6.8bn) business and large enough to control its own destiny.

Clearly Styrolution, like Styron, will have to do things differently in the future, if it is to regain a reasonable level of profitability. But both Roberto Gualdoni and Chris Pappas, the CEOs of the two new businesses, have solid track records in the petchem industry, and good teams alongside them.

The blog wishes them well, and hopes they succeed triumphantly.

US housing was the prime cause of the current financial crisis. US banks spent most of the 2000-7 period lending at low 'teaser' rates to borrowers who had no prospect of repaying the loan. And by syndicating the loans to gullible European banks, they ensured that losses were shared equally, when credit standards finally began to tighten.

This lending binge also led to a Boom period for the global chemical industry. US housing starts rose to 2.2 million in 2006, worth $35bn in chemical sales (in 2010 values), with each house worth $16k according to American Chemical Council analysis. In addition, China's export-based manufacturing economy prospered (requiring ever-increasing volumes of chemical imports), as US demand rose for the goods required to furnish all these new homes.

The result is shown in the above chart, based on the authoritative S&P Case-Shiller Index for the 10 major US cities. From a base of $100k in January 2000, US house prices more than doubled to $226k by July 2006. Since then, they have fallen 29%. Housing starts have tumbled to just 600k, worth only $10bn in chemical sales. Now, the question is what happens next?

• Massive Federal support, including $8k tax breaks for purchases, has only led to a very modest price recovery. The index bottomed at $150k in April 2009, then peaked in July this year at $162k, just 8% higher.
• Unsold housing inventory (including foreclosures) already totals 6.3m homes, equal to 2 year's sales at current rates, versus 6 - 7 months in the Boom.
• The index's originators are cautious in their outlook. Karl Case says his Base Case is for prices to remain flat. But with "2 - 1 odds, I'd bet they go down".
• Yale's Prof Shiller refuses to forecast price changes, instead focusing on what he believes is a "catastrophic drop in confidence". He also seems to share the blog's view that we could be entering a New Normal, noting that "there's been a cultural change which goes beyond any short-run forecasts".

Chemical companies finalising their budgets for 2011 cannot afford to ignore this uncertainty. A Scenario approach seems the best way forward, as described in the blog's own Budget Outlook:

• In a Base Case, housing starts and prices might remain broadly stable
• An Upside Case could hope for some improvement
• The Downside Case of lower starts and prices also implies greater uncertainty in the global financial system, as it increases the risk that more banks will fail.

As always, the blog will be happy to discuss these critical issues in more detail, if this would be helpful for your management team.

China's Dalian futures market has become a hotbed of speculation over the past 2 years, since the government doubled bank lending to $1.4trn during 2009, equal to 1/3rd of GDP. Traders have particularly focused on the assumed linkage between LLDPE (linear low density polyethylene) and crude oil, with price movements mirroring each other most months.

But now there are signs the authorities are getting worried. Their concerns are focused on the agricultural sector, as speculative buying has helped cause food prices to rocket, in turn driving inflation to a worrying 4.4% in October. Thus the regulators have been told to "beef up supervision over the futures market to curb excessive speculation".

Hopefully, this will also dampen speculation in polymer markets, which have become a major factor in setting physical prices in China, as well as in Asia and globally. As the chart shows, LLDPE volumes (blue line) reached a record 93 million tonnes in November, nearly 4 times total annual global production.

Interestingly, however, Dalian's record volume did not lead to higher prices (red line), even though crude oil remained above $80/bbl. This may be the first sign that shrewder traders have decided it might be time to take profits and exit the market. Friday's decision to tighten monetary policy also suggests betting against the government is probably not going to be a winning trade.

US auto sales have slowed again. We seem certain to end 2010 at the bottom end of last year's forecasts for demand, which ranged between 11.5m - 12.5m. This seems the main conclusion from analysing November's sales figures.

The blog has developed the new presentation above, showing sales by month since 2005, to assist comparison between years, given the strong seasonal bias to sales. Plus, of course, the sharp decline in Q4 2008, and the subsequent stimulus programmes, have greatly distorted normal year-on-year comparisons.

Two key conclusions can be drawn:

• Sales have stabilised since Q4 2008, but there has been no real recovery. Between 2005-7, only January ever saw monthly sales below 1.1m. But since 2009, only August 2009's $3bn 'cash for clunkers' took them above this level.
• 2010 (orange line) has seen better volumes overall compared to 2009 (light blue). But 2008 (purple) marked a clear dividing line: H1 was in the 2005-7 sales pattern, but H2 began the new pattern seen since then.

Overall, total sales in 2010 will be ~11.5m. This will clearly be better than 2009's 10.4m. But 2009 was the worst year for US auto sales since 1982.

Overall, it means the value of chemical sales into this critical market (using the ACC's estimate of $2973/auto) will have been only $34bn, versus the $50bn seen between 2005-7. It seems the New Normal has arrived in the US auto market.

Benzene is the blog's favourite leading indicator for chemical demand, due to its widespread use in the industry. Its recent price movements versus its naphtha feedstock, may therefore be telling us something quite important about changing supply/demand balances.

As the chart above shows, based on ICIS pricing, its spread versus naphtha has become very volatile in recent years. This is because, as discussed at our Conference last month, there are now no major sources of on-purpose supply to balance changes in demand. Thus although the spread used to be $80 - $200/t, it has usually either been above, or below, these levels since 2004.

Now in recent weeks it has suddenly halved, from $334/t in H1 to $169/t in Q4, to date. There appear to be two possible explanations for the change:

• Refineries have dramatically increased operating rates in Asia and Europe, due to diesel demand. In turn, this will be increasing benzene production.
• Crude oil prices have leapt to $90/bbl under the influence of the US Fed's QE2 Lifeboat policy. History shows this is a level when major demand destruction starts to occur, as consumers cut back on discretionary spending.

Of course, it could also be that we are seeing both these effects in combination. The blog will keep a close eye on future developments.

The blog was delighted to learn last night that 400 people have already registered for the next American Chemical Society 'Chemicals and the Economy' webinar.

This takes place tomorrow, July 7, at 14:00-15:00 pm US EDT.

It will focus on the transition now underway to the New Normal, and the challenges this presents for companies - and for all of us as individuals.

If you would like to register for this free event, please click here.

Crude oil prices are now up 18% since the US Fed announced its QE2 Lifeboat policy at the end of August. This clearly justifies the blog's faith in the 'triangle pattern' in September. The rise is mainly due to financial players, with the Large Speculators dominating the buy-side on the futures markets.

But in turn, average US gasoline prices have now moved back over $3/gal, nearly double their lows in December 2008. And this highlights the key question, of whether the world economy can really prosper with oil prices at the $90/bbl level?

The evidence from history, in both 1979-80 and 2007-8, is that it can't. But there has been a suggestion recently that 'this time it is different' because demand has been growing quite strongly in Asia in recent months.

However, veteran crude oil market watcher Ed Morse of Credit Suisse has a different view. He suggests we have seen "a series of one-off reinforcing factors that, coupled with winter seasonality, have tightened product and crude oil markets":

• The Q3 heatwave in Japan and S Korea, which led to higher electricity demand for air conditioning
• China has shut 1355 coal mines to curb pollution, causing factories to run diesel generators instead
• Europe is having one of its coldest-ever November/Decembers, also increasing heating and fuel oil demand

None of these factors, sadly, are indicators of economic growth. Instead, with China poised for further interest rate rises, to cool inflation, the risk of slower economic growth there is clearly rising.

What happens if you suddenly double bank lending in a country, and make it equal to 1/3rd of total GDP? And, as part of the experiment, add a further 13% of GDP via a $580bn stimulus programme?

We don't know yet, because it has never been done before. But we are about to find out. Because this is what China has done over the past two years, since the Crisis hit, in order to keep its population employed.

The first part of the answer is easy to guess. A massive boom takes place in consumer spending, house prices leap, and demand generally goes through the roof. After all, we've been here before, with the US Federal Reserve's low interest policy following the collapse of the dot-com bubble.

But China's boom has been an altogether different level of magnitude. Even Alan Greenspan, when Fed Chairman, would never have dared to follow China's recent path. So all we do know, so far, is that China has become the main source of global demand growth for the chemical industry. Equally, as the chart shows, housing prices have soared.

According to an official survey by China's top Think Tank, the "actual value of commercial housing in Fuzhou is only 3,998 yuan ($600) per square metre, while the market price is 13,457 yuan". Its analysis suggests this is a 70.3% bubble, with other major cities such as Beijing not far behind.

Plus, today's figures show inflation is now rising very fast. It was 5.1% in November, up from 4.4% in October. Food prices were up an astonishing 11.7%. As the World Bank note in a new report:

"After the massive monetary expansion since the end of 2008 there is a lot of liquidity sloshing around, potentially putting upward pressure on prices, especially asset prices. In this setting, there are reports that speculative activity has driven up prices of several food products."

So will China now follow the Bank's advice and reduce lending, whilst also increasing interest rates? If they do, what will happen to growth rates? If they don't, how far might the housing bubble go, before it finally bursts?

As the blog noted in its Budget Outlook, the world has become a much more uncertain place over the past 2 years since the Crisis began.

Throwing money at the problem, as China is probably about to discover, is the easy part. The more difficult part, of dealing with the consequences of such rapid expansion, now lies ahead.

October is usually a seasonally strong month for chemical production. Factories are back from the summer holidays, and working flat out to meet orders before the Christmas and Lunar New Year breaks. So it is a bit disappointing that, as the above chart from the American Chemistry Council shows, operating rates (OR%) actually slipped slightly to 85%.

Of course, this is still a lot better than the 81.9% seen in 2009. But for the moment, it suggests that we are still in a Base Case Scenario as far as OR% are concerned. Yet crude oil prices have raced higher, to ~$90/bbl, putting them clearly in an Upside Case Scenario and suggesting demand is improving.

This highlights the importance of the comment made last week by Syngenta's Pierpaolo Ferluga, when he noted that "the main concern at the moment is about a tight chemical market and high commodity prices". He also added two very relevant questions - "if this is due mainly to China, or if this is going to end in 2011 into a new crisis"?

Supply constraints (OPEC quotas and plant force majeures), plus the impact of China's lending/stimulus programmes, have clearly been key features of 2010. What happens next to chemical OR% will therefore probably tell us a lot about whether the perception of recovery that these have provided, will translate into sustainable reality.

The blog was very pleased to talk recently to Business News Americas about developments in Latin America. Please click here if you would like to read the full interview.

It highlights the key role being played by Brazil's Petrobras, particularly in the development of 'green polymers'. These are still very small in volume, compared to traditional polymers. But Brazil's climate means that ethanol-based products can actually be viable without subsidy, a very important factor for future sales.

A new study also shows that its CO2 emissions are much lower, over the total lifecycle, even when the product is shipped from Brazil to Japan for use in packaging there. It reports that "1kg of 'green' PE emits 1.35kg of CO2 equivalent of greenhouse gas emissions, compared to between 4.55-5.10kg for traditional polymers, during its life cycle".

Carbon footprint is of major interest to consumers around the world. So this kind of study is powerful evidence for the potential strength of the bio-based opportunity in Brazil.

The blog's 2 White Papers have proved enormously popular this year. More than 10000 copies have been downloaded around the world.

They focused on the New Normal. This reflected the blog's belief that the current recovery is not taking us back to the 2003-7 Boom period. Instead, it is taking us forward to a world where demand patterns will be quite different.

The key influence is changing demographics:

• Western BabyBoomers, who have driven major consumption growth over the past 25 years, are now in their 50s and 60s. They are starting to consume less, and save more, as they enter retirement. This is already leading to lower sales into previously key markets such as autos and housing.

• In turn, this means the emerging economies of Asia, Latin America and Africa can no longer rely on exports to drive their growth. They instead have to stimulate domestic consumption. And given their lower GDP/capita, this will dramatically change their demand patterns too.

The new White Paper highlights these major changes. It builds on the blog's recent Budget Outlook, Budgeting for Uncertainty.

The changes required are not going to be easy to manage, and they will therefore create winners and losers. Its aim is therefore to help you and your company become winners, as the transition to the New Normal continues.

It will be published in the New Year.

Oil price rises reduce chemical demand.

Initially, as we saw in 2007 - H1 2008, and in 1979 - 80, everything seems fine. Consumers continue to buy, and we all reassure ourselves that demand is still robust.

But, in fact, end-use demand starts to fall when prices rise, as individuals cut back on discretionary spending to pay higher gasoline and heating bills.

Europe's polyethylene market currently offers a clear example of this process in action. An excellent ICIS news report by Linda Naylor highlights how:

• "December monthly business is progressing normally".
• "But extra sales are reported at much higher price levels".

She also notes that buyers are "trying to obtain extra volumes in an effort to avoid higher prices in January", whilst "many sellers had taken the decision to hold on to inventories". As a result, LDPE prices for January are now talked €100/t ($130) higher than for December, with HDPE talked up to €160/t higher.

It is clearly impossible to stop this process, once it gets underway. Buyers are paid to buy below market, and sellers to sell above it, not the other way around. So if feedstock costs are moving higher, both sides have to react by building as much inventory as possible.

But demand for inventory is not the same as demand for consumption.

There seems to be gathering concern in Germany about the outlook for 2011. This is very significant, as the economy has done well this year, and business confidence is at record levels.

Bosch CEO, Franz Fehrenbach, who runs the world's largest auto parts supplier, has warned that "the rebound in commodity prices will put intense strain on European industrial companies".

Equally, the highly respected IFO Institute says that "world economic activity has lost momentum since the spring". It expects "the dynamics to weaken", and forecasts global GDP will slow from 4.7% this year to 3.6% in 2011, and Eurozone growth to weaken from 1.7% to 1.4%. It also highlights 3 major risks:

• The current Eurozone funding crisis is a "special risk for the forecast"
• A further risk is "another clear correction of US real-estate prices"
• It also worries about the outlook "for the Chinese real estate market"

Of course, forecasters are paid to be cautious. But one of the blog's favourite indicators, the Baltic Dry Index (which reflects global demand for bulk shipping of coal, iron ore and grains) is also flashing warning signals.

As the chart above shows, it fell very sharply in June/July, before recovering slightly in Q3. But since then, it has been falling back towards its earlier lows. This is particularly worrying, as Q4 is usually a seasonally strong period.

A year ago, the blog was correctly much more optimistic than the consensus about the prospects for 2010. Now, however, as we look forward to 2011, it can only repeat its comment from December 2007, that:

"the need for chemical companies to develop robust contingency plans, in case the consensus is wrong, is looking ever stronger".

The blog is awarding itself a pat on the back today, for its decision to focus on electricity consumption and bank lending as key indicators for China's economy. According to the Wall Street Journal, these are 2 of the only 3 statistics used by China's Vice Premier, Li Keqiang (the other is rail cargo).

Li's view matters, as he is expected to take over as premier in 2012. And he apparently has the same view as the blog about the value of most Chinese statistics. He told the US ambassador that the GDP figure, for example, is "man-made and therefore unreliable".

Thus it is no great surprise to find that Li also seems to share the blog's concern that China's economy is now in danger of over-heating. This has to be a growng concern, given the trends shown in the above chart:

• Bank lending (red column) is on track to be up 38% in H2, versus H2 2008
• Electricity consumption (blue line) is up 24%.

No economy in the world can grow at these rates without building up problems for the future. As China's Academy of Social Sciences has just reported, "high inflation and soaring housing prices have contributed to a growing sense of popular disaffection".

So far, the current leadership is still trying to avoid taking the painful measures that will be needed. But at least a debate seems to be underway, with Li reportedly arguing that "more efforts should be provided to stabilize prices next year" and to define economic growth rate targets "reasonably".

If the blog offered you a choice between taking $3400 today, or waiting a month to receive $3800, what would you choose?

This was the question posed to 5900 economics students from 45 different countries in a novel experiment by the Swiss Finance Institute. And they got significantly different answers.

As the chart shows, only 8% of Nigerian students chose to wait, compared to 89% of Germans. The authors suggest these differences are based on cultural preferences, as the implied interest rate for waiting a month is nearly 12% - far above any market level.

The authors also grouped the responses into 4 cultural clusters:

• Germanic-Nordic; 88% chose to wait
• Anglo-Saxon, Middle East and Asia; 66% - 70% would wait
• E Europe, Latin America and Latin Europe; 52% - 59% would wait
• Africa; only 34% would wait

Of course, there is no 'right' or 'wrong' answer to the question. But interestingly, the researchers didn't find any major differences by age or gender, although older respondees tended to be more patient.

The researchers conclude that cultures with a higher 'patience' level are more comfortable in undertaking long-term research and innovation. They also appear to have greater interest in measures to increase sustainability.

Equally, of course, the study's conclusions may also be helpful for commercial and finance professionals, when they come to formulate proposals for buyers operating in different parts of the world.

70% of China's women regard "housing, a stable income and some savings" as vital for any man wanting to get married.

And they probably don't regard architect Dai Haifei's $300 Beijing 'egg house' (pictured) as their ideal.

The data comes from the "2010 China Marital Status Report", which adds that the man's personality and morals are only relevant if he meets these 3 requirements.

This is why the dramatic rise in China's house prices, following the massive stimulus/lending programmes of the past 2 years, is causing such social tension. As China Daily comments, there is a clear risk that "China may breed a new group of bachelors, men caught in the trap of unaffordable houses."

So far, the leadership seems divided on what to do. Understandably, current premier Wen Jiabao would probably prefer to ignore the problem until his term finishes in 2012. But likely new premier, Li Keqiang, is clearly very concerned that such a delay would then leave him with a bigger problem to solve.

The problem is that the housing crisis, where Beijing homes sell for an average 22 times earnings, is just the tip of the iceberg. As Yu Yongding, a very senior policymaker, noted last week, "the country's investment rate now stands at more than 50 percent - a clear reflection of China's low capital efficiency". And Yu also worried that "investment in real estate development accounts for nearly 25% of the total".

The blog's best guess is that those in charge will continue to take small steps, such as Sunday's interest rate rise, but fail to step hard enough on the brakes. In turn, the current 'boom' in China's demand will continue to support the global chemical industry for the next few months.

But clearly the risk is rising that we may then discover, too late, we have simply been in the middle of yet another China 'boom and bust' scenario.

The blog's readership continues to grow. It is now read in 133 countries and 4362 cities, compared to 121 countries and 1244 cities a year ago. Readers also remain very loyal, with 24% reading it twice a week, and spending an average of 1.5 minutes on each visit.

As the map above shows, readership continues to cover all the main areas of chemical production. The list of Top 10 countries now reads USA, UK, Germany, China, India, Netherlands, Singapore, Turkey, France and Belgium, with Italy, S Korea and Japan close behind.

The blog has branched out this year, publishing two White Papers for the first time. These provided more details on the blog's annual Budget Outlook, Budgeting for the New Normal. They have been most enthusiastically received, with over 10000 downloads from around the world.

The blog aims "to share ideas about the influences that may shape the chemical industry over the next 12 - 18 months", and so it focuses on:

• The major companies
• Key consumer industries, including housing and autos
• Economic data such as GDP, industrial production and exports
• Developments in oil and financial markets

980 posts have been made in total, with 282 written in 2010.

One area that has also attracted great interest is the potential transition to the New Normal. What will this mean for chemical industry demand in 2011? The blog will therefore be covering this key area in a new White Paper, due to be published on Monday. I hope you will find it valuable.

Thank you very much for your continued support.

The blog's New Year Outlook has just been published in ICIS Chemical Business. Please click here if you would like to download a copy

It suggests that 2010 turned out to be a better year than many in the industry had expected. But even so, global operating rates (OR%), at 86%, remain well below those considered normal over the past 20 years.

So the key question is: What happens next?

Will the recovery continue, and OR% return to more normal levels, perhaps even to another 'super-cycle'?
Will they simply stabilise at today's levels?
Or will a slowing Chinese economy, plus the switch from stimulus to austerity measures by many governments (particularly in Europe), lead to a further fall as demand growth slows?

Equally, it is becoming clear that we are heading towards a New Normal in terms of global demand patterns.

So the articl