http://www.icis.com/blogs/chemicals-and-the-economy/ en Copyright 2009 Fri, 20 Nov 2009 12:29:23 +0000 http://www.sixapart.com/movabletype/ http://blogs.law.harvard.edu/tech/rss 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? ]]> http://www.icis.com/blogs/chemicals-and-the-economy/2009/11/us-interest-rates-turn-negativ.html http://www.icis.com/blogs/chemicals-and-the-economy/2009/11/us-interest-rates-turn-negativ.html Chemical companies Currencies Economic growth Financial Events Futures trading Leverage Oil markets banking central banks CFO chemical industry Fri, 20 Nov 2009 12:29:23 +0000 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. ]]> http://www.icis.com/blogs/chemicals-and-the-economy/2009/11/abu-dhabi-looks-to-build-its-p.html http://www.icis.com/blogs/chemicals-and-the-economy/2009/11/abu-dhabi-looks-to-build-its-p.html Chemical companies Economic growth Financial Events Oil markets Bayer IPIC Nova Wed, 18 Nov 2009 13:09:54 +0000 The Q3 company results season is now almost complete. It suggests that: • Companies still find it difficult to forecast revenue increases • Earnings are instead being boosted by cost cutting eg jobs In the US, the average workweek is now at a record low of 33 hours. Whilst EU companies are worrying whether today's short-time working arrangements can continue into 2010 if demand does not start to recover. The above chart, from S&P, shows that analysts' expectations still diverge for reported and operating earnings. Forecasts for operating earnings remain very bullish (blue line), but reported earnings (which meet accounting standards) are still showing a flat outcome, once last year's destocking falls out of the picture. ]]> http://www.icis.com/blogs/chemicals-and-the-economy/2009/11/reported-earnings-still-foreca.html http://www.icis.com/blogs/chemicals-and-the-economy/2009/11/reported-earnings-still-foreca.html Consumer demand Economic growth Financial Events earnings S&P Tue, 17 Nov 2009 06:53:02 +0000 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.]]> http://www.icis.com/blogs/chemicals-and-the-economy/2009/11/devaluations-risk-leading-to-a.html http://www.icis.com/blogs/chemicals-and-the-economy/2009/11/devaluations-risk-leading-to-a.html Chemical companies Economic growth Financial Events China devaluation protectionism Mon, 16 Nov 2009 17:41:02 +0000 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.]]> http://www.icis.com/blogs/chemicals-and-the-economy/2009/11/oecd-indicators-paint-a-confus.html http://www.icis.com/blogs/chemicals-and-the-economy/2009/11/oecd-indicators-paint-a-confus.html Chemical companies Economic growth Futures trading crude oil prices industrial production OECD recovery Mon, 16 Nov 2009 09:35:56 +0000 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.]]> http://www.icis.com/blogs/chemicals-and-the-economy/2009/11/iea-opec-worry-about-high-oil.html http://www.icis.com/blogs/chemicals-and-the-economy/2009/11/iea-opec-worry-about-high-oil.html Chemical companies Consumer demand Economic growth Financial Events Futures trading Oil markets CO2 crude oil prices IEA Naimi OPEC Sat, 14 Nov 2009 10:49:21 +0000 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.]]> http://www.icis.com/blogs/chemicals-and-the-economy/2009/11/wal-mart-sees-global-price-def.html http://www.icis.com/blogs/chemicals-and-the-economy/2009/11/wal-mart-sees-global-price-def.html Chemical companies Consumer demand Economic growth Oil markets crude oil prices deflation Wal-Mart Thu, 12 Nov 2009 22:23:45 +0000 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".]]> http://www.icis.com/blogs/chemicals-and-the-economy/2009/11/chinas-oil-imports-not-driven.html http://www.icis.com/blogs/chemicals-and-the-economy/2009/11/chinas-oil-imports-not-driven.html Chemical companies Economic growth Futures trading Oil markets China crude oil prices India refining Wed, 11 Nov 2009 12:32:57 +0000 Many US policymakers are still in denial about the underlying causes of the downturn. They argue it is due to a lack of liquidity, and are thus encouraging 'hot money' to flood into financial markets. But the new 'bubbles' created by this wishful thinking, such as today's $80/bbl oil prices, are making the underlying problem worse, not better. As the blog noted last March, the real problem is that too many US banks are actually insolvent. Many loans made during the 2003-7 Boom to property developers and homeowners will never be fully repaid. Already 120 US banks have gone bust this year, and the Federal regulator has another 416 on its watchlist. Insolvent banks can't lend, which is why lending to businesses and individuals remains so weak. Until policymakers start to tackle the solvency problem, the blog fears that we are unlikely to see any major recovery in the US jobs market, or in chemical sales. ]]> http://www.icis.com/blogs/chemicals-and-the-economy/2009/11/insolvent-us-banks-cant-lend.html http://www.icis.com/blogs/chemicals-and-the-economy/2009/11/insolvent-us-banks-cant-lend.html Consumer demand Economic growth Financial Events bankruptcy US subprime crisis Tue, 10 Nov 2009 06:38:31 +0000 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. ]]> http://www.icis.com/blogs/chemicals-and-the-economy/2009/11/us-unemployment-rises-over-10.html http://www.icis.com/blogs/chemicals-and-the-economy/2009/11/us-unemployment-rises-over-10.html Chemical companies Consumer demand Economic growth Financial Events Leverage crude oil prices unemployment US Federal Reserve Mon, 09 Nov 2009 06:12:13 +0000 If you missed the blog's recent webinar, Simon Robinson (ICIS online editor) has kindly posted a recording of it. To access this, you just need to join the new ICIS Chemicals and the Economy Group by clicking here. ]]> http://www.icis.com/blogs/chemicals-and-the-economy/2009/11/webinar-recording-now-availabl.html http://www.icis.com/blogs/chemicals-and-the-economy/2009/11/webinar-recording-now-availabl.html GDP recession recovery Mon, 09 Nov 2009 06:10:51 +0000 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.]]> http://www.icis.com/blogs/chemicals-and-the-economy/2009/11/uk-downturn-follows-the-193034.html http://www.icis.com/blogs/chemicals-and-the-economy/2009/11/uk-downturn-follows-the-193034.html Chemical companies Consumer demand Economic growth Financial Events BASF GDP recession UK Sat, 07 Nov 2009 11:47:21 +0000 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". ]]> http://www.icis.com/blogs/chemicals-and-the-economy/2009/11/insights-from-lyondellbasell-a.html http://www.icis.com/blogs/chemicals-and-the-economy/2009/11/insights-from-lyondellbasell-a.html Chemical companies Consumer demand Economic growth Financial Events BASF China LyondellBasell Polyethylene Fri, 06 Nov 2009 14:02:47 +0000 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.]]> http://www.icis.com/blogs/chemicals-and-the-economy/2009/11/us-auto-sales-enter-the-new-no.html http://www.icis.com/blogs/chemicals-and-the-economy/2009/11/us-auto-sales-enter-the-new-no.html Chemical companies Consumer demand Economic growth Financial Events Chrysler Ford GM Toyota Wed, 04 Nov 2009 08:55:40 +0000 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. ]]> http://www.icis.com/blogs/chemicals-and-the-economy/2009/11/chinas-economic-bubble-continu.html http://www.icis.com/blogs/chemicals-and-the-economy/2009/11/chinas-economic-bubble-continu.html Chemical companies Consumer demand Economic growth Financial Events Dalian Futures Exchange Polyethylene Tue, 03 Nov 2009 06:26:55 +0000