http://www.icis.com/blogs/chemicals-and-the-economy/ en Copyright 2008 Sun, 07 Sep 2008 09:46:46 +0000 http://www.sixapart.com/movabletype/ http://blogs.law.harvard.edu/tech/rss Financial Times. I argued then that 'a buyer of last resort, such as the Federal government, would probably now need to emerge, if the situation is to be stabilised'. Between them, Fannie and Freddie guarantee 47% of all US mortgages, worth around $5 trillion. This sum is equivalent to the combined GDP of the UK and France. According to the excellent Gretchen Morgensen in today's New York Times, today's move 'grew out of deep concern among foreign investors that the companies' debt might not be repaid'. The blog noted in July, that this vast debt was supported by just $70bn of capital. And Morgensen reveals today that even this number is probably overstated. As I discuss below, high leverage makes earnings (and management) look wonderful whilst things are going well. But it also, as we now see with Fannie/Freddie, makes bankruptcy much more likely in the down cycle. ]]> http://www.icis.com/blogs/chemicals-and-the-economy/2008/09/another-major-bailout.html http://www.icis.com/blogs/chemicals-and-the-economy/2008/09/another-major-bailout.html Economic growth Financial Events Leverage Fannie Mae Freddie Mac US house prices Sun, 07 Sep 2008 09:46:46 +0000 explain its impact, and why it is likely to continue for some time to come. He notes that all financial institutions are now reducing the leverage that they use, and as a result: 1. The costs of borrowing are rising, as more equity capital has to be used 2. These costs will continue to rise, until enough new equity capital has been raised 3. Whilst this happens, 'the price of all assets will go down' Pimco had long forecast that housing markets were most vulnerable to deleveraging. And once house prices began to fall, equity markets soon began to weaken. More recently, commodity markets have also been hit. Oil markets have fallen sharply, as the blog forecast back in mid-July, when suggesting that prices 'could easily fall $50/bbl to $100/bbl'. But deleveraging has other implications for chemical companies. Banks now need to cut back on corporate lending, to preserve their equity capital. Small companies have already seen overdraft limits cut back. Next, it will be the turn of larger companies. This could be very painful. As recently as a year ago, you could still find companies who had convinced themselves that cyclicality was no longer a problem. As a result, debt levels were often much higher than considered prudent when I joined the industry. This high leverage boosted earnings during the boom period. But as the blog warned back in August 2007, 'when we go into the 'down' cycle, leverage will exert its same impact on the downside'. CFOs will be very busy people in the next few months, as they seek to identify and manage their credit risk. ]]> http://www.icis.com/blogs/chemicals-and-the-economy/2008/09/deleveraging-and-asset-prices.html http://www.icis.com/blogs/chemicals-and-the-economy/2008/09/deleveraging-and-asset-prices.html Economic growth Financial Events Leverage Oil markets leverage oil prices Pimco Sun, 07 Sep 2008 09:09:03 +0000 this week, in connection with the report that US GDP grew at 3.3% in Q2. Barrons notes that this is supposed to be a 'real' figure, ie after adjusting for inflation. This leads them to question why the inflation rate used by the statisticians was just 1.33%? And they comment, 'maybe it did -- but not in the good old U.S. of A', adding that this would have been the lowest inflation rate in 5 years. It is also a major discrepancy with official figures for consumer price inflation, which was reported at 8.8% for Q2. Barrons suggests that if a realistic inflation estimate had been used, the US economy would instead have been shown to have contracted by 2.9%. Quite a difference!]]> http://www.icis.com/blogs/chemicals-and-the-economy/2008/09/statistics-statistics.html http://www.icis.com/blogs/chemicals-and-the-economy/2008/09/statistics-statistics.html Economic growth Barrons US GDP Fri, 05 Sep 2008 08:13:33 +0000 $514bn. 110 banks and investment firms have now posted writedowns. CitiGroup, the largest US bank, tops the list with $55.1bn of losses, closely followed by Merrill Lynch with $51.8bn. Then comes UBS of Switzerland with $44.2bn. Back in April, the IMF forecast losses of at least $1 trillion, and warned this could lead to recession. New York professor Nouriel Roubini, who has been consistently bearish, but accurate, on the size of the problems, now forecasts the total could reach $2 trillion. That would be equivalent to almost 15% of the output of the US economy. Roubini is also forecasting that US personal consumption will fall, now the impact of the government's Q2 $100bn stimulus package has passed. This has not happened since 1990. If Roubini is correct, 2009 could be a very difficult year for the chemical industry.]]> http://www.icis.com/blogs/chemicals-and-the-economy/2008/09/514bn-and-counting.html http://www.icis.com/blogs/chemicals-and-the-economy/2008/09/514bn-and-counting.html Economic growth Financial Events Citigroup credit crunch IMF Merrill Lynch Prof Nouriel Roubini UBS US Federal Reserve Thu, 04 Sep 2008 07:50:48 +0000 China and the UK's finance ministries warning of bad times to come. Yesterday, France's finance minister joined the chorus, saying that she had 'underestimated the spillover from the US financial and housing market turmoil'. Even more significantly, her boss, French prime minister Francois Fillon, announced a cut in the government's 2008 growth forecast to just 1%, and warned that the world was facing 'A very, very serious global economic slowdown'.]]> http://www.icis.com/blogs/chemicals-and-the-economy/2008/09/a-very-very-serious-global-eco.html http://www.icis.com/blogs/chemicals-and-the-economy/2008/09/a-very-very-serious-global-eco.html Economic growth Financial Events Leverage Oil markets China France global downturn UK Tue, 02 Sep 2008 08:14:13 +0000 Oil prices were still close to $150/bbl in early August, but the blog again warned they could easily slip towards $100/bbl in the absence of any military action on Iran. Since then, they fell to a low of $112/bbl. • Change, challenge, complexity. We published a major Study on the outlook for the petchem industry over the next few years. The post also contains a link to my feature article in ICB, summarising its key conclusions. • US housing and auto markets continued to slow. US house prices fell again, and the number of new housing starts reduced. BMW warned on the outlook for 2009. • GDP forecasts were cut by BASF. The UK's Finance Minister said the global economy was at a 60-year low, and China's minister referred to the need for economic restructuring. • The credit crunch continued. Warren Buffett memorably referred to 'the nudist beach on Wall Street' where those bankers who had been 'swimming naked' were now being exposed. All in all, reading through these headlines makes me think that August was probably a good month to go away. Welcome back, if you have just returned!]]> http://www.icis.com/blogs/chemicals-and-the-economy/2008/09/august-highlights.html http://www.icis.com/blogs/chemicals-and-the-economy/2008/09/august-highlights.html Currencies Economic growth auto sales BASF China credit crunch global downturn housing oil prices Petrochemicals polymers Warren Buffett Mon, 01 Sep 2008 12:06:48 +0000 Liu He started the trend earlier this month, by talking about the need for 'economic restructuring'. Now the UK's Finance Minister, Alistair Darling, has become the first western official to abandon reassurance and instead to focus on the reality of current problems. His analysis is stark in tone, and acknowledges that the depth of the crisis is far worse that he had previously understood. He says: • Today's economic times 'are the worst they've been in 60 years' • The downturn 'will be more profound and long-lasting' that most people had expected Some research in yesterday's Financial Times yesterday also highlights the depth of today's problems. Its shows that Merrill Lynch has already lost 25% of all the profits it has ever made, since it became a listed company back in 1971. And, of course, there are probably still more losses to come, as global housing markets remain weak.]]> http://www.icis.com/blogs/chemicals-and-the-economy/2008/08/global-economy-at-60year-low-u.html http://www.icis.com/blogs/chemicals-and-the-economy/2008/08/global-economy-at-60year-low-u.html Economic growth Oil markets China credit crunch global downturn UK Sat, 30 Aug 2008 09:52:05 +0000 Housing is a vital market for chemical companies. It boomed in the US and other Western countries as credit standards were relaxed between 2003-7. Now it is at the centre of the credit crunch. Martin Feldstein, Harvard economics professor, and the man who chairs the Board that determines the duration of US recessions, is clearly very worried. Writing in the Financial Times today, he summarises the outlook as follows: 'The US economy is sliding into recession. Employment, industrial production and real incomes are declining. Monetary policy has little traction because of the dysfunctional credit markets and the collapse of housing. The fiscal policy of tax rebates failed to achieve a significant impact on consumer spending. The economy will continue to decline and the financial markets to deteriorate unless a policy is adopted to stop the downward spiral of house prices.' Anyone preparing budgets for 2009-11 will need to include a Downside Case that covers what might happen to demand, and margins, if house prices do continue to fall.]]> http://www.icis.com/blogs/chemicals-and-the-economy/2008/08/a-sombre-outlook.html http://www.icis.com/blogs/chemicals-and-the-economy/2008/08/a-sombre-outlook.html Currencies Economic growth Financial Events Leverage M & A credit crunch global downturn Martin Feldstein Wed, 27 Aug 2008 08:59:21 +0000 US house prices, according to today's S&P/Case-Shiller Index, are still falling quite sharply. As shown in the chart, they are now down 17% versus last year. The key influence, according to S&P, is that 'the markets that were the high-flyers during the recent real estate boom continue to be the ones that are leading the current decline'. Thus prices in Miami, San Francisco, Las Vegas, Los Angeles, Phoenix and San Diego are all down around 25%, whilst cities such as Atlanta, Chicago, Detroit, Minneapolis and Washington are 'only' down around 10%.]]> http://www.icis.com/blogs/chemicals-and-the-economy/2008/08/us-house-prices-keep-on-fallin.html http://www.icis.com/blogs/chemicals-and-the-economy/2008/08/us-house-prices-keep-on-fallin.html Economic growth Financial Events Leverage Case-Shiller index subprime crisis US house prices Tue, 26 Aug 2008 16:13:48 +0000 China's growth rate is slowing quite sharply. Exports to the US grew just 9% in H1, half the 2007 rate. In addition, ICIS news has reported that China's important textile industry has seen a 25% decline in orders, whilst US polyethylene exports to China are also slowing. And the above chart showing China's latest Purchasing Managers Index (PMI) indicates the ratio of inventories to new orders has risen 45% since April. Until recently, rapid growth in most Western housing and auto markets created a virtuous circle for chemical producers worldwide. Not only were these major sources of chemical demand in their own right. But as the blog noted last December, they also enabled an export boom to take place in China, due to its role as the world's leading manufacturer. In turn, this supported domestic growth and caused China's own import demand to jump. Now, unfortunately, we may be seeing a vicious circle develop, as slowing Western markets reduce China's export growth, and hence its GDP growth, in turn reducing its own import needs. ]]> http://www.icis.com/blogs/chemicals-and-the-economy/2008/08/chinas-growth-slows.html http://www.icis.com/blogs/chemicals-and-the-economy/2008/08/chinas-growth-slows.html Economic growth China global downturn Polyethylene subprime crisis Sun, 24 Aug 2008 08:19:14 +0000 March, when he commented that 'by any commonsense definition, the US is in recession'. Yesterday, he probably ruffled a few more feathers when he told CNBC that he thought the US economy was still in recession, and 'could be worse' at the end of the year. He also remarked that a 'financial crisis reveals which players have been swimming naked, because the tide goes out'. And, he added, 'we (have) found out that Wall Street has been kind of a nudist beach'. As a result, he expects both the US mortgage giants, Fannie Mae and Freddie Mac, to require 'federal government help' to survive. He also expects more US banks to collapse as a result of 'failures where the bankers were dumb in what they did'. ]]> http://www.icis.com/blogs/chemicals-and-the-economy/2008/08/the-nudist-beach-on-wall-stree.html http://www.icis.com/blogs/chemicals-and-the-economy/2008/08/the-nudist-beach-on-wall-stree.html Economic growth Financial Events Leverage M & A subprime crisis Warren Buffett Sat, 23 Aug 2008 10:49:56 +0000 A year ago, the noted investment analyst, Jeremy Grantham, described the credit crisis as a 'slow motion train wreck'. The Financial Times has now updated the metaphor to describe what has happened since. It notes that train crashes happen more quickly than economic ones, and that there are pauses before the next carriage hits the one in front. It believes this explains how we have since 'moved from crisis to crisis, with rallies in between, as participants persuade themselves that the worst is over'. Its conclusion is not encouraging for chemical companies. It expects that the problems in banking, housing and consumer markets will continue to play out 'in very slow motion'. As a result, it warns that 'we may have much longer to wait until the final impact has juddered through the train'. ]]> http://www.icis.com/blogs/chemicals-and-the-economy/2008/08/the-slow-motion-train-wreck-co.html http://www.icis.com/blogs/chemicals-and-the-economy/2008/08/the-slow-motion-train-wreck-co.html Currencies Economic growth Financial Events Leverage credit crunch global downturn Jeremy Grantham Tue, 19 Aug 2008 13:01:42 +0000 reduced their 2008 GDP forecast from 2.8% to 2.4%. This may sound a small amount, but it means it is now in line with the Global Downturn Scenario set out in our Feedstocks for Profit Study. Previously, it had been just below our Base Case Scenario. CEO Jurgen Hambrecht still sounds confident, commenting that the world 'will still continue to grow respectably, even if not as fast as in the last two or three years'. But he cautions that BASF now think the 'wave-like effects of the subprime crisis' will last 'at least until H1 2009. ]]> http://www.icis.com/blogs/chemicals-and-the-economy/2008/08/basf-reduce-2008-global-gdp-fo.html http://www.icis.com/blogs/chemicals-and-the-economy/2008/08/basf-reduce-2008-global-gdp-fo.html Currencies Economic growth Financial Events BASF Feedstocks for Profit global downturn subprime crisis Tue, 19 Aug 2008 12:19:06 +0000 What is the outlook for the global economy over the next few years? Are we likely to see a continuation of the 2003-7 Global Boom (the purple line)? Will growth reduce to the average level seen between 1980-2000 (the green line)? Or are we at the start of a multi-year Global Downturn (the red line)? This is a key question for the petrochemical industry, with its own growth dependent on increasing GDP/capita. We have just published a major new Study, 'Feedstocks for Profit', that provides a completely fresh and integrated view of the key issues facing the industry, under these 3 potential Scenarios. It focuses on the main 'building blocks' (ethylene, propylene, butadiene, benzene and paraxylene) and their derivatives. It concludes that the industry is about to go through a period of increasing change, which will make decision-making more complex. This will create major challenges for producers and consumers: • Change. The world economy may well be slowing down, after the recent boom period. At the same time, new petchem capacity in the Middle East and China is about to come onstream, whilst the US is increasing its refining capacity and gasoline production. • Complexity. Markets are becoming more volatile. Competition is likely to increase within the main regions, as exporters find life much more difficult. Inter-polymer competition will also become more intense, as supply is increased by new capacity. • Challenges. These developments create significant challenges. Integration (either physical or virtual), will be the critical success factor for the future. This will provide companies with the increased flexibility they will need to maximise their profits, at a time of increasing change and complexity. A copy of this week's ICIS Chemical Business feature on the Study is available by clicking here ICB Aug08.pdf">, if you would like to read more about our Conclusions. ]]> http://www.icis.com/blogs/chemicals-and-the-economy/2008/08/increasing-change-complexity-c.html http://www.icis.com/blogs/chemicals-and-the-economy/2008/08/increasing-change-complexity-c.html Economic growth Petrochemicals polymers Sun, 17 Aug 2008 11:56:02 +0000 Pimco, the world's largest bond investors, are worried about rising inflation. Their main concern is that many Asian and Middle Eastern countries had 'anchored' their currency to the US$. 'With that anchor gone', they comment, 'due to the US Federal Reserve's focus on preventing the US financial system from falling into a depression-style downward spiral, many countries find themselves anchorless'. They regard this as 'wholly inappropriate for emerging markets that are growing in aggregate around 7%, and whose inflation has picked up to double digits in many cases'.]]> http://www.icis.com/blogs/chemicals-and-the-economy/2008/08/global-inflation-on-the-rise.html http://www.icis.com/blogs/chemicals-and-the-economy/2008/08/global-inflation-on-the-rise.html Currencies Economic growth inflation Pimco Thu, 14 Aug 2008 19:06:11 +0000