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The Murkiest Of Outlooks

Business, China, Company Strategy, Economics, Europe, Middle East, Polyolefins, US
By John Richardson on 12-Dec-2011

By John Richardson

LACK OF visibility over what the New Year will bring for the global chemicals industry is a key feature of just about every conversation held with industry executives at the moment.

Perfect forecasting is, of course, always impossible, but with the Eurozone in deep crisis and even China potentially facing its own bad-debt crisis, the immediate outlook seems exceptionally murky.

The fear factor dominates, according to the chief executive officer of a major European-based performance chemicals and polymer producer.

“Buyers have become very worried. They are buying in smaller individual lots, in smaller total volumes, and are waiting very late in each month to make their purchases,” he said.

Stock markets rallied after the European leaders’ meeting last Friday – an example of how positive macro economic news can restore some degree of confidence.

A further example of the instant effect of positive macro news was last week’s increase in the Dalian Commodity Exchange’s linear-low density PE (LLDPE) futures contract.

This followed China’s decision to lower bank-reserve requirements by 50 basis points, which, according to one polyolefin industry source, was also a factor behind the decision by two producers to raise their LLDPE December offer prices to China.

But whereas one swallow might make a summer for chemicals traders who want to get in and out during what of late have been brief market rallies, producers face the pressing need to draw-up robust scenarios for the whole of next year and beyond.

This task is complicated by the fact that Friday’s European deal has failed to address the Eurozone’s long-term problems. Bank failures before Christmas seem quite possible, as is the loss of France’s Triple A credit rating. 

And as for China, while the cut in reserve requirements was good news, the polyolefin industry source added: “I don’t see any change in the government’s overall policy of keeping liquidity much-tighter than during the great lending binge of 2009-2010.

“It wants to bring property prices down to more affordable levels, it wants to reduce overall inflation and it wants to try and reduce the speculative element in the economy. We can therefore expect more bankruptcies of polymer traders.”

Another aspect of Chinese government policy involves providing ample financing to “value-added” consumers of chemicals and polymers. These are the converters which are, for example, produce high-quality food packaging films using the latest technologies.

“The lower value processors are being deliberately forced-out of business,” added the polyolefin industry source.

Not only has overall demand been less in 2011 than just about anybody had forecast because of credit tightening, but the nature of demand also seems to be changing. A return to the way things were in 2010 seems highly unlikely.

How do companies respond?

Putting large volumes of commodity-grade polymers on a ship and sending them to China, via traders, in confidence that this will always deliver decent returns, has been the successful strategy of high and low-cost producers.

From now onwards, this is going to be much more difficult for the higher cost players. The demand growth outlook looks uncertain because of China’s macro-economic problems, and it is increasing self-sufficiency in commodity grades as its manufacturing industries move up the value chain.

More investment will be needed in higher-value grades for those without a feedstock-cost edge – and in on-the-ground market intelligence to identify opportunities.

Companies need to also think about the worst of possible outcomes. For instance, what if a global trade war erupts?

“We are seeing a rise in antidumping cases involving chemicals,” said a Singapore-based trade lawyer who specialises in the chemicals industry.

He had forecast such an event would occur in early 2009, but believes that fiscal stimulus in the US, Europe and China delayed the problem.

The current withdrawal of stimulus programmes might therefore explain the rise in the number of antidumping cases.

Conventional thinking is that China will allow the Yuan to further appreciate.

But what if, faced with the loss of export trade to the European Union – its biggest trading partner – it is forced to competitively devalue its currency in order to protect jobs? This would likely encourage a global trade war.

China is not the only emerging market where growth has declined.

In India, polypropylene (PP) demand for the year ending March 31 is expected to contract after two years of double-digit growth. This reflects an overall slowing of the economy due to inflation, problems in the West and lack of investor confidence resulting from corruption scandals.

Here is another possibility to consider: What if the current policy paralysis affecting the Manmohan Singh-led government continues? What will this mean for growth prospects in 2012 and beyond?

It increasingly feels as if the post-Lehman Bros period was a “one-off” for the global chemicals industry, thanks to temporary fiscal stimulus and the return of confidence when it became clear that the global financial system wasn’t going to collapse.

Long-term growth in developing markets is still a reason for great optimism. Hundreds of millions of people are emerging from poverty and beginning to buy things made from chemicals and polymers for the first time

But how do chemicals companies cost-effectively supply markets where the vast majority of people are living on $2, or even less, a day?.

The planning process has, perhaps, never been more difficult.