Generic Strategies No Longer Good Enough

Business, China, Company Strategy, Economics, Europe, Olefins, Polyolefins, Sustainability

G7births

By John Richardson

DURING the economic Supercycle life was easy for chemicals companies.

Strong and constant demand growth was assured and so all they had to do was focus on building new, cost-effective capacity. Top-down strategy was generic – a one-size-fits-all approach.

Even if chemicals companies got the timing of new capacities slightly wrong it didn’t really matter, as periods of self-inflicted oversupply or macro-economic recessions were always very brief. This was because, as we have said, demand growth was always strong and very predictable.

Demand benefited from two one-of factors:

  • The Babyboomers in the West reaching the peak of their earnings, and therefore consumption, potential.
  • The credit binge both in the West and China. Even as the Babyboomers started retiring in numbers significant-enough to cause a major dent in Western demand, it didn’t matter because of the pre-2008 credit boom in the US and Europe. Quantitative easing post-2008 has kept stock and commodity markets buoyant, creating the false impression that real demand is solid. Similarly in China, as we discussed yesterday, the huge dash for debt after the 2008 crisis has led to the construction of empty cities that will, perhaps, never be filled and industrial overcapacity that needs to be scrapped.

Quantitative easing now looks as if it will  soon be wound down. This is exposing shortcomings in several emerging economies, such as India.

And China, for all the reasons we outlined yesterday, cannot afford to carry on with its debt binge. The economy has to be rebalanced towards much-greater domestic consumption.

Gillian Tett, in her excellent book on the global financial crisis, Fool’s Gold, talked about how most people worked in deep silos before 2008 – i.e. they had excellent knowledge of a particular area, say complex credit derivatives. However, not enough people had a top-down broad-based view across all areas of expertise, from macro-economics to credit derivatives and human psychology. As a result, very few of us saw the financial crisis coming.

Not enough economists, politicians or bankers felt that they had to work on a holistic view because, again, the consensus was that demand growth was assured.

Is the chemicals producer that you work for still stuck in silos? Do most of your company’s efforts remain focused on studying specific industry competitiveness issues, while not enough time and resources are invested in trying to connect all the macro-economic, social and political dots?

It will, of course, remain hugely important – mission critical – to, say, predict long-term ethane availability in the US and how this will affect the economics of making polyethylene (PE) in the States.

But isn’t it just as important to assess how demand growth for plastics packaging in China will be impacted by growing food-contamination concerns? As Gillian Tett pointed out, “deep silo” knowledge is by itself no longer good enough.

Returning to theme of the crucial November plenum meeting in China, chemicals companies should already be working on rigorous scenarios as to what its outcomes could mean for demand.

Here are just three possibilities:

  • China’s leaders go hell-for-leather in tackling the debt crisis. They order that no more empty condos, public buildings and airports that make up the empty cities can be built in the future, and work on those projects yet to be completed is also brought to a halt. Meanwhile, large amounts of industrial capacity are shut down, including in the chemicals industry.
  • A “middle way” is adopted. Projects already underway are completed, leading to a gradual tapering-off in chemicals demand. Meanwhile, industrial restructuring, thanks to the generous continued support of state-owned banks, is equally gradual.
  • Nothing happens and the imbalances continue to build for the next few years until China’s economy implodes.

We are sure that the latter scenario will not happen.

The big challenge will instead be to try and initially assess, and then constantly revise, where chemicals demand growth will fall between the two extremes of “hell-for-leather” and the “middle way”.

But that will still, of course, not be sufficient to work out rigorous-enough demand-growth forecasts, as there are so many other factors involved.

Nobody will ever have all the answers.

But the key is to try and ask the right questions. Then we might begin to understand this new economic, political and social environment.

PREVIOUS POST

China Debt Dwarfs The Fed's Quantitative Easing

03/09/2013

YESTERDAY we highlighted how a crucial government meeting takes place in Novembe...

Learn more
NEXT POST

China's Balancing Act: Reforming Land Rights And Hukou

05/09/2013

Xi Jinping   By John Richardson THE good health of China’s economy and th...

Learn more
More posts
Omicron, petchems and the developing world: we might get lucky this time, but maybe not next time
02/12/2021

By John Richardson UNTIL ALL of us are adequately vaccinated none of us are sufficiently protected i...

Read
Benzene, the need for a new global Industrial Revolution and the big challenges that lie ahead
30/11/2021

By John Richardson THE CHART BELOW shows that 60% of global benzene production in 2021-2040 is forec...

Read
Global polypropylene could also move from inflation to deflation in Q1 next year
23/11/2021

By John Richardson WE ALL NEED TO ASK ourselves whether the global patterns in polyethylene (PE) and...

Read
Global polyethylene could move from inflation to deflation by as early as Q1 2022
22/11/2021

By John Richardson THE BALTIC DRY INDEX, one of the excellent barometers of overall economic activit...

Read
As China coal shortages end, polyolefins margins reach historic lows on oversupply
17/11/2021

By John Richardson AGAIN, DON’T say I didn’t tell you. In my 11 October blog post, having talked...

Read
Dip in Chinese PP exports only temporary with Q1 2022 resurgence looking likely
15/11/2021

By John Richardson TRADE DATA when combined with price assessments, supply and demand estimates and ...

Read
Global polyethylene supply could lengthen, becoming a buyers’ market, sooner than many people think
12/11/2021

By John Richardson RARELY, IF EVER, have events felt so bafflingly complex in the global polyethylen...

Read
China could either see net imports of 63m tonnes in 2021-2031 or net exports of 18m tonnes!
09/11/2021

By John Richardson CONFUSED BY the above chart? Once again I certainly hope so, provided confusion i...

Read

Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more

Analytics

Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more