By John Richardson
AS chemicals companies go back to their budget plans for 2015, and redraw them entirely, here are ten things that they must take into account:
- The oil price is not going to return to $100 a barrel in a hurry, barring a major geopolitical shock – indeed, there is a chance that it could go even lower, down to $50 a barrel. People who tell you that this new price is impossible are the same people that were predicting that the natural price for crude as around $100 barrel based on supply and demand fundamentals – and so be highly suspicious of their assertions.
- Be equally suspicious of arguments that cheaper crude will deliver an immediate boost to the global economy. A landmark International Energy Agency report, which was released last week, says that over the next year at least, there will be more losers than winners.
- Another landmark report, by the Bank for International Settlements, points to one of the many fault lines in the global economy – emerging market debt.
- New fault lines keep on appearing – for example, the Russian rouble crisis.
- And probably most critically of all, China’s manufacturing is now contracting. This underlines that growth in China will further contract next year as economic reforms accelerate.
- The reason for these fault lines opening up is that we have, essentially, learnt nothing from the 2008 crisis (much more on this later). Policymakers have once again failed the world.
- This means that were in all likelihood at the start of a new global financial crisis.
- Chemicals markets will not, as a result, bounce back in January. Buyers globally will remember Q4 2008 when inventory losses triggered bankruptcies.
- And your chemicals companies must also remember Q4 2008, of course. There is no point whatsoever in stockpiling naphtha to turn it into, say, polyethylene and polypropylene that few people anywhere globally will want to buy in January, not just in China. If you set overly aggressive production and so sales and marketing targets, your company will also be at risk of bankruptcy.
- You should instead preserve cash and look ferociously hard at all your customers. Which ones are likely to survive and which ones could go under? How you manage account receivables is going to be a critical factor of success or failure over the next 6-12 months.