By John Richardson
WE were right about China’s change of economic direction, which we identified in November 2013. We were then right about the collapse in oil prices from August 2014 onwards. And we also made the right call when we pointed out that these two events are inextricably linked.
Being right in the past is, of course, no guarantee of being right in the future. But do you really want to base your entire business strategy on the assumption that our core argument is wrong – that these two events are a part of the end of an economic Supercycle which requires you to entirely change the way in which you do business?
Do you really want to wager the entire future of your company on the notion that oil prices must inevitably return to around $80-100/bbl?
And do you really want to bet everything on the highly questionable notion that China is rapidly building a new economic growth model that requires you to make no adjustment whatsoever in the way that you do business?
Of course not. Your company is today struggling to deal with the immediate fallout from getting the oil price and China so badly wrong. So it would be very wrong to take the risk of multiplying the scale of this damage many times over during the next few years, to the point where the very survival of your chemicals companies could well be in question.
But that’s exactly what you will be doing if your sole scenario is a return to “business as usual” – the world before the about turn in China and the collapse of oil.
You instead need a rigorous set of scenarios to guarantee survival and prosperity. These scenarios are detailed in our new Study, which has now been released – Demand :The New Direction for Profit. Please click here for more details.
We put forward three demand-led scenarios that challenge the supply-driven model:
•$25/bbl oil = Collapsing demand. Emerging markets submerge, and developed markets slow dramatically as stimulus-created debt has to be repaid
•$50/bbl oil = Comfortable middle. Stimulus policies prove to have worked, demand recovers, project cancellations and revived growth prospects create a balanced market
•$100/bbl oil = Continuing tension. Further central bank stimulus takes place as economic recovery stalls, and geopolitical risks rise, along with the potential for supply disruptions
Our core argument is that companies cannot any longer simply invest in new capacity on the assumption that demand will soon catch up.
Clearly, we cannot prove at this stage that our analysis is correct. But what would happen if we were right again, this time with our “paradigm shift” argument? At the very, very least, you need a fallback plan.