By John Richardson
EVEN if there is no global trade war the chemicals industry as it stands today points to the failure of the $27.7 trillion of stimulus that’s been pumped into the global economy since the Global Financial Crisis.
Why does tracking the chemicals industry help us understand the wider economy? Because, of course, chemicals go into a huge range of finished goods, which means that when the chemicals industry is weak so is the wider economy.
The latest data from the American Chemistry Council on global chemicals operating rates – or capacity utilisation – is therefore incredibly useful:
- Since 2009, capacity utilisation has never returned to the 91.3% averaged in 1987 – 2008.
- It hit an all-time low at 77.7% in March 2009 after the financial crisis began.
- Even more worrying is that it has seen a steady decline for the past year, from 81.3% in September 2015.
In the West, the core of the problem is demographics. The stimulus policies of the Western central banks were never going to work because you cannot make people buy things that they do not need and anyway cannot afford. That’s the reality of ageing population. But it is a reality that at least the US Federal Reserve is belatedly waking up to.
What is even worse is that stimulus policies have exacerbated today’s core problem – too much supply chasing too little demand. Record low interest rates combined with the US shale oil advantage has flooded global crude markets with extra supply.
Low interest rates again and cheap ethane resulting from the shale gas revolution has led to a big build-up in US petrochemicals capacity. In today’s world, all the additional US polyethylene is going to be hard to sell. What will happen now if trade barriers go up? Everyone is of course this morning keeping a close on the US presidential election, and how the result of the election might affect global trade flows of all chemicals and polymers.
And for me the other big risk for 2017 emanates from China. If China takes the pain now and pushes ahead with economic reforms there are no guarantees that it can avoid a financial-sector crisis as it deflates its real-estate bubble. Such a crisis could well have global implications as severe as US sub-prime in 2008.
I would therefore advise every chemicals company to build a global recession into their scenario planning for 2017.