Chemicals Companies Sleepwalking Into 2012

By John Richardson

CHEMICALS companies appear to be sleepwalking into a crisis as bad as 2008 because they have sacked their in-house economists and take what they want to hear from official bodies such as the Federal Reserve, the International Monetary Fund (IMF) and the World Bank.

The famous international investor, Marc Faber, recently wrote that these three bodies have never accurately forecast a recession.

In the past, it didn’t matter that much if the IMF, World Bank etc missed a recession as up until the world-changing events of late 2008, recessions were short and sweet, as we point out in our e-book, Boom Gloom & The New Normal. All it took to release “pent-up” demand, when demographics were working in the favour of Western companies as the Babyboomers were at the peak of their earnings potential, was to lower interest rates to get economies moving again.

Hence, chemicals companies merely had to cut costs and wait for central banks to work their magic, as demand would always come roaring back.

So companies decided that there was no need to employ in-house economists during this golden period, as freely-available growth estimates from official organisations were “good enough”. Only one major US chemicals company has retained an in-house economist, a chemicals consultant told the blog a few weeks ago.

It seems to extend more broadly, sadly, than just picking up IMF etc data, or some other third party, and trusting its accuracy. Chemicals companies have been so focused on the tried and tested solutions to downturns of keeping costs down, of reducing operating rates, of tracking inventory levels down production chains, that long-term strategic planning has also suffered, the consultant added.

Hence, perhaps, this is why we keep picking up quotes from statements on third-quarter financial results – and from other official releases – that global chemicals markets are not as bad they were in late 2008.

The hope appears to be that if producers just hang-on on long enough, and display further operating-rate discipline, buyers will be forced to replenish stocks across a wide range of chemicals and polymers early in the New Year in Europe and in Asia. In polyethylene (PE) in Europe, for example, my colleague Linda Naylor has written of cracker and polyolefin operating rates trimmed back to just 70 per cent as producers play their familiar waiting game.

But as the New York Times wrote on Tuesday about the Eurozone crisis, “The biggest fear – the one implicit in all the talk about ‘contagion’ and a potential ‘Lehman Bros’ moment – is not that any bank will succumb to a liquidity crisis. It is that an entire nation might do so, if it can no longer obtain the credit it requires to stay in business.”

It is time for a bit more long-term planning about how we get through this complicated, multi-dimensional and constantly changing global crisis. A return to the world before 2008 isn’t going to happen.

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