U is for Uncertainty

Consumer demand

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US housing May12.pngThe blog’s series on the emerging ‘VUCA world’ today looks at how companies have to manage increased levels of Uncertainty. This can be seen in key areas of demand, such as housing.

The above chart shows how US housing starts (blue line) have fallen from 2.1m in 2005 to just 0.6m last year. Housing permits (red line) have followed a similar trend.

Each new home contains ~$15k of chemicals and polymers (paint, furnishings, kitchen/bath fittings, adhesives, appliances etc), according to American Chemistry Council data. So the US market is now worth just $9bn, compared to $32bn then.

Housing markets have been equally key to demand growth in other major regions such as China, Europe and Latin America. So the question of what happen next is critical to anyone in the chemicals business.

The honest answer, is ‘nobody knows’. Instead, Uncertanty abounds:

• In the USA, starts have never been this low since records began. Does this mean housing markets may now rebound strongly, or have rates of household formation changed direction?
• In China, investment in real estate has been 13% of GDP, and also a major source of chemical industry demand. But with 64.5m apartments empty, and prices now falling, will this continue?
• Europe has seen a collapse in housing markets in countries such as Spain and Ireland. Many construction projects are now being cancelled across the continent, as austerity programmes bite. Can demand recover?
• Latin American demand has been supported by an economy boosted by increasing exports to China. If China is slowing, will its growth also slip?

Uncertainty of this intensity in such a key market has a major impact on confidence. Even if a company wants to be bold, and bet on an upturn, it may find its bankers harder to persuade.

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