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The blog’s first birthday

Currencies, Economic growth, Financial Events, Futures trading, Leverage, Oil markets, Pension funds
By Paul Hodges on 05-Jul-2008

Its now a year since the blog started. Since then, 213 postings have appeared. It is now read in 72 countries and 620 cities (shown above). Most encouragingly, readership continues to steadily increase. Since January, it has risen a further 301%.

The blog’s aim is to identify ‘the influences that may shape the chemical industry over the next 12 – 18 months’, and to ‘develop useful insights into the key factors that will drive the industry’s future performance’ . So a first birthday is a suitable moment to assess its success:
Oil and feedstock prices. Exactly a year ago today, the blog warned that ‘$100/bbl is not impossible, if current geo-political concerns continue. And today’s tightly balanced market could persist to 2010’. At the time, this was very much a minority view, with oil looking weak at $70/bbl, but it has been proved right by events. Crude hit $100/bbl on 2 January (how long ago that seems!), and by 5 March the blog was warning that ‘we appear to be back to the difficult times of 1973/4 and 1979/80’.

On 16 April, in noting that Russian supply is ‘peaking’, the blog suggested $125/bbl was likely, and warned that ‘it will be very hard to pass this price on to customers’. It added that ‘End-user demand will also suffer, as Western consumers are forced to spend more on fuel and energy costs’. Since then, the situation has worsened, with the blog noting on 30 April that OPEC’s President was suggesting ‘oil prices could hit $200/bbl’.

The credit crunch. In another early posting on 11 July, the blog worried that a sub-prime induced downturn in the US housing market could impact chemical sales into the ‘key housing and autos’ markets. It also suggested that chemical company M&A activity might be hit, as investors ‘might no longer automatically support high-priced acquisitions of chemical companies which rely on high debt levels’.

On 31 July, it noted Henry Kaufman’s suggestion that the underlying problem was that ‘the distinction between liquidity and credit availability had been blurred, with ‘debt being considered as an asset’. On 20 October, it quoted Warren Buffet’s assessment that Bear Stearns was in major trouble, well before it went bust in March. And sadly, the blog still expects many more major problems to emerge in the banking sector, as investors worry about ‘return of capital’, rather than ‘return on capital’.

The turn in the cycle. On 14 July, the blog noted a strong statement from the President of Wal-Mart USA, where he suggested that their new strategy was to help ‘our customers find lower prices by working with key suppliers, reducing packaging and lowering distribution costs’. The blog suggested that the likely combination of rising oil prices and declining volumes meant that chemical company CEO’s needed to develop and implement ‘a major cost-leadership programme’

By EPCA in early October, the blog was suggesting that ‘a turning point in the petchem cycle had been reached’, and that ‘the consensus forecast for 2008 is very optimistic’. On 22 October, it went further and argued that Boards needed to be ‘putting in place contingency plans’ for a downturn. It forecast this would be led by a cutback on ‘non-essential spending by the US consumer’ and the ‘continuing problems in the banking sector that may well turn off the tap of consumer, and maybe even corporate, lending’.

The impact on margins. On 22 January, the blog reviewed the new ICIS Weekly Margin report, which showed there had been ‘a dramatic fall in polymer margins towards the end of the year. It hoped that the ‘massive US Fed rates cuts’ and the ‘proposed tax rebates’ might restore consumer confidence. But as Q1 progressed, the blog worried that this looked increasingly unlikely, and on 25 May it noted that the Report was ‘starting to tell a very sad story about polymer margins’.

Since then, the blog has noted Dow’s leadership in raising prices on a universal basis to try and support margins. Whilst supporting the effort, it cautioned on 18 June that we may be seeing a return to ‘roll-through pricing’, as ‘when demand drops, the ‘industry quickly loses its pricing power, as plants are very slow to shutdown’. As a result, it feared that ‘profits are likely to take a significant hit in the second half of the year, if demand doesn’t pick up soon’.

China/India/Asia. The blog has followed Asian developments at first hand, via regular visits to this important Region. On 17 July, it worried that Western central banks were mistaken in ignoring rising inflation in food and energy costs, and suggested that ‘we could easily see 5% plus inflation rates next year’ as a result. By 29 October, it was noting that Chinese inflation had hit 6.5%.

Since then it has tracked China’s ‘export’ of inflation, noting on 17 February that whilst ‘China has been a major source of price deflation for the past decade’, the situation was now changing, with wage inflation at 18%. By 15 June, it was observing at first hand in Thailand the social and political unrest that was caused by ‘rising food and energy prices’ in many parts of Asia. It also noted Morgan Stanley’s suggestion that Asia’s next export would be stagflation (higher inflation, lower growth).

Brighter moments. My favourite posting was on 22 August, when the blog documented how a London hedge fund manager had been ‘too busy’ to remember that he had parked his new £80k ($160k, €120k) blue Maserati Cambiocorsa illegally. As a result, it was nearly crushed by the authorities. The blog wondered whether anyone should ‘trust their money to someone who can’t look after his own car’?

Another great story was on 6 November, when the blog noted that super-model Gisele Bundchen had refused to accept US dollars for advertising Pantene shampoo, insisting on euros instead. Her gain so far is around 9% from this decision. I am glad to say that I supported her judgement at the time, commenting that ‘I shall continue using her shampoo with renewed confidence’.

Summary. The aim of the blog is to identify key changes in the wider landscape, as early as possible. As a natural optimist, I would prefer these to be positive changes. Unfortunately, however, the last 12 months have instead proved to be full of warning signs. But hopefully, reading the blog has provided you with valuable insights into the underlying issues, and helped you to prepare for the problems that lie ahead.

Many thanks for your support over the past year. Lets see what the next 12 months may have in store for us!