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Policy makers talk, whilst markets weaken

Chemical companies

LeadIndic Nov11.pngPetchem markets are telling us something very important about the state of the global economy. They are doing their usual job as leading indicators. Prices for all 4 of the blog’s benchmark products are now down over 20% since it launched the IeC Downturn Monitor at the end of April.

The OECD’s leading indicators also “point more strongly to a slowdown”, as the chart above shows from the American Chemistry Council’s weekly report. All 3 indicators for the world’s major economies (green line), industrial production (red) and global trade (blue) are weakening.

The problem is that policy makers are ignoring the message.

Credit conditions are a key concern today for most companies. Bank lending has slowed everywhere. It is particularly tight in the Eurozone and in China, where bankruptcies seem set to increase quite sharply.

Today’s high oil prices make the position especially dangerous. 5kt of benzene costs $4.4m today, other products cost even more.

This means that consumers can’t afford to buy new stock, whilst producers have to worry more and more about credit risk. So we have fallen into a vicious circle, where we all live from hand to mouth, whilst the politicians behave as if today’s problems are merely temporary:

• In Europe, Germany is busy negotiating long-term changes to EU Treaties to “impose German-style financial discipline on its partners”
• In the USA, politicians are spending more and more time campaigning for next year’s elections, rather than governing
• In China, they are also jockeying for position, as up to two thirds of today’s leadership will be replaced at H2 2012’s Party Congress

Their complacency is a legacy from the BabyBoomer-led Supercycle. They all still believe in the concept of ‘pent-up’ demand, and the ability of central banks to avert major crisis. Therefore they think they have the luxury of ignoring today’s increasingly urgent problems.

If they are wrong, as seems almost certain to the blog, then we all risk paying a heavy price when their mistake becomes obvious.

ICIS pricing comments this week, and price movements since 29 April for the benchmark products in the IeC Downturn Monitor are below:

Benzene NWE (green), down 33%. “Demand eased on the back of wider economic uncertainty within the eurozone and fears of another recession”.
HDPE USA export (purple), down 24%. “Activity picking up in Central and Latin American markets.”
Naphtha Europe (brown dash), down 24%. “Market remains in oversupply and stock levels are building.”
PTA China (red), down 21%. “Producers have been running their plants at a loss since October. Downstream textile processors have either closed down or reduced their plants’ operating rates because of tight cash flow at the end of the financial year and few new orders.”
Brent crude oil (blue dash), down 12%.
S&P 500 Index (pink dot), down 11%