Financial markets long ago lost all touch with reality. Not only have central banks provided $tns of cheap liquidity with the specific aim of pushing stock markets higher. But they have also allowed computers to dominate trading, so no single market now knows what it is pricing.
Chemical markets, and those who operate in them, have no such silver lining. They have to deal with the results of these policies – namely higher oil prices and very weak demand.
The blog has been travelling a lot in recent weeks. And everywhere it has been, it has asked the same question: “This should be one of the strongest periods of the year for demand. What are you seeing?” Uniformly, the news has been shockingly bad:
• One board member said on Monday that current performance was so bad, he had talked to his chairman over the weekend about emergency plans
• Nobody in the audience at Thursday’s ICIS PET conference was seeing good demand
• Fellow-blogger John Richardson confirms the same picture for the Asian region
The blog’s IeC Downturn Monitor is also clearly warning that major problems may lie ahead in Q2. As the chart shows, every single physical product in the portfolio is now falling in price. Only the US S&P 500 stock market index is still convinced sunny times lie ahead.
The blog has no crystal ball to forecast what may happen. But in response to an audience question on Thursday, it outlined a possible outlook for the next few weeks:
• Demand in the real economy remains weak as we head into Q2
• Companies start to report what is happening to astonished investors
• Cries go up for more stimulus, immediately
• Financial markets make one final rally as more liquidity is supplied
• Then, perhaps in May, reality can finally no longer be ignored
• Investors realise they have been living in a bubble, and rush for the exits
• Oil and other financial market prices begin a serious retreat
This pattern would tie in with the outlook of stock market historian David Schwartz. Writing in Saturday’s Financial Times, he warns:
“A scan through the record book finds 12 occasions since the first world war when the UK stock market advanced very strongly in the first two months of the year. The aftermath of those rallies was sobering.
“Half of the rallies were soon followed by the start of a bear market with price drops of at least 20 per cent. Two began immediately after the January-February rally ended and four others began a few months later. Five of the remaining six rallies were followed by corrections of at least 10 per cent. Once again, two began immediately while three others began later in the year.
“The only time when shares escaped the curse of a sell-off after a powerful January-February rally was 1986. The stock market continued to rise for another month and then traded sideways for the rest of the year.” (Markets then suffered 1 day falls of 25% in October 1987, blog note)
If your management team has not yet developed a contingency plan for a Q2 downturn, please start to prepare one now. There may be very little time left.
Benchmark price movements since the IeC Downturn Monitor’s 29 April 2011 launch, and latest ICIS pricing comments are below:
PTA China, red, down 17%. “Polyester producers enhanced price promotion this week in a bid to relieve inventory pressure.”
Naphtha Europe, dark brown, down 17%. “Tightness is easing in the market as a result of closed outbound arbitrages and subdued petrochemical demand”
Brent crude oil, blue, down 13%
HDPE USA export, purple, down 10%. “Almost no global demand for exports”
Benzene NWE, green, down 3%. “Values showed signs of volatility throughout the week”
S&P 500 stock market index, brown, up 14%