Slide in Q2 operating rates is bad omen for H2 economic outlook

Chemical companies


ACC OR Jul14The chemical industry is the best leading indicator for the global economy.  The slide in operating rates (OR%) around the world during the seasonally strong Q2 period. is a clear warning that global economic growth may be stalling.

This should be a major wake-up call for anyone still hoping that growth may recover to the Boomer-led SuperCycle level.  The latest update from the American Chemistry Council’s excellent weekly report makes sober reading:

  • The global OR% was just 83.4% in June, down from 83.7% in June 2013
  • This was well below the 92% long-term average between 1987-2013
  • It was also well below the minimum 88% level seen in the SuperCycle

The chart also confirms last month’s comment from Dow CEO, Andrew Liveris, that “for a couple of years after 2008, we had a head-fake that the growth might have returned, but it didn’t”.  OR% temporarily jumped to around 87%, but then fell back again – despite massive continued stimulus by governments and central banks.

The ACC report also highlights that “growth stalled in Q2“.  Yet it should be the seasonally strongest quarter of the year:

  • Global growth rates fell from 4.8% in March to 3.5% in June
  • In the US, the ACC report that “production of basic chemicals fell” in June, despite the shale gas cost advantage
  • Latin America collapsed from 1.4% growth in March to a fall of 2.9% in June
  • W European growth halved from 3% in March to 1.4% in June, with Germany falling from 4.3% to a negative 0.9%
  • Central/Eastern Europe fell from 1.6% in March to a negative 0.1% in June, with Russia falling to a negative 2.9%
  • Asia-Pacific fell from 8.3% in March to 6.8% in June, with India collapsing from 6.5% to a negative 0.4%

Outside the chemical industry, the data also points in the same direction:

  • US GDP growth has been just 2.3% over the past 2.5 years, after inventory build is discounted
  • This is less than 1% per year, despite $10tn of stimulus
  • China’s steel demand grew just 0.4% in H1 this year, according to the official steel association.  Rail freight actually fell 1.4% in June versus June 2013
  • This confirms, if confirmation was needed, that China’s reported GDP growth of 7.5% was pure fiction
  • As China’s Academy of Social Sciences warns:  “The current situation serves as a reminder of how defective and unsustainable our growth model is. There can be no delay in altering the traditional investment- and export-driven model

The same realisation also seems to be dawning in financial markets, which have only been held aloft by a wave of debt.  Now investors will have to wake up to the fact that most of the debt will never be repaid.

Companies need to recognise that we have all been the victims of a collective delusion, and rapidly change course before it is too late:

  • They need to abandon their ambitious growth strategies and instead prepare for tough times ahead
  • Those in Asia can no longer ignore China’s change of course
  • It is becoming an exporter of many products, rather than an importer,  in order to maintain employment
  • Companies also need to review the $123.5bn of new US shale gas-related projects, as most will prove unprofitable due to lack of demand.

Q3 is the time when budgets and strategies are set for the next few years.  So it is not too late for a change of course.

Otherwise, in 5 years’ time, when all this new capacity is online, new managements will scratch their heads and wonder how the industry maintained the collective delusion for so long.  But by then, the money will have been spent.


The blog’s weekly round-up of Benchmark price movements since January 2014 is below, with ICIS pricing comments:
Brent crude oil, down 3%
US$: yen, down 2%
Naphtha Europe, down 2%.  “Cheap propane stocks are eating away naphtha’s market share in the petrochemical sector”
PTA China, up 1%. Producers offered cost-linked formula to stem losses, but buyers face difficulties in passing down the additional costs to their customers”
Benzene, Europe, up 5%. “Prices reversed course amid limited downstream appetite for further increases in August, which is traditionally a slow month because of summer shutdowns and the holiday period across Europe”
S&P 500 stock market index, up 5%
HDPE US export, up 7%. “Some higher trades were heard, and material remained in tight supply”


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