ICIS Supply and Demand Database

CHARLOTTE, North Carolina (ICIS)–The US remains an outlier among advanced nations and continues to power forward. Inflation has moderated and central banks are eyeing rate cuts later this year. Global manufacturing has stabilized and is recovering in most major economies. Output is strongest in emerging economies. There are signs that China’s recovery has re-engaged and that Europe’s economy may be stabilizing, with recovery later this year. The US economy is outperforming most other developed countries, keeping the dollar strong. Based on a string of hotter-than-expected readings on inflation, it appears that interest rates will be higher for longer. The headline March Consumer Price Index (CPI) was up 3.5% year on year and core CPI (excluding food and energy) was up 3.8% year on year. Progress on disinflation appears to be stabilizing. Economists expect inflation to average 3.1% this year, down from 4.1% in 2023 and 8.0% in 2022. This is above the US Federal Reserve’s target of 2%. Inflation is forecast to soften to 2.3% in 2025. As a result, interest rate futures are now moving towards fewer cuts. The case is even being made for no cuts. US MANUFACTURING FINALLY IN EXPANSIONTurning to the production side of the economy, the March ISM US Manufacturing PMI came in at 50.3, up 2.5 points from February and above expectations. This expansionary reading ends 16 months of contraction in US manufacturing. Production moved back into expansion, as did new orders. Order backlogs contracted at the same pace. Inventories contracted at a slower pace, which could provide a floor for output. The long and deep destocking cycle could be ending, with the possibility for restocking later this year. Nine of the 18 industries expanded and demand remains in the initial stages of recovery, with obvious signs of improving conditions. The ISM US Services PMI fell 1.2 points to 51.4, a reading indicating slower expansion. The Manufacturing PMI for Canada remained in contraction during March while that for Mexico expanded for the sixth month. Brazil’s manufacturing PMI expanded for a third month. Eurozone manufacturing has been in contraction for 21 months. However, the region appears to be skirting recession. China’s manufacturing PMI was above breakeven levels for the fifth month. Other Asian PMIs were mixed. AUTOMOTIVE AND HOUSING HOLDING UPTurning to the demand side of the economy, light vehicle sales eased in March, and although inventories have moved up, they still remain low. Economists see light vehicle sales of 15.8 million this year, before improving to 16.3 million in 2025. The latest cyclical peak was 17.2 million in 2018. Pent-up demand continues to provide support for this market. Homebuilder confidence is guardedly optimistic. Housing activity peaked in spring 2022 before sharply falling by July 2022. From then and into mid-2023, housing reports were mixed. ICIS expects that housing starts will average 1.45 million in 2024 and 1.50 million in 2025. We are above the consensus among economists. Demographic factors are supporting housing activity during this cycle. There is significant pent-up demand for housing and a shortage of inventory. But mortgage interest rates have moved back up in recent weeks and will hinder affordability and, thus, demand. US RETAIL SALES, EMPLOYMENT STRONGNominal retail sales made another solid gain in March. Sales growth was marked across most segments. Sales at food services and drinking establishments also advanced. Spending for services is holding up, but the overall pace may be slowing. Job creation continues at a solid pace, and the unemployment rate is still at low levels. There are 1.4 vacancies per unemployed worker, off from a year ago but at a historically elevated level. This is still fostering wage pressures in services. Incomes are still holding up for consumers. Our ICIS leading barometer of the US business cycle has been providing signals that the “rolling recession” scenario in manufacturing and transportation may be ending. The services sector continues to expand, albeit at a slower pace. Real GDP rose 5.8% in 2021 and then slowed to a 2.5% gain in 2022. The much-anticipated recession failed to emerge and in 2023, the economy expanded by 2.5% again. US economic growth is slowing from the rapid pace in the third and fourth quarters, but those gains will aid 2024 performance of an expected  2.4% increase. The slowdown in quarterly economic activity suggests that in 2025, the economy should rise by 1.8% over average 2024 levels.

19-Apr-2024

SAO PAULO (ICIS)–Amid Europe’s industrial crisis, green shots have started to appear in eastern countries, giving hopes the downturn in the region has bottomed out, the CEO at US paints and coatings major PPG said on Friday. Tim Knavish added after PPG announced it was seeking to divest its US and Canada architectural operations, it has recorded more interest from potential buyers than expected, but “no numbers have hit our desk yet". Late on Thursday, PPG said its sales fell in the first quarter as European demand continued to be in the doldrums, but its earnings surged as input costs had fallen considerably. The company expects an overall improvement in industrial production globally in the second half of 2024. “We just have to get through the second quarter,” the CEO said, speaking to reporters and chemical equity analysts on Friday. As a paints and coatings producer, PPG's operations are petrochemicals-intensive. Among many others, one of its key raw materials is titanium dioxide (TiO2). COMING OUT OF THE DOWNTURNWhile Europe’s industrial downturn has been the steepest as the region took the largest hit from sharply higher natural gas prices after the Russian invasion of Ukraine, the US performance has been lacklustre. Amid overall economic growth, manufacturing has been the sick man of the mix for many months. That may have started to turn in March, with official and private bodies’ statistics showing growth in US manufacturing at last, and manufacturers optimistic for the months ahead. “We expect our sales volumes to continue recovering for the remainder of 2024…. We are only 19 days into the month, that’s only a sixth of the second quarter, but we are comfortable with the order book and shipments so far this quarter,” said Knavish. “We have been speaking to our key end-users in the past weeks and they are all saying the same thing about Q1 and Q2, but we are all expecting a return to more normal growth rates in H2 – we just have to get through Q2.” In Europe, however, some key markets such as France and the Nordics have yet to start any meaningful recovery, with sales there slower than the company was expecting, the CEO said. Despite this, in the eastern economies – with more emerging markets characteristics than the European western economies – there has been a notable improvement. “We are seeing green shoots in the east, where we have a strong position, so that gives optimism. We are also seeing that the deco [decorating] segment in those hard-hit countries [in Europe] is also bouncing back from the bottom, so we don’t expect it to get worse,” said Knavish. “The recoveries in the east, they are not the largest individually but when you add them together, they are an important part of our portfolio, countries such as Poland, Romania, Hungary or Czechia: we do see some green shots there.” However, he added that they were not “naive enough” to believe there will be a V shape recovery in Europe. ARCHITECTURAL DIVESTMENTAt the end of February, PPG announced it was seeking alternatives for its US and Canada architectural coatings business, which has been a drag on profits and sales volumes. The company said at the time it would study whether the division could be divested, be set as a standalone entity, or be part of a joint venture. The CEO did not give much away on Friday, saying it was early on, but the company was positively surprised with the level of interest, adding there had been “minimal if any” disruption to the daily operations of the division since the announcement. “There is a lot of chatter [about this]. But we are engaging key customers, employees, and engaging our owners. We expected strong interest, because of the strength of the brands and assets … The interest has been even higher than what we expected. We feel good right now,” said Knavish. “Until the numbers start coming in, and we can look at what is best for shareholder value creation, it is difficult to say [what the likely outcome will be]. We’ll have a much better view in another quarter or so.” INDIA TAKING OFFKnavish ended with an interesting reflection about India. Indians are about to start what is famously the largest democratic process in the world, which will end in June. Current Prime Minister Narendra Modi is widely expected to win a resounding third term in the general election, despite many analysts warning about increasing tensions between Hindus and Muslims, who are India’s largest minority, with 175 million people. But the key to Modi’s expected victory may well be all about the economy. “I have been going to India for 25 years. There has always been the talk of higher civil engineering works, higher industrial production [but it never seemed to come to fruition],” said the CEO. “Now, all that is happening, and the development is very noticeable for someone who has been going there regularly.” Additional reporting by Deniz Koray

19-Apr-2024

LONDON (ICIS)–Senior editor for recycling Matt Tudball discusses the latest developments in the European recycled polyethylene terephthalate (R-PET) market, including: Food-grade pellet (FGP) prices edge up at low end May demand, price expectations unclear Growing conversations about impact of Single Use Plastics Directive

19-Apr-2024

LONDON (ICIS)–Europe stock markets shifted onto bearish footing in morning trading on Friday in the wake of explosions in Iran that escalated fears of ever-higher tensions in the Middle East. Oil prices settled after the initial shock. Explosions in Iran overnight sent crude pricing surging more than $3/barrel during the Asia trading window. Iran state media reported explosions near air bases close to the city of Isfahan, which also operates nuclear facilities. Watchdog the International Atomic Energy Agency (IAEA) stated that there has been no damage to any nuclear facility, but urged caution. “IAEA can confirm that there is no damage to Iran’s nuclear sites. Director General  Rafael Mariano Grossi continues to call for extreme restraint from everybody and reiterates that nuclear facilities should never be a target in military conflicts,” the agency said in a statement. Reports have also emerged in the media of explosions in Iraq and Syria. Speaking at a G7 briefing in Capri, Italy, this morning, US Secretary of State Anthony Blinken declined to comment on the developments beyond disavowing US involvement. “I’m not going to speak to that, except to say that the US has not been involved in any offensive operations,” he said. No parties have officially taken responsibility for the blasts, but the incident is the latest in a volatile week in the Middle East, which began in the wake of Iran’s drone strikes in Israel on 13 April, which the Israel Defence Force (IDF) confirmed had struck the Nevatim air base. Crude oil pricing has whipsawed in the face of the market unrest, breaching the psychological $90/barrel mark before receding, before surging close to that watermark again when news of the blasts in Iran broke. With no reprisals currently threatened, oil futures pricing quickly receded, dropping from $89.42/barrel for Brent at 3:17 BST to well under $87 in midday trading. A build in crude stocks also weighed on sentiment, while diminishing expectations for imminent central bank rate cuts in the face of stubborn inflation has also slowed the pulse of the global economy. Crude demand growth has been subdued this year but substantial downward shifts to supply could substantially tighten conditions, according to crude analysts at ING. "If these reports [of explosions] turn out to be true, fears over further escalation will only grow, as well as concerns that we are potentially moving closer towards a situation where oil supply risks lead to actual supply disruptions," the bank said in a note on Friday morning. European public markets were also subdued, with Germany’s CAC 40 and the UK’s FTSE 100 indices trading down 0.65% and 0.45% respectively as of 13:30 GMT. Europe chemicals stocks also weakened in early trading at a more modest level relative to general markets. The STOXX 600 chemicals index clumped 0.15% compared to Thursday’s close, with shares in seven of the 30 component companies down at least 1-2%. The weakest performer on Friday so far was Solvay, which saw shares shed 3.39% of their value as of 13:17 BST. Thumbnail photo: The city of Isfahan, Iran. Source: Morteza Nikoubazl/NurPhoto/Shutterstock

19-Apr-2024

DUBAI (ICIS)–Importers in the Middle East are being hit by surging costs of transporting goods by land through Saudi Arabia from the Jebel Ali port in the UAE a shipping crisis in the Red Sea to the west of the region. Increased demand meets truck shortage Polymer market activity slow to pick up after Eid holidays Logistics woes may spill into Strait of Hormuz as tensions escalate Buyers in Jordan, Syria and Israel have been relying more on this route to take cargoes coming in from elsewhere in the world. Most shipping companies avoid the Red Sea fearing attacks on commercial vessels by Yemen’s Houthi militants since late last year following the outbreak of the Israel-Hamas war. GCC suppliers are the main exporters of PP and PE to the East Mediterranean region and have been selling most of the material through truck via Saudi Arabia, with limited quantities sold via the CFR (cost & freight) Aqba route. The Red Sea, which has the Suez Canal in the north, offers the shortest route between Asia and Europe and shipping access to the East Mediterranean markets. From the Jebel Ali port in Dubai to Jordan, land freight has more than doubled in recent months, a Jordanian trader said. ”We’ve seen jumps from $60-70/tonne [trucking] cost from Jebel Ali, to Jordan, via Saudi Arabia, to … as high as $150/tonne when ordering non-prime material for both PP and PE  from a major UAE-based supplier,” the trader said. The Middle East observed the Muslim fasting month of Ramadan from 10 March, during which working hours were reduced, culminating with the Eid ul-Fitr holiday during the second week of April. “Now that we are back from Eid, the expectations are towards some decreases in the [land freight] costs,” the trader said. In March, the spike in freight cost was due shortage of trucks following a sharp spike in demand to transport essential goods by land for Israel from Jebel Ali via Saudi Arabia. This shortage was exacerbated by Saudi Arabia’s existing ban on trucks older than 20 years from transiting through its territories, which came into effect in 2023. Trucking demand for polymer cargoes from Oman and the UAE to Egypt via Saudi Arabia also increased, causing a sharp increase in freight cost. “The cost of [transporting] polymers by truck to Egypt was around $80-100/tonne before March, but it increased to $120-140/tonne ahead of Ramadan Season,” a regional trader said. Saudi Arabia’s own cost of transporting polymer cargoes, however, was not affected, market players said, despite a lot of trucks mobilized since the beginning of the year to transport material inland from plants located on the west coast to ports situated on the east coast, so be able to ship them to customers in Asia. Overall polymer market activity has yet to pick up as the Gulf Cooperation Council (GCC), East Mediterranean, and North African markets are just returning from the Eid holiday. Concerns are now shifting toward repercussions of a potential full-on war between Iran and Israel, which could further impact logistics in the region, specifically in the Strait of Hormuz, which could cause oil and feedstock prices to soar. Explosions in Iran, Syria and Iraq were reported early on Friday, causing oil prices to surge by more than $3/barrel in early trade, with Brent crude breaching $90/barrel before easing down. According to media reports, Israel was behind the explosions in Iran. The Strait of Hormuz, which connects the Gulf of Oman and the Persian Gulf, is bordered by Iran, Oman and the UAE. It is an important chokepoint for energy trades from the Middle East. On 13 April, Iran’s Revolutionary Guards seized Portuguese-flagged container ship MSC Aries in the key shipping lane which Tehran says is linked to Israel. On the same day, Iran had launched drones and missiles on Israel, which it blames for a fatal attack on an Iranian diplomatic facility in Damascus that killed a high-ranking member of Iran's Islamic Revolutionary Guards and eight other officers. Focus article by Nadim Salamoun and Pearl Bantillo Click here to read the ICIS LOGISTICS topic page, which examines the impact of shipping disruptions on oil, gas, fertilizer and chemical markets.

19-Apr-2024

SINGAPORE (ICIS)–Shares of petrochemical companies in Asia slumped on Friday, while oil prices surged amid escalating tensions in the Middle East following reported explosions in Iran, Syria and Iraq. Japan’s Nikkei 225 falls 2.66% at close of trade Brent crude briefly crosses $90/bbl; oil eases off highs Israel behind Iran explosions – reports At 07:24 GMT, Asahi Kasei Corp and Mitsui Chemicals were down by 1.31% and 1.98%, respectively, in Tokyo, as Japan’s benchmark Nikkei 225 shed 2.66% to close at 37,068.35. In Seoul, LG Chem fell 2.11% as South Korea's KOSPI composite fell by 1.63% to 2,591.86. Hong Kong's Hang Seng Index slipped by 0.98% to 16,226.07. In southeast Asia, PETRONAS Chemicals Group (PCG) slipped by 0.44% while Siam Cement Group (SCG) was down 2.69%. High oil prices will continue to squeeze margins of petrochemical producers, which are struggling with poor demand and overcapacity. Middle East markets in Saudi Arabia, Kuwait, Bahrain, and Qatar could mirror the movement in Asia when they open on 21 April. Regional bourses are closed on Fridays and Saturdays. Oil prices pared earlier gains in the afternoon trade in Asia after surging by more than $3/barrel earlier in the session, following reports by various media outlets in the Middle East of explosions in Iran, Syria, and Iraq. "If these reports turn out to be true, fears over further escalation will only grow, as well as concerns that we are potentially moving closer towards a situation where oil supply risks lead to actual supply disruptions," said Dutch banking and financial information services provider ING in a note on Friday. Overnight, oil prices settled mixed following a sell-off early in the week as financial markets discounted fears of a war between Israel and Iran that could disrupt crude supplies. Explosions were heard around the central city of Isfahan early on Friday, Iranian media reported, adding that three drones were destroyed after the country's air defense systems were activated. Isfahan houses a significant military airbase, and the province is host to numerous Iranian nuclear facilities, among them the city of Natanz, which is central to Iran's uranium enrichment efforts. Iran's state-run Press TV in a report said that "important facilities in the Isfahan province, especially nuclear facilities, are completely safe and no accidents have been reported". Iran initially closed its airports in Tehran, Shiraz and Isfahan after the attack but has since re-opened them. "Normal operations have resumed for flights at Iranian airports including Imam Khomeini International Airport and Mehrabad International Airport in Tehran after temporary delays," Press TV said, citing the Iran Airports and Air Navigation Co. Elsewhere, Iran’s official IRNA news agency said a series of explosions in Syria targeted military sites. In Iraq, meanwhile, explosions were reported in the al-Imam area of Babel. The reports have sparked worry that Israel has retaliated against Iran's drone attacks last week. Iran launched the strikes on 13 April in response to a suspected Israeli airstrike on Iran's consulate in Syria at the start of the month. Prior to the news of Friday's attacks, Iran's Foreign Minister Hossein Amir-Abdollahian issued a warning during an interview with US broadcaster CNN on Thursday that Iran would respond "immediately and with maximum intensity" to any Israeli aggression. Focus article by Nurluqman Suratman Additional reporting by Nadim Salamoun

19-Apr-2024

SINGAPORE (ICIS)–Oil prices surged by more than $3/barrel in Asian morning trade on Friday, with Brent crude crossing above $90/barrel before easing midday, amid heightened fears of supply disruption following unofficial reports of explosions in the Middle East. ($/barrel) Contract Low High Open Last (at 03:17 GMT) Previous Settlement Change High Change Brent June 86.85 90.75 87.04 89.42 87.11 2.31 3.64 WTI May 82.47 86.28 82.62 84.76 82.73 2.03 3.55 "If these reports turn out to be true, fears over further escalation will only grow, as well as concerns that we are potentially moving closer towards a situation where oil supply risks lead to actual supply disruptions," said Dutch banking and financial information services provider ING in a note on Friday. Overnight, oil prices settled mixed following a sell-off early in the week as financial markets discounted fears of a war between Israel and Iran that could disrupt crude supplies. On Friday, various media outlets in the Middle East reported explosions occurred in Iran, Syria, and Iraq. Israel has launched a missile attack against a site in Iran, according to US broadcaster ABC News, while Iran’s semi-official Fars news agency has reported explosions in Isfahan province with state television reporting flights in several cities have been suspended. Isfahan houses a significant military airbase, and the province is host to numerous Iranian nuclear facilities, among them the city of Natanz, which is central to Iran's uranium enrichment efforts. Iran’s official IRNA news agency said a series of explosions in Syria targeted military sites. In Iraq, meanwhile, explosions were reported in the al-Imam area of Babel. The reports have sparked worry that Israel has retaliated against Iran's drone attacks last week. Iran launched the strikes on 13 April in response to a suspected Israeli airstrike on Iran's consulate in Syria at the start of the month. Prior to the news of Friday's attacks, Iran's Foreign Minister Hossein Amir-Abdollahian issued a warning during a interview with US broadcaster CNN on Thursday that Iran would respond "immediately and with maximum intensity" to any Israeli aggression.

19-Apr-2024

SINGAPORE (ICIS)–Oil prices rose on Thursday, reversing sharp losses in the previous session, after the US re-instated oil sanctions on Venezuela, and amid discussions by the EU about implementing new restrictions on Iran. EU leaders mull fresh sanctions against Iran at Brussels summit Market uncertainty tied to potential Israeli response to Iran Poor economic data from China cap crude gains Product ($/barrel) Latest (at 04:27 GMT) Previous Change Brent June 87.57 87.29 0.28 WTI May 82.87 82.69 0.18 Both crude benchmarks fell overnight by nearly $3/barrel on demand concerns, with the US showing a higher-than-expected build in crude inventories. The US on 17 April announced it would not renew a license expiring on Thursday which had previously eased sanctions on Venezuelan oil, opting to re-instate punitive measures due to President Nicolas Maduro's failure to fulfill his election commitments. The US’ six-month sanctions relief for Venezuela took effect on 18 October 2023. Meanwhile, EU leaders are in Brussels, Belgium for a two-day summit (17-18 April) to discuss intensifying sanctions against Iran following Tehran's missile and drone attack on Israel on 13 April, an incident that prompted global powers to attempt averting a broader Middle Eastern conflict. "We have to adjust, to expand them [the sanctions] on Iran," French President Emmanuel Macron said in Brussels ahead of the summit. "We are in favor of sanctions that can also target all those who help manufacture drones and missiles that were used in the attacks last Saturday and Sunday [13-14 April]." Israel has indicated its intention to retaliate, although it has not specified the means of response. Iran and Venezuela, which are among the founding members of oil cartel OPEC, have substantial oil reserves, with Iran having the world’s fourth-largest proven oil reserves and Venezuela holding the largest. Despite their influence on global oil prices, international sanctions have curtailed their production and export capabilities and market impact. "The lack of direction in the market reflects the significant uncertainty about Israel's possible response to Iran’s attack over the weekend," Dutch banking and financial information services provider ING said in a note. "However, for oil, sanctions are already in place, the issue is that they have not been strictly enforced for the last couple of years. And the big question is whether they will be enforced more rigorously now," it said. Keeping a lid on prices was poor March economic data from China, the world’s second-biggest economy. Chinese exports in March fell by 7.5% year on year, the biggest fall since August last year. March retail sales and industrial output also missed expectations, heightening concerns of muted demand from the world’s largest crude importer. The US, on the other hand, showed improved in economic activity from late February to early April, with firms indicating expectations for steady inflation pressures, based on a Federal Reserve survey released on 17 April. The Federal Reserve is currently not considering interest rate cuts in the near term due to a combination of resilient economic activity and persistently high inflation. In March, US employers added more than 300,000 jobs – the most in nearly a year – and retail sales exceeded expectations after expanding by 0.7% month on month. Focus article by Nurluqman Suratman An oil tanker at the dock of the El Palito oil refinery at Puerto Cabello, Carabobo, Venezuela – 13 March 2022. (Juan Carlos Hernandez/ZUMA Press Wire/Shutterstock)

18-Apr-2024

SAO PAULO (ICIS)–US manufacturers were "uniformly optimistic" in March about the prospects for the next 12 months on expected higher sales, the country’s Federal Reserve (Fed) Beige Book said on Wednesday. The Beige Book is a summary of US economic activity during the past six weeks among the 12 districts, one of which is the Federal Reserve Bank of Dallas. That bank includes all of Texas and northern Louisiana, the home of many petrochemical plants and refineries. The Beige Book published on Wednesday contains survey responses collected in the six week to 8 April. US manufacturing activity was in the doldrums in 2023 and beginning of 2024, but the manufacturing PMI index for March showed activity expanding for the first time in 17 months. Earlier this week, official data from the Fed showed manufacturing output expanding 0.5% in March. Increased recent demand may have been one of the reasons for manufacturers to feel reasonably optimistic for the months ahead. “Contacts were uniformly optimistic for the remainder of 2024, projecting steady to moderately higher sales moving forward; in one case, however, that still meant that total sales in 2024 would fall short of their 2023 levels,” said the Fed. “The positive forecasts were based largely on firms’ own recent demand trends, although one contact cited the prospects of productivity gains from AI and expected cuts in the federal funds rate as additional sources of optimism.” For the six weeks covered in the report, overall US manufacturing revenues were practically unchanged, with half of respondents reporting moderate gains in sales over the cycle and the other half experiencing moderate losses. In the Dallas district – the 11th District in the Fed’s terminology – the economy expanded modestly, propped by services and housing. However, the district’s manufacturing output “declined slightly”, with job creation slowing. “Employment growth slowed as wages, input costs, and selling prices grew at a moderate pace. Overall, Texas firms noted an uptick in uncertainty,” said the Fed. OVERALL, STEADY The overall US economic continued expanding in the six weeks to 8 April, with 10 out of 12 districts experiencing “either slight or modest” economic growth, up from eight in the previous report. Some downside economic risks remain, however, with labor shortages still being mentioned, although with the expectation that over the course of the next 12 months a more balance labor market could emerge. “On balance, contacts expected that labor demand and supply would remain relatively stable, with modest further job gains and continued moderation of wage growth back to pre-pandemic levels,” said the Fed. Price increases were practically unchanged from the last report, with logistics disruptions in the Red Sea and the collapse of Baltimore’s Key Bridge not leading yet to a significant increase in costs, despite some shipping delays. “Another frequent comment was that firms’ ability to pass cost increases on to consumers had weakened considerably in recent months, resulting in smaller profit margins. Inflation also caused strain at nonprofit entities, resulting in service reductions in some cases,” concluded the Fed. “On balance, contacts expected that inflation would hold steady at a slow pace moving forward. At the same time, contacts in a few districts – mostly manufacturers – perceived upside risks to near-term inflation in both input prices and output prices.” Thumbnail image shows an ExxonMobil plant in Beaumont, Texas. Photo courtesy of ExxonMobil

17-Apr-2024

SAO PAULO (ICIS)–Argentina’s latest cut to interest rates had more to do with shoring up the central bank’s balance sheet, possible thanks to currency controls implemented by the prior Administration, than the actual control of price rises, according to the director at Buenos Aires-based Fundacion Capital. Carlos Perez said the so-called Cepo currency controls limiting the ability to buy or sell any foreign currency may be causing losses for savers getting returns on their deposits below the rate of inflation, but they are helping the central bank to kick off a much needed shoring up of its balance sheet. Effectively, savers who have their pesos in the Argentinian banking system are paying with their losses certain stabilization for the central bank's balance sheet. Stability is something the Banco Central de la Republica Argentina (BCRA) could do much with. First introduced by Cristina Fernandez de Kirchner’s cabinet in 2011, the restrictions became informally known as Cepo cambiario (Spanish for 'exchange clamp'). They were lifted by the center-right cabinet of Mauricio Macri in 2015 but implemented again by his successor Alberto Fernandez in 2020. Argentina’s new President Javier Milei blasted the Cepo controls during the electoral campaign and has promised to lift them in due course but, for now, some old regime tools are coming in handy to shore up the new regime. Last week, the BCRA lowered the main interest rate benchmark from 80% to 70%. One day after that, the country’s statistics body Indec said the annual rate of inflation had jumped to nearly 290% in March, although it noted a fourth consecutive slowdown in monthly price increases. See bottom graphs for monthly and annual inflation rates. Lowering rates amid rocketing inflation: just the opposite of what is meant to be done, as the global inflation crisis has just showed us. MAKING SENSE OF IRRATIONALSo, while trying to get Argentina back into the realm of "normal economic policy", according to Perez, some irrational measures are still being used. But, at least, the central bank is quickly consolidating its position and starting to resemble a normal central bank, the economist went on, and not just the printer of money, or lender of last resort, it had become under the prior Administration, who used it to finance its recurrent spending, fueling inflation along the way. Milei’s two more controversial proposals – dismantle the central bank and dollarize the economy – are now forgotten: Argentina was far from having the necessary dollars to dollarize, and the central bank, like in any economy, has in these four months proved a useful tool to start stabilizing runaway inflation. Perez said the current interest rates – nominally, monthly at around 5% – are well detached from the monthly rate of inflation, now at around 11%. Effectively, savers’ deposits are losing 6% of their value. But this sacrifice, added the economist, had to be seen considering the wider stabilization of the system. “In Argentina right now we have economic variables which are running at speed, like inflation; others which are walking, such as the interest rates; and others which are crawling, such as the peso's official exchange rate,” said Perez. “In this situation, Cepo controls take center stage. By law, most deposit holders have almost no way to dollarize their savings, for instance. Their money is imprisoned, so to speak. Thus, the central bank is effectively cleaning up its balance sheet by liquidizing little by little the liabilities it holds.” Financial institutions and banks will place their deposit holders’ savings within the central bank, like in any other economy; the Argentinian specific feature lies in that the bank itself is charging savers by keeping their returns well below inflation. Milei has hinted at lifting the Cepo controls by mid-2024 – but it remains to be seen whether more sacrifices from suffering savers will be required. It is worth noting that a lot of Argentinian money left Argentina years ago. Some estimates say Argentinians hold around $250 billion in assets abroad. “Therefore, the logic behind a real negative interest rates can only be found in the Cepo system. If the economy was free of those restrictions, we would be probably facing a massive capital flight, now contained by the law,” said Perez. “Will the government lift the Cepo system? It will be facing a dilemma. While Cepo is in place, a progressive clean-up of the central bank’s balance sheet can take place. Without restrictions, returns on deposits will have to match or surpass the inflation rate, if a large-scale capital flight is to be avoided.” INFLATION DOWNSo, asking savers to make sacrifices is one leg of the plan to stabilize the central bank’s balance sheet and, with it, the economy. To stabilize runaway inflation, a second leg has been stopping all issuance of bonds by the central bank to finance recurrent public spending, a vice the prior Administration became too addicted to. Printing money became virtually the sole financing method for the Administration as finding investors abroad willing to buy Argentinian debt became a rarity and the IMF’s bailout would only partly cover the spending needed in what was at the time one of the most subsidized economies. A third leg has come from the fiscal adjustment implemented by the government. Milei’s “chainsaw” which propelled him to fame when he was just a libertarian, media-prone economist, has started making its early rounds: subsidies have been severely curtailed and recurrent spending is on the cards with a plan to implement large-scale redundancies among civil servants. ECONOMIC RULEBOOK, AT LAST The recession is hitting hard the real economy, said Perez, but voters who overwhelmingly backed Milei seem, at least for the moment, be putting up with the pain. This time, Argentinian world-famous, violent-at-times, media-grabbing street protests have so far been absent. Global investors and the IMF alike also like the tune of what is being done. But no-one hides that the recession is hitting consumers hard, and poverty levels have jumped over 50%, according to official figures. With the hit to consumers' purchasing power comes the hit to the petrochemicals-intensive manufacturing sectors, which official figures confirm are registering hefty falls in output. Petrochemicals sources in Argentina have said to ICIS this week they are registering falls in demand between 30% and 50%; for now, stocks are still catering for depressed demand. Perez, ordinary voters struggling to make ends, and global investors alike are for now giving a vote of confidence to a cabinet which is playing by the book set out in the electoral campaign. Milei never shied away from the fact it had to be a "brutal" adjustment if past errors were to be mended. Perez said that, at least, the measures being implemented are all within the realm of ordinary economic policy, a terrain Argentina had left years ago, he added. “The first four months have been quite positive. From one day to the other, Argentina went from an irrational economic policy to a reasonable one,” he said. “The fiscal adjustment has been severe, relative prices are starting to adjust positively, the central bank is shoring up its reserves – albeit they are still in the red; the relationship with the IMF is good; and the cabinet is working hard to shore up its economic policy with political support in Parliament, where Milei’s party is in a minority.” Argentina’s fertilizers- and export-intensive agricultural sector should also register a positive harvest in the second quarter, which will continue propping up much-needed dollars reserves within the central bank. “Right now, the positive financial feelings contrast with how hard the recession is hitting the real economy. At Fundacion Capital we expect GDP to contract by around 6% in Q1, year on year. In Q2, output will also fall, but the hit will be lessened by agriculture,” said Perez. “The first half of 2024 will be very hard for ordinary Argentinians. And let’s not forget, the challenges for the government remain daunting: the fiscal adjustment still lacks sustainability, i.e. political support. And despite the improvements, the central bank’s reserves are still negative: a genuine, sustainable flow of dollars into Argentina is yet to take place.” ARGENTINA MONTHLY INFLATION RATE In % change Source: Indec ARGENTINA ANNUAL INFLATION RATEIn % change Source: Indec Front page picture source: Shutterstock Interview article by Jonathan Lopez

16-Apr-2024