Rising interest rates, volatile exchange rates, high oil prices and plastic waste challenge aromatics industry

Fears are rising about the risks of recession, as I discuss in a new one-page summary of the key issues facing the aromatics industry, ‘What does the future hold for Aromatics?‘.  Please click here to download it.

These issues will also be key topics at next month’s 17th World Aromatics and Derivatives Conference, jointly organised with ICIS, along with detailed coverage of the benzene and xylene value chains.

We have the usual strong line-up of speakers, and the Conference will also provide an excellent opportunity to exchange views with business partners and colleagues.  For further details and to book your place, please click here.

I hope to see you in Amsterdam next month.

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Anti-pollution drive hits China’s role as global growth engine

China is no longer seeking ‘growth at any cost’, with global implications, as I describe in my latest post for the Financial Times, published on the BeyondBrics blog

A pedestrian covers up against pollution in Beijing © Bloomberg

China’s President Xi Jinping faced two existential threats to Communist party rule when he took office 5 years ago.

He focused on the first threat, from corruption, by appointing an anti-corruption tsar, Wang Qishan, who toured the country gathering evidence for trials as part of a high-profile national campaign.

More recently, Mr Xi has adopted the same tactic on an even broader scale to tackle the second threat, pollution. Joint inspection teams from the Ministry of Environmental Protection, the party’s anti-graft watchdog and its personnel arm have already punished 18,000 polluting companies with fines of $132m, and disciplined 12,000 officials.

The ICIS maps below confirm the broad nature of the inspections. They will have covered all 31 of China’s provinces by year-end, as well as the so-called “2+26” big cities in the heavily polluted Beijing-Tianjin-Hebei area.

The inspections’ importance was also underlined during October’s five-yearly People’s Congress, which added the words “high quality, more effective, more equitable, more sustainable” to the Party’s Constitution to describe the new direction for the economy, replacing Deng’s focus from 1977 on achieving growth at any cost.

It is hard to underestimate the likely short and longer-term impact of Mr Xi’s new policy. The Ministry has warned that the inspections are only “the first gunshot in the battle for the blue sky”, and will be followed by more severe crackdowns.

In essence, Mr Xi’s anti-pollution drive represents the end for China’s role as the manufacturing capital of the world.

The road-map for this paradigm shift was set out in March 2013 in the landmark China 2030 joint report from the World Bank and China’s National Development and Reform Commission. This argued that China needed to transition “from policies that served it so well in the past to ones that address the very different challenges of a very different future”.

The report focused on the need for “improvement of the quality of growth”, based on development of “broader welfare and sustainability goals”.

However, little was achieved on the environmental front in Xi’s first term, as Premier Li Keqiang continued the Populist “growth at any cost” policies of his predecessors. According to the International Energy Agency’s recent report, Energy and Air Pollution, “Average life expectancy in China is reduced by almost 25 months because of poor air quality”.

But as discussed here in June, Mr Xi has now taken charge of economic policy. He is well aware that as incomes have increased, so China is following the west in becoming far more focused on ‘quality of life issues’. Land and water pollution will inevitably take longer to solve. So his immediate target is air pollution, principally the dangerously high levels of particulate matter, PM2.5, caused by China’s rapid industrialisation since joining the World Trade Organization in 2001.

As the state-owned China Daily has reported, the Beijing-Tianjin-Hebei region is the main focus of the new policy. Its high concentration of industrial and vehicle emissions is made worse in the winter by limited air circulation and the burning of coal, as heating requirements ramp up. The region has been told to reduce PM2.5 levels by at least 15% between October 2017 and March 2018. According to Reuters, companies in core sectors including steel, metal smelting, cement and coke have already been told to stagger production and reduce the use of trucks.


The chemicals industry, as always, is providing early insight into the potentially big disruption ahead for historical business and trade patterns:

  • Benzene is a classic early indicator of changing economic trends, as we highlighted for FT Data back in 2012. The chart above confirms its importance once again, showing how the reduction in its coal-based production has already led to a doubling of China’s imports in the January to October period versus previous years, with Northeast and Southeast Asian exporters (NEA/SEA) the main beneficiaries
  • But there is no “one size fits all” guide to the policy’s impact, as the right-hand panel for polypropylene (PP) confirms. China is now close to achieving self-sufficiency, as its own PP production has risen by a quarter over the same period, reducing imports by 9%. The crucial difference is that PP output is largely focused on modern refining/petrochemical complexes with relatively low levels of pollution

Investors and companies must therefore be prepared for further surprises over the critical winter months as China’s economy responds to the anti-pollution drive. The spring will probably bring more uncertainty, as Mr Xi accelerates China’s transition towards his concept of a more service-led “new normal” economy based on the mobile internet, and away from its historical dependence on heavy industry.This paradigm shift has two potential implications for the global economy.

One is that China will no longer need to maintain its vast stimulus programme, which has served as the engine of global recovery since 2008. Instead, we can expect to see sustainability rising up the global agenda, as Xi ramps up China’s transition away from the “policies that served it so well in the past”.

A second is that, as the chart below shows, China’s producer price index has been a good leading indicator for western inflation since 2008. Its recovery this year under the influence of the shutdowns suggests an “inflation surprise” may also await us in 2018.

Paul Hodges and Daniël de Blocq van Scheltinga publish The pH Report.

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Populism rises as global dynamics drive market shifts

Populists Nov16

We are living in a New Normal world.  Populists such as Nigel Farage, Donald Trump, Marine le Pen and Beppe Grillo are gaining support as economic growth slows and social/political unrest becomes common.  My presentation at our annual conference last week in Vienna highlighted some of the key issues, as Jessie Waldheim of ICIS news reports.

VIENNA (ICIS)–Markets face a period of increased volatility as political and demographic changes result in a paradigm shift from globalisation to sustainability as the driver for chemical markets, the chairman of consultancy International eChem said on Tuesday.

“The world is at a tipping point,” said International eChem chairman Paul Hodges. “Everything we’ve known, everything we’ve lived with for the last 50-70 years is now changing.”

In 1987, then US president Ronald Reagan stood in front of the Berlin Wall in Germany and demanded that it be torn down. In 2017, US president-elect Donald Trump is expected to build a wall.  In Europe, the Brexit vote for the UK to leave the EU and the upcoming referendum in Italy could cause further turmoil for the EU.

These political changes are being driven by demographic changes which are also going to effect petrochemical and other markets. Essentially, as life expectancies have increased and birth rates have lowered, a larger percentage of populations are older.

US consumer Nov16For example, as the second chart shows, the number of US households in the 25-54 age bracket has been steady while the number in the 55-and-up age bracket has risen by nearly 50%. The older households tend to spend less money, having already made most major purchases.

This is in contrast to recent decades, when major population growth in the younger age brackets drove global demand.  ”We don’t have lots of young people, so you don’t need as much stuff,” Hodges said, speaking at the 15th annual World Aromatics & Derivatives Conference in Vienna, Austria.

According to figures from the American Chemistry Council, we’re seeing a drop-off in capacity utilisation, which is the “best single predictor we have” of global GDP, Hodges said.  With the capacity utilisation numbers in September 2016 nearly as low as in 2009, we’re likely to see a global recession next year, he added.

Our economy has not yet adapted to the new demographics. This adaptation will mean uncertainty and political risk.  ”We’re seeing the rise of protectionism. Sustainability is replacing globalisation,” Hodges said.

Trump has said he has plans to declare China a currency manipulator and to withdraw from or renegotiate trade deals. The Brexit vote is part of this same paradigm shift. “We need to be planning for this,” Hodges said.

Specifically for aromatics markets, benzene price spreads have already come down. Benzene is a byproduct and refineries don’t increase production when benzene is tight and won’t slow production if less benzene is needed. ”We’ve seen benzene below naphtha before. We could see benzene trading below naphtha again,” Hodges said. “We have to accept the volatility is there.”

Companies will need to consider how trade flows will change with China no longer the major importer and manufacturing capital of the world. And companies will need to consider inter-polymer competition from lower polypropylene prices.  Businesses models will have to change and restructuring will be inevitable.

Key chemical hubs will have to be made more robust, and being near customers may become more important, Hodges said.  With the change comes opportunities. For instance, businesses could focus on designing solutions with new materials or by repurposing materials already in the market.

“Aging populations are an opportunity. Why are we not developing new services and products for them?” Hodges said.

Outlook for the global aromatics industry – insights from senior executives at Amsterdam Conference

Ben, PTA Aug15Aromatics markets often lead petrochemical markets, and provide good insight into economic trends.  This has certainly been true of PTA (terephthalic acid) and benzene over the past year.

PTA demand into polyester and PET is dominated by Asia: benzene’s wide variety of uses means it is a good proxy for industrial production in Europe.  Recent developments have been very significant, as the chart highlights.

It shows the spread (difference) between benzene and naphtha in Europe (green line); and between PTA and naphtha in Asia (red).  Naphtha is the oil-based feedstock for both products, and so the spread is the key measure for profitability:

  • PTA spreads collapsed in H2 2008 due to the financial crisis, but then rallied to $650/t with China’s stimulus
  • They then began a steady decline in H2 2013 as China introduced its New Normal policies
  • They fell to zero in H1 2014, but have since managed to stabilise around $200/t
  • Benzene spreads showed the same decline in H2 2008, but their rally was more volatile up to 2012
  • Spreads actually went negative for a period in early 2009, and returned to this level in late 2011, having been as high as $500/t
  • They then moved into the $300/t – $600/t range until a year ago, before declining and then rallying recently

Both products are thus highlighting underlying weakness in the global economy, with PTA also acting as an important leading indicator for the Asian economy.

How should companies and investors react to these developments?  Should they sit tight, and wait for the storm to pass?  Or should they develop new strategies to deal with a more difficult environment?

These are some of the key questions that will be debated at our 14th annual World Aromatics & Derivatives Conference in Amsterdam on 17 – 18 November.  Co-organised as always with ICIS, we will benefit from the insight of key executives from the global industry including:

  • Bayer MaterialScience’s Global Procurement head, Dirk Jan de With
  • Dow Chemicals’ Corporate Chief Economist, Rafael Cayuela
  • Investec’s Chemicals Analyst, Paul Satchell
  • PwC’s Director, Deals, Don van Neuren
  • Reliance Industries President, Strategy & Business Development, Harish Davey
  • Shell Chemicals’ General Manager Kate Johnson, and Global Strategy Manager for Styrene and Aromatics, Herbert Le Lorrain

A €150 ($175) Early Bird Discount is available until Friday night – please click here to register.

US markets see Happy Days again

US house, jobs Jan14New Year optimism over the economic outlook is breaking out all over the USA.   Weak employment numbers for December were ignored, as were weak data on housing markets.  Whilst prices for benzene, the blog’s favourite sentiment indicator, not only jumped to a record high but dragged European levels to an all-time record as well.

Happy Days are clearly here again.

The problem is that the data doesn’t support the optimism.  And not just the short-term data, but the more important long-term data, as the charts above show:

  • The percentage of people employed, the participation rate, is back at 1978 levels of 62.8% (left chart)
  • Annual 2013 housing starts at 923k were still below the lowest figure ever seen before 2007 (right chart)

The detail of the numbers is also very worrying:

  • The number of Americans employed in December at 136m was still 3m below the November 2007 peak.  There has never before been a period when employment has failed to recover to previous levels.
  • Even more importantly, the improvement in housing markets since 2009 seems now to have come to a halt.  Higher interest rates have taken levels of refinancing back to those last seen in 2000, whilst Americans with average credit scores still find mortgages difficult to obtain

Markets are at their most dangerous when they take leave of the real world and run solely on sentiment.  The US market moved into melt-up mode in May, and this was confirmed in November with the record $142m price for a Bacon painting.  It thus seems only appropriate that we now learn this was bought by the former wife of casino billionaire Stephen Wynn.

Those who run casinos are clearly at home with today’s market movements.  And with net worth of $1.9bn, the former Ms Wynn probably won’t worry too much about what happens to her painting’s value in the future.  But for the rest of us, in the real world, it seems a bit late to be jumping on last year’s trend

Or, as the Financial Times headlined a major analysis. “Valuations: Is This Nuts?”

The blog thus believes the ‘Two Steps and a Stumble’ scenario is worth watching very carefully.  Given today’s optimism, retiring Fed Chairman Ben Bernanke may well decide to taper his stimulus by another $10bn at his final meeting later this month.  If he doesn’t, markets would presumably become worried about what worried him.

So that would be the Two Steps.  Then next month, the pressure would be on new Chair Janet Yellen to taper by another $10bn.  In the past, when interest rates were rising, markets used to shrug off the impact of the first two increases.  But by the third, reality began to dawn that things were not looking so good after all – hence the ‘Two Steps and a Stumble’ motto.

As American humourist Mark Twain once wisely noted, “history doesn’t repeat itself but it does rhyme”.

Benchmark price movements since January 2013 with ICIS pricing comments are below:
PTA China, down 19%. “Weaker performance in the downstream polyester sectors continued to add downward pressure”
Brent crude oil, down 5%
Naphtha Europe, down 3%. Prices fell below $900/t, pulled down by a steep fall in Asian prices and weak domestic petrochemical demand combined with poor gasoline uptake ”
Benzene, Europe, up 3%. Soaring US spot numbers and healthy January demand has pushed European numbers comfortably above the $1,550/tonne mark to record highs”
HDPE US exportup 14%. Demand remains weak in Asia, and with the Mexican peso weakening against the US dollar, local resin is becoming more competitively priced”
US$: yen, up 19%
S&P 500 stock market index, up 25%

Benzene markets suggest BabyBoomer growth will not reappear

C6 global Nov13Benzene has always been one of the blog’s favourite leading indicators for the global economy.  The reason is simple, in that it has been around a long time, and is now used in a very wide range of industries.  So it provides us with a broad-based picture of the global economy.

The chart above highlights another important factor, that we have a continuous history of its production going back to 1960, when oil-based production first became a major source of supply*.  Before this, coal had been the feedstock.  It shows:

  • 1950-75 saw average growth of 9%/year, as markets developed rapidly under the influence of low prices and increasing availability
  • Annual volume thus soared from 4.2MT/year to 15.6MT/year, with major growth in N America, W Europe, Japan and E Europe
  • Then the first and second oil crises, when oil prices hit $50/bbl ($2012) and $100/bbl ($2012), brought a temporary end to growth between 1975-80
  • Demand increased again as the arrival of the BabyBoomers in their peak demand years led to the growth SuperCycle between 1983-2007
  • Annual volume rose 4%/year from 15MT/year to 41MT/year over the period
  • Asia became a major source of output as China briefly became the manufacturing capital of the world, supplying goods to the West
  • But growth has since slowed sharply as central bank stimulus has taken oil prices back to $100/bbl, whilst the Boomers increasingly join the New Old 55+

The oil price is clearly a major headwind, which will probably only prove temporary.  History shows that the economy simply cannot support oil prices above $30/bbl.

But the loss of demand as the Boomers move into their New Old phase will likely prove a long-lasting constraint on growth.  The world has never before seen large numbers of people in this generation – life expectancy in 1950 was still only 47 years, compared to 70 years today.  And in the wealthy Western countries, the New Old are already 35% or more of the adult population.  They not only don’t need to buy many new things, but their incomes are declining as they enter retirement.

The benzene market thus provides a valuable snapshot of economic development over the past 50 years.  It also suggests it is unlikely that stimulus programmes can overcome the impact of the major generational changes now underway in the global economy.