Financial crises and the five stages of loss

The Financial Times has kindly printed my letter as their lead letter, arguing that the rise of the populists emphasises the risk of continuing to deny the impact of today’s ageing populations on the economy.

Sir,  Martin Wolf’s sobering analysis of policymakers’ post-crisis decision to “go back to the past”, ( “Why so little has changed since the financial crash”, September 5), brings to mind the celebrated “Paradigm of Loss” model developed by Elizabeth Kübler-Ross. Originally designed to describe how people come to terms with loss and death, it has since been more widely applied, including to economic and financial market developments.

His description of the post-1918 period appears to be a classic example of the paradigm’s denial stage, with policymakers ignoring the economic impact of the earlier carnage. Young people are the prime source of future demand as they enter the wealth creator 25-54 age group, when people typically settle down, have children and develop their careers. The war cruelly destroyed the lives of millions of young men before they could realise this potential.

As the paradigm would suggest, this denial then led to anger, and the rise of fascism and communism. This proved so intense that the next stage, bargaining, was delayed until 1945, when the adoption of Keynes’s new thinking finally allowed the cycle to complete.

Today, we are again seeing a demand deficit created by demographic change. Thankfully, it is not due to war, but to the post-1945 increase in life expectancy and collapse in fertility rates. Inevitably, therefore, consumer spending — the motor of developed economies — is now slowing as we have an ageing population for the first time in history. Older people already own most of what they need, and their incomes decline as they retire.

Just as in 1918, this means we need new policies to create “a better future”, as Mr Wolf notes. In their absence, the rise of the populists suggests that we instead risk moving into a new anger phase. It is not yet too late for new thinking to emerge, but time is starting to run out.

Paul Hodges

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UK faces ‘make or break summer’ as ‘No Deal’ Brexit risk rises

Last week, the UK’s Foreign Secretary, its chief Brexit negotiator and several junior ministers, resigned.  President Trump gave an interview attacking the UK prime minister, Theresa May, and suggesting her policies would “kill” any future trade deal with the US.  And the EU 27’s main negotiator on the critical Brexit issue, Michel Barnier, warned:

“On both sides of the Channel, businesses… should analyse their exposure to the other side and be ready, when necessary, to adapt their logistical channels, supply chains and existing contracts.  They should also prepare for the worst case scenario of a “no deal”, which would result in the return of tariffs under WTO rules.” (My emphasis)

It was quite a week.  None of us know what may happen next, as I warned when Ready for Brexit launched last month.

WHAT ARE WTO RULES?
It is now less than 9 months until the UK officially leaves the EU on 29 March.  Yet according to a ReadyforBrexit poll:

  • Only around a quarter of businesses have begun to plan for what happens next
  • Nearly three-quarters have so far done nothing

They could have a considerable shock ahead of them, as the Brexplainer video above explains.

Currently, the UK trades with the world on the basis of around 750 agreements negotiated by the EU.  Trade between the current 28 EU members is covered by the Single Market and Customs Union.  But as Barnier warns, if there is no deal agreed by 29 March, then WTO rules will apply:

  • WTO rules would mean that a tax, called “Tariffs”, would be reintroduced for trade in goods between the UK and the EU27.  Services, including financial services, could also be impacted by restrictions on market access
  • Border controls and customs checks could add time to shipments and impact supply chains.  This could be particularly important for highly regulated sectors such as chemicals
  • Documentation and paperwork will increase, as businesses will need to be able to prove the nature and origin of their goods, especially if they use parts or components from several different countries

HAS YOUR BUSINESS PLANNED AHEAD FOR A ‘NO DEAL’ BREXIT?
Most major businesses have been planning for a ‘no deal’ scenario for some time:

  • They are increasing warehouse space, in case deliveries are delayed
  • They are checking their cash flow, as VAT could be payable up-front under WTO rules
  • They are working out the possible ‘no deal’ impact in key areas such Customs & Tariffs, Finance, Legal, Services & Employment and their Supply Chain

Most smaller businesses have assumed they don’t need to do anything.  Yet 29 March is now only 257 days away.

SURELY ITS CERTAIN THAT WITHDRAWAL AND TRANSITION AGREEMENTS WILL BE SIGNED? 
After the Brexit vote in June 2016, the chief Brexit negotiator, David Davis, was confident that all the major trade deals would be finalised by July 2018:

“Be under no doubt, we can do deals with our trading partners, and we can do them quickly… So within two years, before the negotiation with the EU is likely to be complete, and therefore before anything material has changed, we can negotiate a free trade area massively larger than the EU.

But by September last year, he had changed his mind and was instead warning as the Telegraph noted:

Nobody ever pretended this would be simple or easy.

And now, of course, Davis has resigned along with his fellow Leave campaigner, Boris Johnson.

NOBODY KNOWS WHAT WILL HAPPEN NEXT
The truth is that nobody knows what will happen next.  After last week, any UK business that trades with the EU, or any EU business that trades with the UK, would be wise to start planning ahead for a ‘no deal’ WTO rules scenario:

  • Have you asked your suppliers about their plans for a ‘no deal’ scenario?
  • Have you asked your customers about their plans for one?
  • Have you checked if your ‘just in time’ deliveries will still arrive?
  • Have you checked if your insurance policies will still be valid?

As the UK’s main business organisation, the CBI, warned on Friday “It will be a make or break summer:

‘With three months left to go, it is now a race against time. The EU must now engage constructively and flexibly, as must politicians from all UK parties. This is a matter of national interest. There’s not a day to lose.’

We can all hope that negotiations are successful.  But hope is not a strategy.  And after the events of the last week, prudent managers now need to start start planning for ‘no deal’.  Please click here to watch the Brexplainer video.

 

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US-China tariffs could lead to global Polyethylene price war

I was interviewed on Friday about the likely impact of President Trump’s trade wars on the global chemical industry by Will Beacham, deputy editor of ICIS Chemical Business. His interview is below.

The introduction on Friday of trade tariffs by China and the US is the first step in a trade war that could turn into a global polyethylene (PE) price war as the wave of new US production is sent to new markets, likely Europe.

Paul Hodges, chairman at London-based International eChem, said that around 6m tonnes/year of new US PE capacity has to find a home and, with China largely out of reach, the obvious destination would be Europe, where the surplus production will put downward pressure on prices there and around the world.

“The main hit from a trade war is going to be the US PE expansions – clearly it is being targeted so the opportunity to export to China is sharply reduced,” said Hodges.  “But this won’t just be a US problem because they will still want to move their product – it has got to come to Europe as there is no surplus demand in Asia, the Middle East or Latin America.”

He added that this first wave of tariffs were a wake-up call to those who thought globalisation was going to continue as it did in the past.  “We have reached a tipping point where we have to expect that trade wars are more rather than less likely”, he said.

“If you assume the US production will come onstream, then where will those 6m tonnes of product go? It can’t go to China, it can’t go to Latin America as that is too small a market, the Middle East is in surplus, Africa is too small – so Europe is the only place,” said Hodges.

US PE producers that are integrated up to the wellhead need to extract ethane in order to monetise their gas production:

  • These producers will continue to export happily at whatever price because essentially the ethane is a distressed product and has to be sold
  • However, non-integrated players’ margins could come under pressure.

In Europe, there is a parallel to the US, said Hodges, as regional production is generally tied into refineries.

Naphtha is a relatively small part of the product flow from a refinery, so prices can go down quite a long way before you start to think about cutting back on refinery operating rates.

“The risk for the second half of this year and 2019 is that you have two heavyweights in the boxing ring – one integrated back to the gas wellhead in the US and the other refinery-integrated in Europe – and people get squeezed in between,” he added.

EUROPE VALUE CHAINS
Hodges pointed out that if cracker operating rates decline in Europe it will hit all the other product streams such as propylene, butadiene (BD) and pygas. There are tremendous knock-on risks across all the value chains, not just ethylene.

“This won’t happen this year, but if it continues and gets worse over the next 12-18 months, do you start to look at cracker shutdowns in Europe? What will the implications be for people relying on those crackers for feedstocks?” said Hodges.  “It’s a hornet’s nest of unintended consequences: people don’t send a ship load of PE to Europe expecting it to shut down a PP plant.”

Hodges urged the industry to make contingency plans now to manage these future risks.  European producers will have to think about how they protect feedstock supplies for value chains on a Europe-wide and country basis so that pipelines are not shut down.

“You’d have to focus on a number of core hubs and reinvest in those to give the infrastructure you need for the future. You need to do it now – while there is time to take action,” he said.  “You might end up spending money you don’t need to spend, but that’s much better than waking up and realising you don’t have a feedstock supply,” he said.

According to ICIS data, the US is forecast to export a total of 1.37m tonnes of low density polyethylene (LDPE), high density polyethylene (HDPE) and low linear density polyethylene (LLDPE) to China (see LLDPE map above).  Although HDPE is not included in the current tariffs, it could be added later, according to Hodges.

He added that a price war in PE would impact other polymers because of inter-polymer competition.  It may only be 5-10% that is substituted, but to lose that amount of volume at the margin would be quite significant.

He described the trade war as a paradigm shift for the whole global industry as the era of globalisation switches to regional and nationalism.  “I’m worried that a lot of people in this industry have grown up with globalisation and they assume that is how it is,” he said.

Trade policy and geopolitics are like a chess game with lots of moving pieces and the approach is that you give up something in order to gain more, he added. This has been a very successful approach by the US since the Second World War, when it implemented the Marshall Plan or ‘European Recovery Plan’.  Almost the equivalent of $110bn in today’s money was invested to rebuild the continent.

“This boosted the European economy in order to make it a bigger import market for US exports. Trade expands opportunities and the overall economy. There may be some short-term successes going into a trade war but ultimately the US economy will lose,” Hodges conclude.

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The blog’s 11th birthday – and a look forward to 2021

The blog has now been running for 11 years since the first post was written from Thailand at the end of June 2007.  And quite a lot has happened since then:

Sadly, although central banks and commentators have since begun to reference the impact of demographics on the economy, they have not changed their basic belief that the right combination of tax and spending policies can always create growth.

As a result, the world has become a much more complex and confusing place.  None of us can be sure what will happen over the next 12 months, given today’s rising geo-political tensions.

In times of short-term uncertainly, it can be useful to take a longer-term view.  It is therefore perhaps helpful to look back at Chapter 4 of Boom, Gloom, which gave Our 10 predictions for how the world would look from 2021: 

  • “A major shake-out will have occurred in Western consumer markets.
  • Consumers will look for value-for-money and sustainable solutions.
  • Young and old will focus on ‘needs’ rather than ‘wants’.
  • Housing will no longer be seen as an investment.
  • Investors will focus on ‘return of capital’ rather than ‘return on capital’.
  • The term ‘middle-class’ when used in emerging economies will be recognised as having no relevance to Western income levels.
  • Trade patterns and markets will have become more regional.
  • Western countries will have increased the retirement age beyond 65 to reduce unsustainable pension liabilities.
  • Taxation will have been increased to tackle the public debt issue.
  • Social unrest will have become a more regular part of the landscape.

“The transition to the New Normal will be a difficult time. The world will be less comfortable and less assured for many millions of Westerners. The wider population will find itself following the model of the ageing boomers, consuming less and saving more. Rather than expecting their assets to grow magically in value every year, they may find themselves struggling to pay-down debt left over from the credit binge.

“Companies will need to refocus their creativity and resources on real needs. This will require a renewed focus on basic research. Industry and public service, rather than finance, will need to become the destination of choice for talented people, if the challenges posed by the megatrends are to be solved. Politicians with real vision will need to explain to voters that they can no longer expect all their wants to be met via endless ‘fixes’ of increased debt.

“We could instead decide to ignore all of this potential unpleasantness.

“But doing nothing is not a solution. It will mean we miss the opportunity to create a new wave of global growth from the megatrends. And we will instead end up with even more uncomfortable outcomes.”

Most of these forecasts are now well on the way to becoming reality, and the pace of change is accelerating all the time.  It may therefore be helpful to include them in your planning processes for the 2019 – 2021 period, to test how your business (and your personal life) might be impacted if they become real.

THANK YOU FOR YOUR SUPPORT OVER THE PAST 11 YEARS
It is a great privilege to write the blog, and to be able to meet many readers at speaking events and conferences around the world.   Thank you for all your support.

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Airbus warns of “dawning reality” there may be no Brexit deal

Suddenly, businesses across Europe are waking up to the realisation that the UK is currently on course to leave the European Union (EU) on 29 March next year, without a deal on trade and customs.  As Katherine Bennett, the UK boss of aerospace giant, Airbus, warned on Friday:

“This is not project fear, this is dawning reality.”

As the BBC reported on Friday: “Airbus has warned it could leave the UK if it exits the European Union single market and customs union without a transition deal…It also said the current planned transition period, due to end in December 2020, was too short for it to make changes to its supply chain.  As a result, it would “refrain from extending” its UK supplier base. It said it currently had more than 4,000 suppliers in the UK.”

BMW, which makes the iconic Mini and Rolls Royce, added:

“Clarity is needed by the end of the summer.”

Similarly Tom Crotty, group director at INEOS, the giant petrochemicals group, said several companies were putting investment decisions on hold because of Brexit uncertainty:

“The government is relatively paralysed … it is not good for the country.

THE RANGE OF TOPICS COVERED BY THE BREXIT NEGOTIATIONS IS VERY LARGE

This is why my IeC colleagues and I have now launched Ready for Brexit on the 2nd anniversary of the UK’s referendum to leave the EU.  We are particularly concerned that many small and medium-sized businesses (SMEs) – the backbone of the European economy – are failing to plan ahead for Brexit’s potential impact.

As our Brexit Directory above shows, Brexit creates a wide range of challenges and opportunities:

  • Customs & Tariffs:  Export/Import Registration, Labelling, Testing, VAT
  • Finance:  Payment Terms, Tax & VAT, Transfer Pricing
  • Legal:  Contracts, Free Trade Agreements, Intellectual Property
  • Services & Employment:  Banking, Insurance, Investment, Property
  • Supply Chain:  Documentation, Regulation, Transport

And yet, today, nobody knows on what terms the UK might be trading with the other EU 27 countries after 29 March.  Or indeed, all the other countries where UK trade is currently ruled by EU agreements.

The EU is a rules-based organisation, and the legal position is very clear:

  • The UK has notified the EU of its intention to leave by 29 March
  • Negotiations are underway over a possible Withdrawal Agreement, which would set new terms for UK trade with the EU 27 after this date
  • The proposed Transition Agreement, which would extend the deadline for leaving until 31 December 2020, will only apply if this Withdrawal Agreement is finalised in the next few months

Ready for Brexit will keep its subscribers updated on developments as they occur, as well as providing news and insight on key areas of business concern.

A NUMBER OF VERY DIFFERENT OPTIONS EXIST FOR FUTURE UK-EU TRADE ARRANGEMENTS

The UK has been in the EU for 45 years.  Unsurprisingly, as the slide above confirms, the negotiations are proving extremely complex.  Both sides have their own objectives and “red lines”, and compromise is proving difficult.

The negotiators not only have to deal with all the trade issues covered in the Ready for Brexit Directory, but also critical political questions such as the trading relationship between N Ireland and Ireland after Brexit.  That, in turn, is complicated by the fact that the UK government depends on Democratic Unionist Party (DUP) votes for its majority, and the DUP is opposed to any “special deal” on customs for the Irish border.

BUSINESSES NEED TO RECOGNISE THERE MAY BE “NO DEAL” AFTER 29 MARCH
I have taken part in trade negotiations, and negotiated major contracts around the world.  So I entirely understand why Brexit secretary David Davis has insisted:

“The best option is leaving with a good deal but you’ve got to be able to walk away from the table.”

Similarly, International Trade Secretary Liam Fox is right to warn that:

“The prime minister has always said no deal is better than a bad deal. It is essential as we enter the next phase of the negotiations that the EU understands that and believes it… I think our negotiating partners would not be wise if they thought our PM was bluffing.”

The issue is simply that many businesses, and particularly SMEs, have so far ignored all these warnings.

According to a poll on the Ready for Brexit website, only a quarter have so far begun to plan for Brexit.  Half are thinking about it, and almost a quarter don’t believe it is necessary.  This is why we have produced our easy-to-use Brexlist™ checklist, highlighting key areas for focus.

“NOTHING IS AGREED UNTIL EVERYTHING IS AGREED”
As the UK and EU negotiators have said many times over the past 2 years, “nothing is agreed until everything is agreed“.  These 7 words should be written above every business’s boardroom table:

  • They remind us that it may prove impossible to agree a Withdrawal Agreement between the UK and EU27
  • And without a Withdrawal Agreement, there will be no Transition Agreement

Instead, the UK would then simply leave the EU in 278 days time on World Trade Organisation terms.

If you don’t know what WTO terms would mean for your business, you might want to visit Ready for Brexit and begin to use its Brexlist checklist *.

 

 Ready for Brexit offers users a free one-month trial including access to the Brexlist. After this there is an annual fee of £195 to access the platform.  Discounts are available for companies who want to help SMEs in their supply chains to prepare for Brexit, and for trade associations who would like to offer the service to their members.

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2018 Global Outlook – a mid-year update: ACS webinar on Thursday


There will be no shortage of important topics to discuss on Thursday, at my regular Chemistry and the Economy: 2018 Mid-Year Update webinar for the American Chemical Society.

Please join me on Thursday @ 2pm – 3pm Eastern US Time for the webinar, which will be moderated as usual by Bill Carroll, former ACS Chair.

Free registration is at Chemistry and the Economy: 2018 Mid-Year Update.

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