Contingency planning is essential in 2020 as “synchronised slowdown” continues

The IMF has now confirmed that the world economy has moved into the synchronised slowdown that I forecast here a year ago. Its analysis also confirms the importance of the issues highlighted then, including “rising trade barriers and increasing geopolitical tensions”, a sharp decline in manufacturing, contraction in the auto industry and structural forces such as the impact of ageing populations.

Capacity Utilisation (CU%) data from the American Chemistry Council has therefore once again proved to be the best leading indicator for the global economy. It has been far more reliable than stock markets, where valuations continue to be massively distorted by central bank stimulus. And unfortunately, the latest data shows no sign of any improvement as the chart confirms, with November’s CU% now back at November 2012’s level at 81.7%.

Of course, it remains very easy to ignore the warning signs. ‘Business as usual’ is always the most popular forecast, as we saw a year ago when the consensus assumed a sustainable economic recovery was finally underway. And it would be no great surprise if, in a year’s time, consensus opinion starts to claim that “nobody could have seen recession coming”.

This is why it seems likely that businesses will now start to divide into Winners and Losers. As the IMF note in their analysis, the current situation is “precarious”, with a number of potential downsides starting to crystallise. On a macro view, these include the growing supply chain risks created by Brexit, where the UK expects to leave the EU at the end of this month.

Anyone with experience of trade negotiations knows that these normally take years rather than months to complete. No Deal is therefore the most likely outcome in a year’s time at the end of the transition period.

This will have a major impact on industries with complex and highly integrated downstream value chains like autos, chemicals and aerospace. Contingency planning is therefore on the critical path for any company that currently relies on product flowing seamlessly and tariff-free across the UK-EU27 border.

Of course, potential Losers will continue to nurse the hope that the UK government might reverse its refusal to accept the 2-year extension offered by the EU. But anyone who followed the recent UK election campaign knows this is an unlikely outcome.

The chemical industry also has its own specific challenges to face, given the growing impact of US shale gas-based expansions in the polyethylene area. This is no great surprise, as I have been warning about the likely consequences of these supply-led expansions since they were first announced in 2014 . But unfortunately, the combination of stock market euphoria over the shale gas revolution and the Federal Reserve’s easy money policy meant that the core assumptions were never properly challenged.

Euphoria remained the rule even after the oil price collapse at the end of 2014 disproved the assumption that prices would always be above $100/bbl. And it continued despite President Trump’s election. As a self-confessed “tariff man”, his policies were always likely to upset the idea that plants could be sited half-way across the world from their markets.

Warning signs were also obvious around the assumption that China’s growth would remain at double-digit rates, creating an ongoing need for major imports. And more recently, concerns over climate change and plastic waste issues have created further question marks over the outlook for single-use plastic demand.

Incumbents are often slow to understand the likely impact of potentially disruptive developments on their businesses. Business discussions around the boardroom and water cooler can often take place in a parallel universe to those that happen outside the office with friends and family.

The upstream oil industry is currently providing a classic example of this phenomenon as it promotes the idea that despite mounting concerns over the role of fossil fuels in climate change, chemicals can somehow replace lost oil demand into transport. Yet as former Saudi Oil Minister Yamani warned back in 2000, “the Stone Age didn’t end for lack of stones, and the Oil Age will end long before the world runs out of oil”.

Unfortunately, therefore, it seems likely that 2020 will see today’s synchronised slowdown continuing to challenge consensus optimism. Contingency planning around recession risks should therefore be top of the agenda, particularly for companies with high debt levels.

But at the same time, better placed companies have a once in a generation opportunity to take advantage of the paradigm shifts now underway, as adoption rates accelerate up the typical S-curve. These Winners are likely to discover that their best days still lie ahead of them, given the range and scale of the new opportunities that are emerging.

Please click here to download my full 2019 Outlook (no registration necessary).

Markets remain “volatile and challenging” says BASF chairman

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Nothing has really changed over the past year.  That seems to be the key conclusion from the blog’s quarterly summary of company results for Q1.

A year ago, BASF noted that “achieving our earnings target is significantly more challenging today than we had expected”.  This month, chairman Kurt Bock “warned the markets will remain volatile and challenging, with persistent negative currency effects“.

In the US, despite the benefits of shale gas, operating rates (OR%) remained at an anaemic 75.8% in April according to American Chemistry Council data, whilst OR% for plastic resins fell to 86.4% from 90.2% in April 2013.

Each quarter we are assured by policymakers that recovery is now certain.  But every quarter we are disappointed, with most companies facing headwinds.  Thus the blog continues to argue that companies need to assume that its Demographic Scenario is the most likely outcome.

The benefit of this Scenario is that it explains the economic developments of the past 50 years in a simple and common-sense fashion.  It does not require us to believe that central bankers have somehow become ‘Masters of the Universe’, able to change people’s entire behaviour via the simple manipulation of monetary policy.

Its APPLY workshop programme is an excellent way for company boards and senior executives to understand the real challenges and opportunities for their business.  More details are in its Value Proposition.

The rationale for the workshop is very clear:

The choice is becoming very simple, now that China’s President Xi Jinping has signalled his country’s move into the New Normal.  Companies can either look forward to the future, or they can be left behind.  The blog will be delighted to help you look forward.

Air Products. “We remain focused on continuing to increase productivity and generate benefits from further price and cost actions”
AkzoNobel. “Revenues were down across the company’s three key divisions of decorative paints, performance coatings and specialty chemicals, despite an across-the-board increase in volumes”
Ashland. “More work to do in driving growth and removing costs”
BASF. “Markets will remain “volatile and challenging”, with persistent negative currency effects”
BP. “Petrochemicals environment continues to be challenging with excess supply affecting product margins”
Bayer. “Higher volumes for most regions and lower raw material costs”
Borealis. “Good performance at its polyolefins business and the start-up of its Borouge 3 cracker”
Celanese. “Higher VAM pricing, plus closure of two plants, more than offset higher raw material and energy costs”
Clariant. “An improving but still mixed economic environment”
Dow. “Predicted a slow global economic recovery characterised by continued volatility”
DSM. Lower prices and exchange rate effects offset a 3% increase in volumes”
DuPont. “Anticipated growth in global industrial market demand”
Eastman. “Global economy continues to be lacklustre”
Evonik. “Selling prices for some important products were well below Q1 2013 due to challenging market conditions”
ExxonMobil. “Weaker margins decreased earnings by $90m; volume and mix effects increased earnings by $40m”
Honeywell. “Cautiously optimistic on the macro environment”
Huntsman. “Improved performances across all business segments with the exception of some polyurethanes”
Indorama. “Rapidly falling feedstock prices led to the weaker absolute prices of commodity products”
Linde. “Exchange rate effects had a significant adverse impact on growth”
LyondellBasell. “Profits from the US olefins and polyolefins businesses were down sharply”
Methanex. “Industry demand remains steady, particularly for methanol into energy”
Nova. “Higher polymer sales prices and lower feedstock costs, offset by lower product sales volumes”
OMV. “Margins improved mainly due to increased propylene prices”
Olin. “Lackluster chlorine and caustic soda sales were a drag on overall financial performance”
Oxychem. “Lower caustic soda prices driven by new chlor-alkali capacity in the industry”
PPG. “Anticipate solid global growth to continue, but it will not be uniform across geographies or end-use markets”
PetroChina. “Prolonged weak conditions”
PetroLogistics. “Improvement in consistency in demand of propylene derivatives because of better economic indicators”
Phillips 66. “Higher olefins and polymers and benzene margins”
PKN Orlen. “Deterioration of model olefins margin as well as PTA and butadiene margins
Praxair. “Modest growth in line with the current macro-economic environment”
Reliance. “Earnings grew sharply with margin expansion across polymers and downstream polyester products”
SABIC. “Lower product prices offset rise in production and sales volumes”
Saudi Kayan. “ Higher production and sales volume despite a decrease in average sales prices”
Sherwin-Williams. “Impact of harsh weather on domestic sales in the quarter was modest”
S-Oil. “PX market conditions not likely to change much from the soft H1 2014″
Shell. “High volatility remains in the macro-environment”
Sinopec. “High and volatile feedstock prices, declining chemical product prices and other challenges”
Solvay. “Improved demand and benefits from our excellence initiatives”
TOTAL. “Implementation of performance improvement plans by the segment”
Trelleborg. “Not received any indication of a general improvement in the demand situation”
Unipetrol. “Robust olefin and polyolefin margins”
Versalis. “Weaker product margins and sales volumes”
Wacker. “Restructured its contractual relationships with a solar-sector customer”
Westlake. “Benefited mainly from higher olefins volumes and improved integrated product margins”
Yansab.  “Decrease in net profit is attributable to lower sales prices of certain products and increase of cost of sales”

Policymakers’ faith in US Confidence Index badly misplaced

Consumer conf Nov13There was an interesting discussion at our annual conference last week about the relevance of correlation statistics.  The general view was that anything less than 90% wasn’t really worth bothering about, as the number of errors would be too great.

Thus the blog was very amused to see Neil Irwin in the Washington Post writing about the major US confidence indicator (hat-tip FT Alphaville).  He has checked back to see the correlation between the University of Michigan Consumer Sentiment indicator and actual consumer spending.

This is an indicator that has been produced since 1978.  And it is routinely used by US government and Federal Reserve officials to forecast consumer spending, as well as being cited each month in most mainstream media.  Consumer spending is, after all, the most critical economic variable as it is 71% of the US economy.

There is just one problem, as Irwin notes in discussing the chart above:

“The two have only a 4.5% correlation from 1978 through the present, meaning that knowing what happened to one tells you pretty much nothing about what happened to the other”.

So there we have it.  Policymakers happily spend their time studying the Confidence Indicator, and using it to draw conclusions about the outlook for the economy.  They have never thought to test its predictive power.  Yet they choose to ignore demographics, which has to be the key driver of demand.