There seems little doubt that the global economy is now entering a new downturn. Pessimists may worry that it has already begun in Q3. Optimists might hope it will be delayed till Q4, or even Q1.
But almost all major indicators are pointing in the same direction.
• On the macro-level, the latest American Chemistry Council report notes that OECD leading indicators for “Canada, France, Germany, Italy, UK, Brazil, China and India (continue) to point to a slowdown“, whilst those for the USA and Russia “are now also pointing more clearly to a slowdown“.
• In the chemicals sector, ICIS news reports that “the problem for the market now, however, is that the mood is no longer upbeat and optimistic, but prices for many chemicals are still at or hovering below record highs. In such an environment nobody wants a warehouse full of material and no cash in the bank.”
China, of course, is a major concern. It led the global economy out of the 2008/9 downturn, and justified today’s high crude oil prices. Yet as the above chart from Petromatrix shows:
• Oil imports this year (black) are only 270 kbpd higher than 2010 (blue)
• Over the past 3 months, they are actually down 164 kbpd versus 2010
Equally, the Turkish chemical market is showing signs of distress. Turkey is an excellent leading indicator, due to its large domestic demand and low level of production:
• In tight markets, this means prices rise very quickly, as exporters see better returns in their own markets
• In weak markets, prices fall very quickly, as producers fight for volume
A long-time Turkish reader told the blog this week that in polyethylene, European producers are active at “very competitive levels…followed by ME producers who do not have enough volume in Asia“. Similarly, he says “copolymer PP has lost its usual €50/t premium over homo“, whilst “the PVC market is under huge pressure“, with US exporters very active.
Price movements since the IeC Downturn Alert launched in April, and ICIS pricing comments this week are below:
Benzene NWE, down 19%. “Continued to struggle with global economic bearishness.”
HDPE USA export, down 14%. “Prices too high to compete with lower Asian and Middle Eastern prices”.
Naphtha Europe, down 12%. ” Demand is weak from petchems and gasoline”.
S&P 500 Index, down 11%.
Brent crude oil, down 11%.
PTA China, up 1%. “Prices rose after China’s Yisheng Petrochemical shut 3.3 million tonnes due to a mechanical issue. They then dropped because of the bleak global economic outlook.”
The IeC Downturn Alert has hopefully done the job for which it was intended.
It was launched at the end of April, when the blog became convinced that the global economy was highly likely to enter a new downturn. It also realised from its experience in 2007-8, when it later became known as ‘The Crystal Blog’, that this view was probably not widely shared.
It therefore wanted to monitor the situation on a regular basis. It decided to select benchmark chemical products from the key regions, as a way of linking its wider concerns with the evidence on the ground.
The role of ICIS pricing, and its network of editors, has therefore been crucial. This has enabled the blog to follow individual product markets, and provide an objective analysis of their weekly fluctuations.
The chart above is, of course, a key reason why the blog was convinced a new downturn was near. As it noted in June, history shows that recession (shaded area) has occurred every time oil prices (red line) have remained above $50/bbl in real (eg inflation adjusted) terms.
Sadly, it appears that this time is not going to be different.
The evidence for a renewed downturn is now all around us:
• The OECD says “economic recovery appears to have come close to a halt in the major industrialised economies” with likely H2 growth at • China’s economy is slowing fast. Ethylene demand growth tracks GDP, and was just 1.9% in H1, compared to ~10% in 2009-10.
• The American Chemistry Council (ACC) reported Friday that “we see an economy still near stalling speed“.
The blog hopes that the IeC Downturn Alert, coupled with its IeC Boom, Gloom Index, has helped to catalyse debate about the potential for a renewed downturn. We cannot avoid the severe problems that this will cause. But hopefully the Alert has provided companies with clear advance warning that problems lay ahead.
Equally concerning is the fact that Western central bankers and policymakers have so completely misread the underlying economic situation over the past 3 years. The blog will look at the likely reason for this terrible mistake over the next two days.
Price movements since the Alert launched, and ICIS pricing comments this week are below:
Benzene NWE, down 16%. “Values softened over the course of the week due to wider economic bearishness.”
S&P 500 Index, down 15%.
HDPE USA export, down 14%. “Prices are still too high to compete with Asian prices”.
Naphtha Europe, down 13%. “Demand from petchems remains weak”.
Brent crude oil, down 9%.
PTA China, stable. “Underpinned by firmer feedstock PX prices and pre-holiday restocking activity by end-users”.
German Chancellor Merkel’s recent comment that “I don’t see anything which signals a recession in Germany” is just one sign of the current complacency about the global economy within the Western political elite.
Long-standing readers will remember Profs Eichengreen and O’Rourke 2009-10 work comparing today’s Great Recession with the Depression of the 1930s. Worryingly, the parallels seem to be increasing again, as the chart above shows from new research by Prof Nouriel Roubini:
“World trade (dark grey line) has stalled since the onset of the year and is falling in line with lower growth in the developed world. While global industrial production increased slightly in June, it is still down on the quarter. July data, coupled with leading indicators such as PMIs (Purchase Manager Indices), points to Q3 weakness. Chinese commodity demand began to weaken in Q2 and continued to fall in July.”
JACKSON HOLE MEETING OF ECONOMIC POLICYMAKERS
There was less complacency amongst economic policymakers at the US Federal Reserve’s annual Jackson Hole meeting last week. There was no mention of a new QE3 programme to try and boost stock and commodity prices. Instead, as the OECD’s head noted, policymakers are now realising that “this consolidation effort is going to take a generation.”
Fed Chairman Ben Bernanke warned that “The quality of economic policy-making in the United States will heavily influence the nation’s long-term prospects”. Whilst Christine Lagarde, new IMF head, said economic risks “have been aggravated further by a deterioration in confidence and a growing sense that policymakers do not have the conviction, or simply are not willing, to take the decisions that are needed.”
Policymakers, if not yet the politicans, may therefore be finallly realising that we face a solvency crisis, not one of liquidity:
• Solvency is whether one is able to pay one’s total debts
• Liquidity is simply whether one can pay today’s bills
The risk is, of course, that 2 years of implementing the wrong policies have left them dangerously short of time, and money. With actual US GDP growth just 0.33% ($40bn) in H1, there is surely a strong risk that the US is now entering a new recession. Europe cannot be in much better shape, despite the politicians’ denials, given Q2 data.
IeC DOWNTURN ALERT UPDATE
Hopefully the blog’s April launch of its IeC Downturn Alert launch has enabled chemical companies to prepare robust contingency plans for what may lie ahead. Price movements since April, and ICIS pricing comments this week are below:
S&P 500 Index (pink dot), down 14%.
Naphtha Europe (brown dash), down 13%. “Most sources still believe an oversupply threatens in September “.
Brent crude oil, down 12%.
HDPE USA export (purple), down 13%. “Latin America has now turned its attention to Asian offers”.
Benzene NWE (green), down 11%. “Shutdowns downstream are expected to soften demand next month.”
PTA China (red), down 5%. “Expected to be underpinned by rising PX prices caused by limited supply”.