2015 operating rates confirm chemical industry slowdown

ACC OR Feb16

Financial markets are becoming more and more chaotic, with prices regularly moving by 1% per cent or more in a day.  Prices have also started to suffer sharp reverses of direction within a day, as talk of new stimulus competes with the reality of mounting supply gluts.  These developments are classic red flags, warning of a potential major change in direction.  They also highlight the impact of the Great Unwinding of policymaker stimulus, as markets return to their core role of price discovery based on the fundamentals of supply and demand.

Commodity markets are the immediate cause of this chaos, as their collapse creates increasing numbers of forced sellers.  Speculators facing margin calls have been joined by sovereign wealth funds, needing to raise cash quickly so that their governments can pay the bills.  If the ratings agencies are correct, we will soon see bankruptcies and defaults intensify the downward pressure.

As always, chemical company utilisation rates have proved an excellent leading indicator for these developments. Sadly, as the chart shows, latest data from the American Chemistry Council gives no sign of any major improvement taking place:

  • December saw rates at 81.7%, marginally down from 81.9% in December 2014
  • The average rate for 2015 fell to 81.7% from 82.3% in 2014
  • The average rate since the Crisis began in 2009 is 82.8%, versus 91.3% in the period to 2008

Individual regions saw a mixed performance in December:

  • N America was up 2% versus 2014, and Latin America was down 2%
  • W Europe was up 3.4% as consumers rushed to buy, expecting an oil price rise that failed to happen
  • E Europe was up 8.2% as Russian volumes jumped 11% with the weaker rouble
  • The Middle East/Africa was up 5%, and Asia up 4.8% – with China up 4.8% on lower imports

January will probably show a weaker performance, as consumers had to run down higher -price inventory bought in the pre-Christmas panic.  This month will also be slow, due to Lunar New Year, and March will be affected by Easter.

Of course, the central banks will keep talking of new stimulus.  But in the real world, more and more people have decided that stimulus simply increases the debt-load, and does nothing to increase underlying growth.  Chemical industry data doesn’t lie, and clearly shows that the post-2008 strategy simply doesn’t work.

WEEKLY MARKET ROUND-UP

My weekly round-up of Benchmark prices since the Great Unwinding began is below, with ICIS pricing comments: 
Brent crude oil, down 68%
Naphtha Europe, down 66%. “Naphtha crack slips deeper into negative territory, closed arbitrages drag naphtha down”
Benzene Europe, down 59%. “There was some confusion about what was driving the upward movement towards the end of the week. Some sources believed that the market was simply following crude oil movements, while others cited stronger demand from the Mediterranean.”
PTA China, down 46%. “Restocking of cargoes were just about finished, with most companies expected to stop business activities from next week due to the Lunar New Year holidays”
HDPE US export, down 42%. “Domestic prices for export held steady, though there were reports of slightly lower prices by a penny or so.”
¥:$, down 14%
S&P 500 stock market index, down 4%

2015 operating rates confirm chemical industry slowdown

ACC OR Feb16

Financial markets are becoming more and more chaotic, with prices regularly moving by 1% per cent or more in a day.  Prices have also started to suffer sharp reverses of direction within a day, as talk of new stimulus competes with the reality of mounting supply gluts.  These developments are classic red flags, warning of a potential major change in direction.  They also highlight the impact of the Great Unwinding of policymaker stimulus, as markets return to their core role of price discovery based on the fundamentals of supply and demand.

Commodity markets are the immediate cause of this chaos, as their collapse creates increasing numbers of forced sellers.  Speculators facing margin calls have been joined by sovereign wealth funds, needing to raise cash quickly so that their governments can pay the bills.  If the ratings agencies are correct, we will soon see bankruptcies and defaults intensify the downward pressure.

As always, chemical company utilisation rates have proved an excellent leading indicator for these developments. Sadly, as the chart shows, latest data from the American Chemistry Council gives no sign of any major improvement taking place:

  • December saw rates at 81.7%, marginally down from 81.9% in December 2014
  • The average rate for 2015 fell to 81.7% from 82.3% in 2014
  • The average rate since the Crisis began in 2009 is 82.8%, versus 91.3% in the period to 2008

Individual regions saw a mixed performance in December:

  • N America was up 2% versus 2014, and Latin America was down 2%
  • W Europe was up 3.4% as consumers rushed to buy, expecting an oil price rise that failed to happen
  • E Europe was up 8.2% as Russian volumes jumped 11% with the weaker rouble
  • The Middle East/Africa was up 5%, and Asia up 4.8% – with China up 4.8% on lower imports

January will probably show a weaker performance, as consumers had to run down higher -price inventory bought in the pre-Christmas panic.  This month will also be slow, due to Lunar New Year, and March will be affected by Easter.

Of course, the central banks will keep talking of new stimulus.  But in the real world, more and more people have decided that stimulus simply increases the debt-load, and does nothing to increase underlying growth.  Chemical industry data doesn’t lie, and clearly shows that the post-2008 strategy simply doesn’t work.

WEEKLY MARKET ROUND-UP

My weekly round-up of Benchmark prices since the Great Unwinding began is below, with ICIS pricing comments: 
Brent crude oil, down 68%
Naphtha Europe, down 66%. “Naphtha crack slips deeper into negative territory, closed arbitrages drag naphtha down”
Benzene Europe, down 59%. “There was some confusion about what was driving the upward movement towards the end of the week. Some sources believed that the market was simply following crude oil movements, while others cited stronger demand from the Mediterranean.”
PTA China, down 46%. “Restocking of cargoes were just about finished, with most companies expected to stop business activities from next week due to the Lunar New Year holidays”
HDPE US export, down 42%. “Domestic prices for export held steady, though there were reports of slightly lower prices by a penny or so.”
¥:$, down 14%
S&P 500 stock market index, down 4%

Chemical production continues to slow across most regions

ACC data Sept14Chemical production is currently the best leading indicator for the wider economy, as financial markets have lost their power of price discovery due to the impact of central bank stimulus.

The above chart, based as always on the excellent American Chemistry Council (ACC) data, continues to flash the orange warning signal first seen last month.  The key issue then was the very worrying slide in operating rates during the seasonally strong Q2.  As the ACC had noted then, ”growth stalled in Q2“.

Today, it seems the weak performance is continuing with production slowing almost everywhere:

  • Global growth peaked at 5% in April, but has since fallen to just 3.3% (black line)
  • N America improved in August, but as the ACC comment, ”even with a competitive edge and some-what stronger recovery, production has been limited by weakness elsewhere in the globe (green)
  • Latin America has fallen very sharply, down from 1.2% growth in March to a 3.9% fall in August (red)
  • W Europe has fallen from 4% growth in May to 2.9% in August (light blue)
  • Central/Eastern Europe has collapsed from 2.4% growth in February to a 3% fall in August (orange)
  • Middle East/Africa has slowed from 8.4% growth in February to 6.7% in August (dark blue)
  • Asia has slowed sharply from 8.3% growth in March to 5.6% in August (purple)

Some individual countries have also seen very sharp falls.  Germany, for example, has gone from 4.8% growth in February to a fall of 3.5% in August.  India has crashed from 12.9% growth in January to 3.4% in August.  Japan has fallen from 9.2% growth in March to just 0.8% in August.  Mexico has gone from 1% growth in April to a 2.8% fall in August.  Russia has gone from 4.2% growth in January to a fall of 10.4% in August.

Only one major country has maintained a relatively strong growth level – China.  It peaked at 11.1% in April, and saw 8.8% growth in August.  But, of course, this stability is due to its shift to become an exporter, rather than importer, following the loss of its downstream markets in the West.  This confirms the blog’s conclusion yesterday when discussing Sinopec’s financial performance.

China is now well on the way to becoming a major exporter of many key petrochemicals.  And it will continue to reduce its import needs from Asia and other regions as fast as possible.”

The sharp global slowdown now underway confirms that companies and investors have been the victims of a collective delusion in recent years.  We accepted the assurances of the central banks that they could easily restore growth to previous Boomer-led levels, despite the ageing of the global BabyBoomer population.

But central banks can only print money, they can’t create babies.  And only babies, when they grow up, can create sustained demand growth.

Chemical production data doesn’t lie.  It makes clear that we are instead heading for an abrupt change of economic course as we enter the New Normal.

 

Slide in Q2 operating rates is bad omen for H2 economic outlook

ACC OR Jul14The chemical industry is the best leading indicator for the global economy.  The slide in operating rates (OR%) around the world during the seasonally strong Q2 period. is a clear warning that global economic growth may be stalling.

This should be a major wake-up call for anyone still hoping that growth may recover to the Boomer-led SuperCycle level.  The latest update from the American Chemistry Council’s excellent weekly report makes sober reading:

  • The global OR% was just 83.4% in June, down from 83.7% in June 2013
  • This was well below the 92% long-term average between 1987-2013
  • It was also well below the minimum 88% level seen in the SuperCycle

The chart also confirms last month’s comment from Dow CEO, Andrew Liveris, that “for a couple of years after 2008, we had a head-fake that the growth might have returned, but it didn’t”.  OR% temporarily jumped to around 87%, but then fell back again – despite massive continued stimulus by governments and central banks.

The ACC report also highlights that “growth stalled in Q2“.  Yet it should be the seasonally strongest quarter of the year:

  • Global growth rates fell from 4.8% in March to 3.5% in June
  • In the US, the ACC report that “production of basic chemicals fell” in June, despite the shale gas cost advantage
  • Latin America collapsed from 1.4% growth in March to a fall of 2.9% in June
  • W European growth halved from 3% in March to 1.4% in June, with Germany falling from 4.3% to a negative 0.9%
  • Central/Eastern Europe fell from 1.6% in March to a negative 0.1% in June, with Russia falling to a negative 2.9%
  • Asia-Pacific fell from 8.3% in March to 6.8% in June, with India collapsing from 6.5% to a negative 0.4%

Outside the chemical industry, the data also points in the same direction:

  • US GDP growth has been just 2.3% over the past 2.5 years, after inventory build is discounted
  • This is less than 1% per year, despite $10tn of stimulus
  • China’s steel demand grew just 0.4% in H1 this year, according to the official steel association.  Rail freight actually fell 1.4% in June versus June 2013
  • This confirms, if confirmation was needed, that China’s reported GDP growth of 7.5% was pure fiction
  • As China’s Academy of Social Sciences warns:  “The current situation serves as a reminder of how defective and unsustainable our growth model is. There can be no delay in altering the traditional investment- and export-driven model

The same realisation also seems to be dawning in financial markets, which have only been held aloft by a wave of debt.  Now investors will have to wake up to the fact that most of the debt will never be repaid.

Companies need to recognise that we have all been the victims of a collective delusion, and rapidly change course before it is too late:

  • They need to abandon their ambitious growth strategies and instead prepare for tough times ahead
  • Those in Asia can no longer ignore China’s change of course
  • It is becoming an exporter of many products, rather than an importer,  in order to maintain employment
  • Companies also need to review the $123.5bn of new US shale gas-related projects, as most will prove unprofitable due to lack of demand.

Q3 is the time when budgets and strategies are set for the next few years.  So it is not too late for a change of course.

Otherwise, in 5 years’ time, when all this new capacity is online, new managements will scratch their heads and wonder how the industry maintained the collective delusion for so long.  But by then, the money will have been spent.

 

WEEKLY MARKET ROUND-UP
The blog’s weekly round-up of Benchmark price movements since January 2014 is below, with ICIS pricing comments:
Brent crude oil, down 3%
US$: yen, down 2%
Naphtha Europe, down 2%.  “Cheap propane stocks are eating away naphtha’s market share in the petrochemical sector”
PTA China, up 1%. Producers offered cost-linked formula to stem losses, but buyers face difficulties in passing down the additional costs to their customers”
Benzene, Europe, up 5%. “Prices reversed course amid limited downstream appetite for further increases in August, which is traditionally a slow month because of summer shutdowns and the holiday period across Europe”
S&P 500 stock market index, up 5%
HDPE US export, up 7%. “Some higher trades were heard, and material remained in tight supply”