Many indicators are now pointing towards a global downturn in the economy, along with paradigm shifts in demand patterns. CEOs need to urgently build resilient business models to survive and prosper in this New Normal world, as I discuss in my 2019 Outlook and video interview with ICIS.
Global recession is the obvious risk as we start 2019. Last year’s hopes for a synchronised global recovery now seem just a distant memory. Instead, they have been replaced by fears of a synchronised global downturn.
Capacity Utilisation in the global chemical industry is the best leading indicator that we have for the global economy. And latest data from the American Chemistry Council confirms that the downtrend is now well-established. It is also clear that key areas for chemical demand and the global economy such as autos, housing and electronics moved into decline during the second half of 2018.
In addition, however, it seems likely that we are now seeing a generational change take place in demand patterns:
- From the 1980s onwards, the demand surge caused by the arrival of the BabyBoomers into the Wealth Creating 25 – 54 cohort led to the rise of globalisation, as companies focused on creating new sources of supply to meet their needs
- At the same time the collapse of fertility rates after 1970 led to the emergence of 2-income families for the first time, as women often chose to go back into the workforce after childbirth. In turn, this helped to create a new and highly profitable mid-market for “affordable luxury”
- Today, however, only the youngest Boomers are still in this critical generation for demand growth. Older Boomers have already moved into the lower-spending, lower-earning 55+ age group, whilst the younger millennials prefer to focus on “experiences” and don’t share their parents’ love of accumulating “stuff”
The real winners over the next few years will therefore be companies who not only survive the coming economic downturn, but also reposition themselves to meet these changing demand patterns. A more service-based chemical industry is likely to emerge as a result, with sustainability and affordability replacing globalisation and affordable luxury as the key drivers for revenue and profit growth.
Please click here to download the 2019 Outlook (no registration necessary) and click here to view the video interview.
There should be no surprise that President Trump has launched his trade war with China. The real surprise is that financial markets, and business leaders, are so surprised it is happening. He was, after all, elected on a platform that called for a trade war, as I noted originally back in November 2016 – and many times since, even just last month.
Nor is it a surprise that China has chosen to target chemicals in its proposed list of products for retaliation. As my colleague John Richardson has noted:
“On Tuesday, China’s reaction to that first round of $50bn US tariffs included proposed tariffs of 25% on US exports of low and linear-low density polyethylene. The same tariffs could also be levied on US polycarbonate, polyvinyl chloride, plastic products in general, acrylonitrile, catalysts, lubricants, epoxy resin, acrylic polymers, vinyl polymers, polyamides (nylon) and surfactants.”
China, unlike almost everyone else it seems, has used the past 15 months to prepare for Trump’s trade war. So they are naturally targeting the chemicals industry – which was a great supporter of Trump in the early days, and has also come to depend on China for much of its growth.
They will have seen this December 2016 photo of Dow Chemicals CEO, Andrew Liveris, joining Trump at a victory rally in Michigan.
They will also have read Liveris’ tribute to the new President, when announcing the opening of a new R&D centre in Michigan:
“This decision is because of this man and these policies,” Mr. Liveris said from the stage of the 6,000-seat Deltaplex Arena here, adding, “I tingle with pride listening to you.”
The fact that Liveris stepped down last year as head of Trump’s manufacturing council will also have been noticed in Beijing, but clearly did not change their strategy.
FINANCIAL MARKETS EXPECT THE FED TO BE A FAIRY GODMOTHER
Industry now has a few weeks left to plan for the inevitable. But if history is any guide, many business people will fail to take advantage of this narrowing window of opportunity. Instead, like most investors, they will continue with “business as usual”. The problem is simple:
- A whole generation has grown up expecting the central banks to act as a fairy godmother
- Whenever markets have moved downwards, Fed Chairmen and others have showered them with cash
- Therefore the winning strategy for the past 20 years and more has been to “buy on the dips”
- Similarly, industry no longer bothers with genuine scenario analysis, where bad things can and do happen
Another key factor in this developing drama is that not all the actors are equally important. China seems to have been initially wrong-footed, for example, by placing its trust in Treasury Secretary, Steve Mnuchin, and US Ambassador to China, Terry Branstad, to argue its case. They might appear on paper to be the right people to lobby, but at the end of the day, they are simply messengers – not the ones deciding policy.
The key people are the US Trade Representative, Robert Lighthizer, and his aide, Peter Navarro. They are now being joined by arch-hawk John Bolton, who in his role as National Security Advisor can be expected to play a key role – along with newly appointed Secretary of State, Mike Pompeo. Like everything in the Trump White House, Lighthizer’s power comes from his relationship with the President, as the Wall Street Journal describes:
“To Mr. Trump, Mr. Lighthizer was a kindred spirit on trade—and one who shuns the limelight. The two men, who have a similar chip-on-the-shoulder sense of humor, bonded. Mr. Lighthizer caught rides to his Florida home on Air Force One. Mr. Trump summons Mr. Lighthizer regularly to the Oval Office to discuss trade matters, administration officials say.”
THE NEXT 6 MONTHS WILL BE A WAKE-UP CALL FOR MANY
The past 18 months have in many ways been a repeat of the 2007-8 period, when I was told my warnings of a subprime crisis were simply alarmist. This complacency even lasted into October 2008, after the Lehman collapse, when senior executives were still telling me the problems were “only financial” and wouldn’t impact “the real world”.
Similarly, I have been told since September 2015, when I first began warning of the dangers posed by populism in the US and Europe, that I “didn’t understand”. It was clear, I was told, that Trump could “never” become the Republican candidate and could “never ever” become President – and if he did, then Congress would “never ever ever” allow him to take charge of trade policy. Similarly, I was being told in March 2016 that the UK would “never” vote for Brexit.
I also understand why so many friends and colleagues have been blindsided by these developments, as I discussed in the same September 2015 post:
“The economic success of the BabyBoomer-led SuperCycle meant that politics as such took a back seat. People no longer needed to argue over “who got what” as there seemed to be plenty for everyone. But today, those happy days are receding into history – hence the growing arguments over inequality and relative income levels.
“Companies and investors have had little experience of how such debates can impact them in recent decades. They now need to move quickly up the learning curve. Political risk is becoming a major issue, as it was before the 1990s.”
TIME TO DEVELOP PROPER SCENARIOS ANALYSIS
Nobody can forecast everything in detail over the next 6 months, let alone the next few years. And it is very easy to mock if one detail of the scenario analysis turns out to be wrong. But the point of scenario analysis is not to try and forecast every detail. It is instead to give you time to prepare, and to think of alternative strategies.
Just imagine, for example, if you had taken seriously my September 2015 warning about the rise of populism:
- Think about all the decisions you wouldn’t have made, if you had really believed that Trump could become President and Brexit could happen in the UK?
- Think of all the decisions you would have made instead, to create options in case these developments occurred?
I understand that you may worry about being mocked for being “stupid” and “alarmist”. But you should simply remind the mockers of the lesson learnt by insurer Aetna’s CEO, from his failure to undertake proper scenario analysis, as he described in November 2016:
“When Aetna ran through post-election expectations, the idea that Donald J. Trump would win the presidency and that Republicans would control both chambers of Congress seemed so implausible that it was not even in play. We started with a fresh piece of paper yesterday — we had no idea how to approach it. What we would have spent months doing if we thought it was even remotely possible, we had to do in a day.”
There is no doubt that he was the one feeling stupid, then.
The post Trump’s trade war should set warning bells ringing for every company and investor appeared first on Chemicals & The Economy.
“By Monday, the third straight day of flooding, the aftermath of Hurricane Harvey had left much of the region underwater, and the city of Houston looked like a sea dotted by small islands. ’This event is unprecedented,’ the National Weather Service tweeted. ‘All impacts are unknown and beyond anything experienced.’”
This summary from the New York Times gives some idea of the immensity of the storm that struck large parts of Texas/Louisiana last week, including the 4th largest city in the US. And this was before the second stage of the storm.
I worked in Houston for 2 years, living alongside the Buffalo Bayou which flooded so spectacularly last week. The photo above from the Houston Chronicle shows the area around our former home on Saturday, still surrounded by water. Today, as the rest of America celebrates the Labor Day holiday, the devastated areas in Texas and Louisiana will be starting to count the cost of rebuilding their lives and starting out anew:
Some parts of the Houston economy will recover remarkably quickly. It is a place where people aim to get things done, and don’t just sit around waiting for others to do the heavy lifting
But as Texas Governor Abbott has warned, Harvey is “one of the largest disasters America has ever faced. We need to recognize it will be a new normal, a new and different normal for this entire region.”
The key issue is that the Houston metro area alone is larger in size than the economies of Sweden or Poland. And as Harris County Flood Control District meteorologist Jeff Lindner tweeted:
“An estimated 70% of the 1,800-square-mile county (2700 sq km), which includes Houston, was covered with 1½ feet (46cm) of water”
Already the costs are mounting. Abbott’s current estimate is that Federal funding needs alone will be “far in excess of $125bn“, easily topping the costs of 2005′s Hurricane Katrina in New Orleans. And, of course, that does not include the cost, and pain, suffered by the majority of homeowners – who have no flood insurance – or the one-third of auto owners who don’t have comprehensive insurance. They will likely receive nothing towards the costs of cleaning up.
SOME PARTS OF THE ECONOMY HAVE THE POTENTIAL FOR A QUICK RECOVERY
Companies owning the large refineries and petrochemical plants in the affected region have all invested in the maximum amount of flood protection following Katrina, when some were offline for 18 months
Oil platforms in the Gulf of Mexico are used to hurricanes and are already coming back – Reuters reports that only around 6% of production is still offline, down from a peak of 25% at the height of the storm
It is hard currently to estimate the impact on shale oil/gas output in the Eagle Ford basin, but the Oil & Gas Journal reports that 300 – 500 kb/d of oil production is shut-in, and 3bcf/d of gas production
ExxonMobil is now restarting the country’s second-biggest refinery at Baytown, and Phillips 66 and Valero are also restarting some operations, whilst ICIS reports that a number of major petrochemical plants are now being inspected in the expectation that they can soon be restarted
Encouragingly also, it seems that insurance companies are planning to speed up inspections of flooded properties by using drone technology, which should help to process claims more quickly. Loss adjusters using drones can inspect 3 homes an hour, compared to the hour taken to inspect on roof manually. But even Farmers Insurance, one of the top Texas insurers, only has 7 drones available – and has already received over 14000 claims.
RECOVERY FOR MOST PEOPLE AND BUSINESSES WILL TAKE MUCH LONGER
For the 45 or more people who have died in the floods, there will be no recovery.
Among the living, 1 million people have been displaced and up to 500k cars destroyed. 481k people have so far requested housing assistance and 25% of Houston’s schools have suffered severe or extensive flood damage.
These alarming statistics highlight why clean-up after Harvey will take a long time. Basic services such as water and sewage are massively contaminated, with residents being told to boil water in many areas. The “hundreds of thousands of people across the 38 Texas counties affected by Harvey” using their own wells are particularly at risk.
And as the New York Times adds:
“Flooded sewers are stoking fears of cholera, typhoid and other infectious diseases. Runoff from the city’s sprawling petroleum and chemicals complex contains any number of hazardous compounds. Lead, arsenic and other toxic and carcinogenic elements may be leaching from some two dozen Superfund sites in the Houston area”
FEW IN HOUSTON HAVE FLOOD INSURANCE
Then there is the issue that, as the chart from the New York Times shows, most of those affected by Harvey don’t have home insurance policies that cover flood damage. Similarly, a survey in April by insurer Aon found that:
“Less than one-sixth of homes in Harris County, Texas, whose county seat is Houston, currently have active National Flood Insurance Program policies. The county has about 1.8 million housing units.”
As the Associated Press adds:
“Experts say another reason for lack of coverage in the Houston area was that the last big storm, Tropical Storm Allison, was 16 years ago. As a result, people had stopped worrying and decided to use money they would have spent for insurance premiums on other items.”
Even those with insurance will get hit by the low levels of coverage – just $250k for a house and $100k for contents. Businesses carrying insurance also face problems, according to the Wall Street Journal, as they depend on the same Federal insurance scheme, which:
“Was primarily designed for homeowners and has had few updates since the 1970s. Standard protections for small businesses, including costs of business interruption and significant disaster preparation, aren’t covered, and maximum payouts for damages haven’t risen since 1994.
The maximum coverage for business property is $500k, and the same cap applies to equipment and other contents, far below many businesses’ needs. And even those with insurance find it difficult to claim, according to a study by the University of Pennsylvania and the Federal Reserve Bank of New York after Hurricane Sandy in 2012:
“More than half of small businesses in New York, New Jersey and Connecticut that had flood insurance and suffered damages received no insurance payout. Another 31% recouped only some of their losses.”
Auto insurance is a similar story. Only those with comprehensive auto insurance are likely to be covered for their loss – and even then, people will still suffer deductions for depreciation. According to the Insurance Council of Texas:
“15% of motorists have no car insurance, and of those who do, (only) 75% have comprehensive insurance. That leaves a lot of car owners without any protection.”
In other words, around 1/3rd of car owners probably have no insurance cover against which to claim for flood damage.
HARVEY’S IMPACT WILL BE LONG-TERM
It is clearly too early, with flood waters still rising in some areas, to be definitive about the implications of Hurricane Harvey for Houston and the affected areas in Texas and Louisiana.
Of course there are supply shortages today, and the task of replacement will created new demand for housing and autos. But over the medium to longer term, 3 key impacts seem likely to occur:
It will take time for the supply of oil, gas, gasoline and other refinery products, petrochemicals and polymers to fully recover. There will inevitably also be some short-term shortages in some value chains. But within 1 – 3 months, most if not all of the major plants will probably be back online
It will take a lot longer for most people affected by Harvey to recover their losses. Some may never be able to do this, especially if they have no insurance to cover their flooded house or car. And those working in the gig economy have little fall-back when their employers have no need for their services
The US economy will also be impacted, as Slate magazine warned a week ago, even before the full magnitude of the catastrophe became apparent:
“For the U.S. economy to lose Houston for a couple of weeks is a human disaster—and an economic disaster, too….Given that supply chains rely on a huge number of shipments making their connections with precision, the disruption to the region’s shipping, trucking, and rail infrastructure will have far-reaching effects.”
Last week’s summit meeting between US President Donald Trump and China’s President Xi Jinping was initially overshadowed by Friday’s news of US missile strikes on Syria. But from the details since released, it is clear the summit will likely have far-reaching impact on the global economy. As US Commerce Secretary Wilbur Ross revealed afterwards, the 2 leaders agreed to implement:
“A 100-day plan with way-stations of accomplishment. We made very clear that our primary objectives are twofold:
One is to reduce the trade deficit quite noticeably between the United States and China
The second is to increase total trade between the two countries
Ominously, he added, “Words are easy, discussions are easy, endless meetings are easy. What’s hard is tangible results, and if we don’t get some tangible results within the first 100 days, I think we’ll have to re-examine whether it’s worthwhile continuing them.”
Ross has set a tough target to be met with 100 days (18 July), especially given the range of major issues involved.
This is why ICIS and International eChem have combined their expertise to produce a new Report, The War of Words, focused on the implications of any deal – or lack of any deal – on the global petrochemicals industry. The Report highlights how a “business-as-usual scenario” is the least likely outcome for the years ahead. As my co-author, John Richardson of ICIS highlights:
“Our aim is to provide a clear understanding of the tectonic shifts now under way in the world’s two largest economies, and to offer a detailed road map outlining the potential impact of these developments on business and investments.”
The Report provides companies and investors with the insight and analysis needed to prepare for almost inevitable change to today’s business models. It highlights how today’s globalised world – whereby raw materials are routinely shipped half-way around the world, and then returned as finished product – is most unlikely to survive for much longer.
The “War of Words” Report is the first in a quarterly series of “Uncertainty Studies“. It provides a clear understanding of the tectonic shifts now under way in the world’s two largest economies, and a detailed road map highlighting the likely impact of these developments on business and investments. It is essential support for decision-makers.
Please click here for subscription details, or contact me directly at email@example.com
Chemical companies face difficult times if they cling to the hope that current challenges will simply disappear. This is my main concern in a new analysis for ICIS Chemical Business.
It argues that major change is underway in petrochemicals and polymers markets, which will create winners and losers. The current round of major capacity expansions has been based on two flawed assumptions:
Oil prices would always be above $100/bbl and provide US gas-based producers with long-term cost advantage
China would always grow at double-digit rates and require ever-increasing volumes of petrochemical imports
Life would be difficult enough if just one of these assumptions had proved to be wrong. But now the industry is going to labour under the burden of spare capacity for years to come. Even worse, this surplus will be occurring at a time when global trade is being impacted by rising protectionism, as governments focus on preserving local jobs.
The winners will be those who develop new business models, aligned to future market needs. The losers will simply carry on, business as usual, heading into an inevitable brick wall.
The good news is that two major new opportunities are available to spur future revenue and profit growth, as we highlight in the joint ICIS/International eChem study “Demand – the New Direction for Profit”. Both require new business models, but are closely aligned with core business competencies:
One opportunity is based on the future megatrends of water and food – two of the five critical risks highlighted by the World Economic Forum for the next decade
The second opportunity is to develop a more service-based offering, using industry expertise in areas such as process engineering and research and development
There is no doubt that the industry faces difficult times in the next few years. Its previously successful growth models are going to be increasingly challenged by overcapacity, protectionism and the climate change agenda.
Losing companies will ignore the mounting evidence of paradigm shift, as well as the potential for growing revenue and profit by helping customers to “do more with less”. But winners will recognise that new, more service-driven strategies will provide an excellent base from which to develop the new offerings required for future success.
Please click here if you would like to download a free copy of the analysis.
Imagine your government decided to shutdown most of the industry in two major cities for 2 weeks or more? Say Detroit and Chicago in the US, or Milan and Turin in Italy, or Leeds and Manchester in the UK. Now you will have some idea of the scale of the shutdowns being mandated in China for Shanghai and Ningbo ahead of the G20 Summit in Hangzhou on September 4-5.
The reason is the need to improve air quality during the summit, as I noted last month.
Hangzhou itself is China’s 4th largest city, with a population of 21m. And as the map shows, it is bordered by Shanghai (with 24m people), and Ningbo (8m people). Together, they are one of the biggest industrial conurbations in the world.
Now, as ICIS news reports, more details are starting to emerge of the scale of the likely disruption:
“Hangzhou is home to major polyester producers, which are expected to implement the prescribed temporary measures to curb pollution until after the summit, market sources said.
“For Shanghai, the production cuts and shutdowns will take effect from 24 August to 6 September, according to a document published on the Shanghai Environment Protection Bureau website. Other industries such as steel, coking and cement sectors in Shanghai are also being required to restrict production for a prescribed period, based on the document.
“In Ningbo City, a number of industries were likewise given orders to help out in the efforts to reduce pollution in preparation for the G20 summit. Cement, non-ferrous metal, chemical fibre companies are due to shut down their plants during the summit, while refining and chemical companies must reduce operation more than 50%, according an official statement obtained by ICIS.”
More information will obviously follow in the next few weeks. But already details have begun to emerge on the scale of the planned shutdowns in Ningbo:
- In the polyester sector, Yisheng Petrochemical will shut 5 million tonnes of PTA capacity
- In polyurethanes, Wanhua Chemical will shut 1.2 million tonnes of MDI capacity
- There will also be 1.2 million tonnes of propylene capacity shutdown
- In addition, production of at least 16 major petrochemicals will be disrupted including PVC, ethylene, styrene. ethylene glycol, acrylic acid and polypropylene
- CNOOC’s Ningbo Daxie refinery complex will also be operating at reduced rates
These closures/cutbacks will obviously have a very disruptive impact on a whole range of supply chains. Some companies will lose their raw material supplies – others will lose their customers for finished product. So there will be no easy answers for managements – and even if their immediate suppliers or customers are still operating, there may well be closures or disruption in another part of the value chain.
Companies outside China, whether suppliers or customers, will clearly also be impacted, given the importance of this region in global markets. My suggestion would be that you need to check as soon as possible with your business partners to gain their insights into the likely outcome, now that details of the plans are becoming clear. Then you will have time to work out alternative options.
One other important conclusion is clear. No government would lightly create this level of disruption, particularly at a time when the domestic economy is already under pressure. The fact that President Xi Jinping is taking these major steps, is a sign of the severity of China’s pollution problems. The country simply cannot go back to the Old Normal way of doing things – the New Normal policies are here to stay.