We are living in a New Normal world. Populists such as Nigel Farage, Donald Trump, Marine le Pen and Beppe Grillo are gaining support as economic growth slows and social/political unrest becomes common. My presentation at our annual conference last week in Vienna highlighted some of the key issues, as Jessie Waldheim of ICIS news reports.
VIENNA (ICIS)–Markets face a period of increased volatility as political and demographic changes result in a paradigm shift from globalisation to sustainability as the driver for chemical markets, the chairman of consultancy International eChem said on Tuesday.
“The world is at a tipping point,” said International eChem chairman Paul Hodges. “Everything we’ve known, everything we’ve lived with for the last 50-70 years is now changing.”
In 1987, then US president Ronald Reagan stood in front of the Berlin Wall in Germany and demanded that it be torn down. In 2017, US president-elect Donald Trump is expected to build a wall. In Europe, the Brexit vote for the UK to leave the EU and the upcoming referendum in Italy could cause further turmoil for the EU.
These political changes are being driven by demographic changes which are also going to effect petrochemical and other markets. Essentially, as life expectancies have increased and birth rates have lowered, a larger percentage of populations are older.
For example, as the second chart shows, the number of US households in the 25-54 age bracket has been steady while the number in the 55-and-up age bracket has risen by nearly 50%. The older households tend to spend less money, having already made most major purchases.
This is in contrast to recent decades, when major population growth in the younger age brackets drove global demand. ”We don’t have lots of young people, so you don’t need as much stuff,” Hodges said, speaking at the 15th annual World Aromatics & Derivatives Conference in Vienna, Austria.
According to figures from the American Chemistry Council, we’re seeing a drop-off in capacity utilisation, which is the “best single predictor we have” of global GDP, Hodges said. With the capacity utilisation numbers in September 2016 nearly as low as in 2009, we’re likely to see a global recession next year, he added.
Our economy has not yet adapted to the new demographics. This adaptation will mean uncertainty and political risk. ”We’re seeing the rise of protectionism. Sustainability is replacing globalisation,” Hodges said.
Trump has said he has plans to declare China a currency manipulator and to withdraw from or renegotiate trade deals. The Brexit vote is part of this same paradigm shift. “We need to be planning for this,” Hodges said.
Specifically for aromatics markets, benzene price spreads have already come down. Benzene is a byproduct and refineries don’t increase production when benzene is tight and won’t slow production if less benzene is needed. ”We’ve seen benzene below naphtha before. We could see benzene trading below naphtha again,” Hodges said. “We have to accept the volatility is there.”
Companies will need to consider how trade flows will change with China no longer the major importer and manufacturing capital of the world. And companies will need to consider inter-polymer competition from lower polypropylene prices. Businesses models will have to change and restructuring will be inevitable.
Key chemical hubs will have to be made more robust, and being near customers may become more important, Hodges said. With the change comes opportunities. For instance, businesses could focus on designing solutions with new materials or by repurposing materials already in the market.
“Aging populations are an opportunity. Why are we not developing new services and products for them?” Hodges said.
“A week is a long time in politics” was the insight of former UK premier Harold Wilson. It is tempting to think that the events of the past week – a terrorist massacre in France: an attempted army coup in Turkey: a fatal US sniper attack: the overnight emergence of a new government with new policies in the UK – confirm Wilson’s remark.
But sadly, these were not just isolated, once-off incidents. They are just the latest examples of the increasingly volatile, uncertain, complex and ambiguous world in which we now live. Instead, the comment of Russian revolutionary leader VI Lenin seems more relevant:
“There are decades when nothing happens and there are weeks when decades happen”
One super-critical issue is that for the past 20 years, policymakers have chosen to ignore today’s unprecedented level of demographic change – the fact that a New Old 55+ generation is emerging for the first time in history. Instead they have claimed that the arrival of 1bn people in this cohort between 2000 – 2030 is simply “business as usual”. Similarly, they have greeted the collapse of fertility rates – now well below replacement levels in most major economies – with just a shrug of the shoulders.
They have effectively created a fictional “La-La Land” where central banks believe they can create economic growth simply by printing money and reducing interest rates. But now, this fiction is being exposed for all to see:
- If the economy is going well, social and political issues tend to be downplayed
- People don’t want to risk losing what they have, and hope their lives will improve
- But when the economy starts going badly, then people have less to lose
The core economic issue is that the fundamentals of the global economy have been undermined by debt. The alchemists at the central banks have promised NICE decades stretching out into the future, offering us Non-Inflationary Constant Expansion. But today, it is becoming increasingly obvious that all the debt they have created – already 3x the size of the global economy – can never be repaid.
Trust in our political elites is therefore falling. And more and more people are becoming uncomfortably aware that there will be many more Losers than Winners in the coming years – many pensioners, for example, will find that the promises they were made, will not be fulfilled. And we all hope to live to be pensioners, one day.
A reader wrote to me recently asking the following question, which highlights just one of the many areas of major uncertainty in today’s world – currency volatility:
“I was wondering if you could talk more about what you think the effect will be on different world currencies as central banks continue to print money. Do you think the dollar will strengthen? Will it collapse with the S&P 500? What will happen to the euro and pound as Brexit intensifies? If the dollar collapses, will that change your outlook on the oil price? I’d also love to hear your opinion on gold and whether it is commodity or a currency – and what do you see happening to it as the Great Unwinding occurs?”
This is a key issue, with major implications for governments, companies and ourselves as individuals. The fact that questions like this are now being asked so often, by so many people in so many different parts of the world, tells us something very important is happening.
It confirms we are now living in a VUCA world, where Volatility, Uncertainty, Complexity and Ambiguity dominate – and where politicians’ focus on “soundbite analysis” fails to recognise there are no easy answers to the problems we face.
The issue of currency values is particularly important, as these are supposed to “take the strain” of balancing supply and demand in today’s economy. I will return to it in a future post. And please do let me know at email@example.com about other questions that you have.
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 55%
Naphtha Europe, down 55%. “Naphtha market is over-supplied. US gasoline blending demand poor”
Benzene Europe, down 54%. “Healthy derivative demand and balanced regional availability was keeping numbers buoyant into August”
PTA China, down 40%. “PTA ops rate at operational units remain high ahead of G20 shutdowns”
HDPE US export, down 33%. “Chines market players’ confidence was dampened amid continuous weak demand and sparse deals in the market. Thus, prices are expected to soften in the following week as some traders might need to lower their offers in a bid to move more cargoes.”
US$ Index, up 19%
S&P 500 stock market index, up 11%
The good news was that the Eurozone leaders did realise, at the last moment, that Sunday was a “moment of truth” for the currency union and for Europe. They spent 17 hours negotiating through the night as a result. But reports suggest it wasn’t an easy time:
- The BBC carried live reports of arguments between key players and shouting matches
- At one point German Finance Minister , Wolfgang Schäuble apparently shouted “I’m not stupid” at the Governor of the European Central Bank, Mario Draghi
- One participant described the meeting as being like “a kindergarten – the emotions have completely taken over“
And since the meeting, a new IMF report has warned that ”Greece will need debt relief far beyond what euro zone partners have been prepared to consider, due to the devastation of its economy and banks in the last two weeks:
“The dramatic deterioration in debt sustainability points to the need for debt relief on a scale that would need to go well beyond what has been under consideration to date – and what has been proposed by the ESM,” the IMF said, referring to the European Stability Mechanism bailout fund.
“European countries would have to give Greece a 30-year grace period on servicing all its European debt, including new loans, and a very dramatic maturity extension, or else make explicit annual fiscal transfers to the Greek budget or accept “deep upfront haircuts” on their loans to Athens, the report said, adding.
“Greece’s debt can now only be made sustainable through debt relief measures that go far beyond what Europe has been willing to consider so far.”
It thus looks as though this may well be another of those “one step forwards, two steps back moments“.
I fear we will see many more of these moments in the future, as our leaders are finally forced to confront the problems of the real world – and can no longer pretend everything has been solved by printing money. As we wrote in chapter 11 of Boom, Gloom and the New Normal:
“The transition to the New Normal is a sea-change for the global economy. Its full impact will take years, if not decades, to become clear. Meanwhile, the world will face much greater uncertainty, as conflicting views of the world play out on a day-to-day basis. Companies therefore need to plan for a VUCA environment: Volatility, Uncertainty, Complexity and Ambiguity will be the order of the day.”
The Greek crisis thus highlights the insight of Unilever CEO, Paul Polman:
“I use the term VUCA to describe the world – Volatile, Uncertain, Complex and ambiguous. It is very difficult for people to get a total picture.”
- Volatility. Nobody, including the key players, had forecast the twists and turns of the crisis over the past few months. Crisis Eurozone summits followed each other in quick succession, Greece held a referendum on a week’s notice. And we still don’t know if a final deal can be agreed.
- Uncertainty. The focus on the drama now shifts back to Athens. Will the Syriza government gain approval for the package? Will it survive as a government, or be replaced by different leaders? Will there be new elections in the autumn? We simply cannot know the answers to these critical questions
- Complexity. The Greek crisis was supposed to have been settled in 2010, and then in 2012. Each time the bailout figure was higher, and now a 3rd bailout of €86bn ($95bn) is discussed. But nobody really believes this will finally put Greece back on the road to economic sustainability
- Ambiguity. After all this time, there is no agreement within the Eurozone on objectives. Greece wants to “end austerity”, Germany wants Greece to cut spending and increase taxes, other countries (poorer than Greece) don’t understand why they should handover yet more cash to Greece
And Greece is only a very small economy, its GDP was just $238bn last year. What will happen when it becomes clear that one or more G20 countries cannot pay their bills? As I wrote in my 2014 – 2016 Budget Outlook:
“The key is for each company to develop its own VUCA for success:
- “Volatility. Developing a road-map requires Vision
- “Uncertainty. A strategic Understanding of the changes underway is essential
- “Complexity. The planning process requires Clarity over implementation
- “Ambiguity. Unforeseen events will place a premium on Agility
“Nobody said business was meant to be easy. But companies who take on the challenge of today’s VUCA world will be increasingly successful as we move through the 2014 – 2016 budget period.”
The number “42″ was the answer to “the ultimate question of life” in the classic novel ‘The Hitchhiker’s Guide to the Universe’. Yet as the supercomputer providing this answer then explained, it was a pointless exercise as nobody understood the meaning of the original question.
The world’s policymakers are in the same position, although they don’t yet realise this. They are some of the finest minds on the planet, but they have been asking a meaningless question since the Crisis began 5 years ago, namely “How do we restore growth to the pre-Crisis level?”
Their response has also been a 2-letter answer, “QE”. But even today, nobody quite knows how QE (Quantitative Easing) is supposed to work. It is vaguely thought to be a new way of borrowing that magically repays its own debt over time. But instead, the debt has kept rising whilst growth has remained slow.
Yet a moment’s thought makes it obvious that policymakers can’t print babies. And only people can create demand. So the question we really need to ask is ”What is the impact of today’s ageing populations on demand?”
Put this way, it is obvious that we cannot possibly know the answer to the question:
- Between a third and a half of all adults are now in the New Old 55+ generation in most major economies
- They are in their low-demand, low-earning years
- And globally, there will be 600m more New Olders by 2030 – a 50% increase.
This has never happened before in history.
Clearly demand patterns must be very different from the past, as Q1 has shown. Seasonally it will be the strongest quarter this year, as Easter is late. Yet demand has been modest, with most shortages caused by plant outages.
Business leaders therefore need to be very careful when planning for the rest of 2014. As the blog argued in its Budget Outlook, we are in a VUCA world where Volatility, Uncertainty, Complexity and Ambiguity dominate. Simple answers such as “42″ or “QE” cannot possibly be relevant to the complex questions that we now face.
In this context, a blog reader has kindly forwarded an important interview with Gen George Casey, widely credited with rescuing Iraq from near-chaos during his 2004-7 command of US troops there. In it, Casey argues:
“In reality, VUCA has never been more relevant, for the military and for business. I experienced VUCA environments in Bosnia (1996), in Kosovo (2000), and in Iraq (2004-07). Leading grew progressively more difficult in those conflicts, with Iraq unquestionably the toughest. I believe that my experiences leading in those environments can benefit business leaders.
“The reason is that the primary function of any leader is to point the way ahead. I’ve learned that doing so in VUCA environments is extraordinarily difficult. Leaders need to “see around corners” – to see something significant about the future that others don’t see. Yet the more VUCA the environment, the harder it is for leaders themselves to comprehend the situation, let alone articulate a clear way forward. VUCA environments thus become invitations for inaction — people are befuddled by the turmoil and don’t act. And to succeed, you must act!”
A quick summary of today’s key issues highlights the common sense behind Casey’s analysis:
- Volatility. Financial markets in the West are priced for perfection. What will happen when, not if, people begin to recognise that QE cannot bring recovery?
- Uncertainty. China’s new leadership have begun to slow the economy. Will they continue now GDP growth is slowing, or will they panic and do a mega-stimulus?
- Complexity. Geopolitics have begun to dominate the headlines. Does Russia’s annexation of Crimea echo the Cold War? Will social unrest grow in the Arab world?
- Ambiguity. What are the key metrics for running a business today. Are they cost-cutting to boost current profits? Or are they focused on innovation for future growth?
As Casey advises, “to succeed, you must act!” Asking the right question is thus the key need today. It is the only way to see round corners. Failing to act means the future of your business will be dependent on the success of a policy that nobody understands and that cannot work, because policymakers didn’t ask the right question.
Benchmark product price movements since January 2014 are below, with ICIS pricing comments:
PTA China, down 10%. “Average operating rate in China for April is expected to be at 57% because of operating cut backs at several units, and scheduled maintenance”
Brent crude oil, down 2%
US$: yen, down 2%
Benzene, Europe, up 1%. “Several traders and consumers noted that the upward pressure on European values was largely supply-driven, with derivative demand still not supporting any major upturn in pricing”
S&P 500 stock market index, up 1%
Naphtha Europe, up 1%. “Market is being supported by Asian petrochemical demand, while US gasoline buying appetite has fallen from its peak two weeks ago”
HDPE US export, up 8%. “Traders have said it will be necessary for producers to lower prices if they want to compete in the global market”
There seems almost no need to publish a forecast for 2014. Policymakers have toured the TV studios to confirm that this is finally the year of recovery. They admit it may have taken nearly 5 years longer than first expected, and that there have been numerous ‘false dawns’ on the way. But now, they are certain that the US, Europe, China and the global economy are all moving forward in a powerful synchronised recovery.
Investors certainly believe them, as the blog notes in its annual New Year Outlook for ICIS Chemical Business. And of course this Recovery Scenario may indeed finally come true in 2014. But the blog was clearly right to be cautious back in its 2009 Outlook, when policymakers and the mainstream media were similarly confident. It suggested then that CEO’s, whilst “keeping faith in the future” needed to ask themselves:
“One key question. ‘Is your business robust enough to survive an extended period of low volumes and margins, against a background of tight credit markets, and continuing volatility in oil and currency markets?”’
As we enter 2014, the blog worries that we are in fact approaching a T-junction, as described by PIMCO, who manage $2tn of assets and who cannot be simply dismissed as a lunatic fringe:
“Where markets realise that the policy Kings/Queens have no clothes… and that monetary and fiscal policies cannot produce the real growth that markets are priced for”. This concern leads PIMCO to the sombre conclusion that “global economies and their artificially priced markets are increasingly at risk”.
The Demographic Scenario seems to make much more sense. It is clearly hard to imagine an economy without people. And the Scenario also 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.
The auto industry provides a vivid example of the challenges posed for company Boards under the Demographic Scenario. What happens if people’s need for mobility is no longer focused on car ownership and, for example:
- The rising numbers of New Old 55 year-olds decide not to bother owning a car, given they will use it even less than the general average of just one hour per day?
- The percentage of young Western men taking the driving test continues to steadily reduce due to their lack of interest in car ownership?
- Car-sharing and the concept of ‘pay to use’ continue to grow exponentially, as seems likely with the support of companies such as Mercedes and BMW?
- The ‘design to cost’ model for suppliers, pioneered by Renault’s Dacia range, proves equally successful in Nissan’s launch of its $3,000 Datsun range?
Boards may naturally want to believe that this time the Recovery Scenario will deliver on its promise. But today’s VUCA world may well continue to upset conventional wisdom. Those who have prepared in advance for the Demographic Scenario will then prove to be the winners.
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Knowing that we don’t know something makes us uncertain and cautious. If, for example, we come to a dangerous corner in the road when driving, we see the sign and slow down. Its when we are driving on a bright winter morning and don’t look for the ice under the trees that we end up in the ditch.
In other words, its what we don’t know that we don’t know, that is the real problem.
As we approach the end of the year, the blog would like to present 4 critical issues where we think we know the answer, but probably don’t:
HOW LARGE WILL THE WORLD POPULATION BE BY 2050?
Everyone thinks they know the answer to this question. We all believe that the population is rising fast. Conferences are often held with the titles such as ’9 Billion People by 2050′.
But the real answer is that we don’t know. The chart above gives the official forecasts from the UN Population Division 5-yearly report in 2010:
- The black line shows the period since 1950, where the global population nearly trebled from 2.5bn to 7.2bn due to the the post-War BabyBoom and increasing life expectancy
- The red line shows the population rising in a straight line to reach 10.6bn by 2050 in the UN’s High Scenario
- The orange line is the rise to the very popular 9.3bn number in the Medium Scenario
- The green line shows growth ending within a decade at 8.1bn in the Low Scenario
But look at the purple line for a moment. That shows the steady decline since 1960 in the number of children being born per woman. It is now close to the population replacement level of 2.1 children. And recent data shows no overall sign of this decline slowing.
Heroically, however, as the UN makes clear in its methodology, all 3 of its Scenarios assume that this trend will now reverse – either immediately or more gradually. And, of course, it may well be right. But even its own estimates under this methodology give very different results. A difference of 2bn people within the space of the period from now to 2050 is a fairly wide margin of error!
And what happens if today’s trend for lower fertility continues? It has been falling at an annual rates of 1.2% since 1950. Could it continue to fall at this rate?
In Africa, for example, the UN assumes that today’s 4.9 level will fall to at least 3.4 in its High Scenario, and to 2.3 in its Low Scenario. They base this on the assumption that African women are following trends already seen everywhere else in the world.
But this assumption then forces us to make another assumption, if we want to believe that the global population will continue to rise – namely that enough women somewhere else will start having more babies to compensate.
Maybe they will, maybe they won’t, the blog hears you saying. But what if they instead follow the lead of Asian women, particularly those in North East Asia, where rates fell in a straight line from 5.28 in 1970 to 1.11 today? They didn’t stop at the magic 2.1 replacement level.
If this became the norm, then the global population could instead be in steep decline by 2050. What would this then do to demand forecasts?
The simple fact is that we don’t know. After all, even if we correctly forecast fertility rates, we still have to guess right on life expectancy. Or to put it another way – did anyone back in 1950 forecast that global fertility rates would halve to 2.5 children per woman today, or that life expectancy would rise 50% to around 70 years?
Knowing that we don’t know something of course leads to uncertainty. And human beings don’t like uncertainty. But uncertainty can also be a good thing if it leads us to watch for the patch of ice ahead that will take us into the ditch.
This is the New Normal in action, where we need to become prepared for whatever outcome develops by challenging accepted thinking as hard as we can.
Tomorrow’s post will look at another critical area of business, where we all think the answer is obvious.
The weekly look at benchmark price movements since January 2013 is below with ICIS pricing comments:
PTA China, down 15%. “Price increases were limited, curtailed by softer downstream polyester sales in China during the week”
Benzene Europe, down 9%. ”Domestic sentiment buoyed by ongoing production outages limiting feedstock availability”
Brent crude oil, down 2% . “Asian naphtha market is keen to purchase as much European product as possible because of fears over shipment delays on other routes”
Naphtha Europe, up 1%
HDPE USA export, up 11%. “Not yet seen any evidence of the typical slowdown in advance of the Chinese Lunar New Year holiday”
US$: yen, up 17%
S&P 500 stock market index, up 21%