D'turn 31Aug14

We are now two-thirds of the way through 2014, and critical decisions are looming for companies and investors.  Do they give central banks one more chance to stimulate growth?  And are they prepared to trust policymakers to avoid a major geopolitical crisis in the Ukraine?

Or do they decide that ‘enough is enough’, and that they should develop new strategies for the future?

As the chart above shows, chemical prices since 2013 in the blog’s benchmark portfolio confirm the sense that a ‘tipping point’ has been reached:

  • PTA prices in China are falling again due to weakness in cotton and the polyester chain (red)
  • Benzene prices in Europe are also falling due to weakness in downstream demand (green)
  • Brent crude oil (blue) and naphtha (black) are facing a “supply glut
  • Only US polyethylene prices appear strong (orange) but these are really nominal due to supply issues

This leaves only the financial markets showing strength.

In currency markets, the US$ is now moving higher versus the Japanese yen (brown).  July’s fall in Japanese consumer spend has severely dented hopes that Abenomics might succeed in overcoming the major demographic headwinds created by its ageing population.

Similarly, the S&P 500′s rise to the 2000 level (purple) seems likely to prove at least a temporary peak unless more stimulus is created.  The US also saw its consumer spending fall in July, with teenage apparel spend (15% of total retail) in a deep slump.  Thus more forecasters have recently lowered GDP estimates back below 3% again.

Meanwhile the Eurozone is coming closer and closer to outright deflation, with inflation just 0.3% in August.  Whilst even hosting the soccer World Cup couldn’t stop Brazil falling into recession in H1.

Plus, of course, in the background looms the growing geo-political crisis over the Ukraine.  Western leaders still assume that Russia is bluffing when it threatens “gas wars”.  And it will be too late to put in place proper emergency measures in mid-winter, if we then discover they were wrong.  Yet as Reuters reported last November, this is clearly part of Russia’s gameplan:

Moscow meanwhile had threatened retaliation for Kiev’s moves west, raising fears it could cut energy supplies in new “gas wars”.” 

In the next few weeks, companies will be finalising their Budgets for 2015-17:

  • Will they hope that more stimulus will finally return economies to SuperCycle growth levels?  And will they assume that the threat of ‘gas wars’ in the Ukraine will remain just a newspaper headline?
  • Or will they start to worry that current policies have opened ”fault-lines in a debt-fuelled ‘ring of fire’“, and that wishful thinking has obscured the risk to the 45% of Germany’s gas that is supplied by Russia?

Reorienting corporate strategy is never easy.   But doing nothing may well turn out to be the bigger risk as we move into Q4.

 

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 6%
Naphtha Europe, down 4%. “Supply is long despite a wide-open arbitrage window to Asia”
PTA China, down 2%. ”Downstream demand in the polyester markets continued to be weak, with slower sales off-take”
US$: yen, down 1%
Benzene Europe, flat 0%.  “Downward pressure from raw materials and bearish sentiment in both Europe and Asia are weighing down on the European styrene market”
S&P 500 stock market index, up 9%
HDPE US export, up 12%. “August prices in the US market settled flat for the sixth month in a row…  Buyers who would previously have used PE for rigid containers starting to move to stand-up pouches, which use less plastic, and in some cases, steel containers rather than PE”