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%