ACC OR Jun16

Global chemical industry sales are around $3tn a year, close to 5% of global GDP.  They are even larger when converted into all the products that we actually use on a day-to-day basis such as plastics, coatings, fibres, agrochemicals etc. And thanks to the American Chemistry Council, we have near real-time data of core trends such as capacity utilisation (CU%).

This is why the industry is the best leading indicator that we have for the global economy.

The chart above confirms the clear picture of weakness that has re-emerged over the past year:

  • The post-2008 Crisis recovery was relatively weak, with the CU% peaking at just 85.7% in March 2011
  • This was below anything seen in the 1987 – H1 2008 period, when the lowest CU% level was 86.3% in H1 2002
  • Even more worrying is that CU% has been in a renewed decline for the past year
  • It is now down at 79.3% versus 81% a year ago in May 2015

The drop is even more worrying when one remembers that consumers have generally been building inventory over the past few months – seeking to buy forward ahead of price increases caused by the rising oil price.  Without this support, the CU% would presumably have been even lower.  And of course, the unwinding of this inventory will now have a negative impact on CU% in H2, unless the oil price rises further for some reason.

The performance in the main Regions adds further cause for concern:

  • N American production rose just 1.3% in May, despite the ramp-up of new shale gas based capacity
  • Latin America kept falling and was down 5.6%, whilst W Europe was up just 0.3%
  • Central/Eastern Europe was up just 2.6% versus 3.4% in January, although Russia was up 5.1%
  • India was up only 0.8% versus 6.4% in December (that’s not a typo)
  • Japan was up only 2.5%, nearly halving from December’s 4.6%
  • Only China and the Middle East are on an improving trend – China is up 6.4% as it boosts its self-sufficiency; whilst the Middle East is up 7.1% as it boosts exports and Iran returns to global markets

The key question, of course, is whether H2 sees any improvement?  This seems unlikely following the Brexit vote, which is already having an impact on confidence within and outside Europe.  Plus there is the uncertainty over the outcome of the US Presidential election, which has clearly set nerves on edge around the world.

This is the New Normal world, unfortunately, where political and social issues assume equal or even greater importance than economic issues.  It is very hard to adjust to these changed priorities, particularly as the pace of change keeps increasing.

Who would have thought a year ago, for example, that in the UK both major political parties would now be holding leadership elections?  Or that a man of the moment would be Nigel Farage of the UK Independence Party – who had failed once again in May 2015 to win a seat in Parliament?

Truth is indeed proving stranger than fiction.  And who knows what shocks are yet to come, as we move into H2?