The chemical industry continues to be the best leading indicator that we have for the global economy. This is because it is not only the 3rd largest industry (after agriculture and energy), but also because it is truly global and impacts virtually all areas of modern-day life.
The chart above therefore presents a very downbeat message about the outlook. It shows the latest data for global capacity utilisation as reported by the American Chemistry Council (ACC):
- Operating rates averaged 93.5% between 1987 – 2008 during the Boomer-led economic SuperCycle
- But since then they have averaged just 84.7%, nearly a tenth below the SuperCycle level
- Even more worrying is that the peak rate since 2009 was as long ago as 2011, at just 87.2%
- During 2014, the rate saw a steady decline from April’s peak of 83.7% to 83.2% in November
The ACC’s commentary is also not encouraging:
“Gains in production were centered in North America (aided by the shale gas advantage) with nominal gains in Central & Eastern Europe, Africa & the Middle East and, to a lesser extent, Asia-Pacific. Chemical industry production contracted elsewhere….In Europe, year-earlier comparisons were negative for Germany, Italy and the United Kingdom as well as in The Netherlands, Denmark and Greece.”
Oil prices have, of course, already fallen by $30/bbl from November’s $80/bbl level. So we can only assume that N America’s temporary shale gas advantage is already disappearing.
CHINA IS KEY TO THE OUTLOOK
Recent developments in financial markets suggest they are also now starting to recognise this reality.
They have been fooled into thinking that central bank stimulus can solve every problem. But as yesterday’s Financial Times reported, most leading economists now doubt that more money-printing (QE) by the European Central Bank (ECB) will help the economy. Its front page headline was very clear and to the point:
“Massive QE not enough to revive Eurozone, economists warn”
In turn, markets are beginning to recognise that China’s New Normal policies are the real key to the outlook. President Xi has clearly abandoned previous stimulus policies, which have left the country with a massive debt burden, as I described in China’s Bank Lending: from $1tn to $10tn and Back Again?. As HSBC reported last week:
“Chinese manufacturers signalled a renewed deterioration in operating conditions at the end of 2014, with both output and new orders falling slightly on the month ….. In response to lower total new orders, firms cut their workforce numbers again in December, albeit only slightly. On the prices front, both input prices and output charges fell at the sharpest rates in nine months.”
Those who have been hoping for new China stimulus therefore seem likely to be disappointed. The downbeat tone of the HSBC report suggests it would be prudent to assume that Xi meant what he said a year ago, when opening China’s main economic policy conference with the comment:
“The good meat is all gone; all that is left are hard bones to chew.”
It is now only a matter of time before the West faces the same harsh reality. As China exports deflation, and the oil price continues to fall, we are clearly headed for a Cycle of Deflation.