"Those whom the gods wish to destroy…"
on September 10, 2012

D'turn 7Sept12.pngWriting over 2000 years ago, the ancient Greek dramatists had a phrase to describe what is happening today in the global economy:

‘Those whom the gods wish to destroy, they first make mad”

Central banks have spent the last 4 years, since the Crisis began, handing out free money to their friends in financial markets. But higher prices in financial markets have not helped to boost consumer spending or recovery, as they fondly hoped.

The reason is obvious. Most people do not directly invest in stock markets, or in commodity futures. But they do have to pay the higher prices that result, in terms of the cost of food, transport, heating etc.

Unfortunately, central bankers seem not to talk to ordinary people. They talk to the CEOs of the big financial firms, who are desperate to have more free cash to fund their speculative trading activities.

Thus over the past 2 weeks, the central banks have geared up to provide even more free cash. They appear not to understand that the unintended consequences of their policies make life more difficult for ordinary people.

The chemical industry is the 3rd largest industry in the world. It sits in the middle of the value chain. And so a chart like the one above raises major concerns about the likely impact of further lending increases:

• In the first lending boost to April 2011 (yellow box), companies were unable to fully pass through the higher prices for crude oil (blue line) and feedstocks like naphtha (black)
• The second yellow box shows that the price rises from the lending boost at the end of Q4 2011 were even more difficult to pass through
• And the third box shows how companies are now struggling even more with the impact of the most recent lending programme
• The most worrying sign is China’s PTA market (red line). It is one of the poorest countries in the world (88th in the IMF’s GDP/capita ranking, at just $5.4k). And now its oil prices are close to record levels
• PTA is used for polyester, one of the most basic products, and normally immune to price pressures. But it is clear that these successive rounds of cost increases cannot be passed through, as they simply destroy demand.

The blog will return to this critical issue in more detail on Thursday.

Benchmark price movements since the IeC Downturn Monitor’s 29 April 2011 launch, with latest ICIS pricing comments, are below:
PTA China down 21%. “Supply remained tight because of continued production cutbacks in Taiwan, South Korea and Thailand on the back of negative margins”
HDPE USA export, down 16%. “Price was far too high to be workable in most places except Mexico”
Naphtha Europe down 10%. “Disconnection between a soft physical market and robust paper market persists”
Brent crude oil down 9%
Benzene NWE up 6%. “Hand-to-mouth inventory management was keeping prices high”

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