Market and product

And then there were two…. When history comes to bewritten, 29, April 2011 will have a strong claim to beselected as the date that the central bank liquidity programmes began tovisibly fail.

Most executives joined the workforce during the 1983-2007 SuperCycle,and came to believe that constant growth was now “normal”. TheUS economy saw just 17months of recession in these 25 years. Previously unknown concepts such as ‘pent-up demand’ and ‘stretch targets’ werenormal for them. Demand might slow for a few months, butwould then come racing back. So they expected to be set targets thatreflected this reality.

The 6 months of Q4 2008 – Q1 2009 seemed more worrying atthe time. But then, just as in the past, the clouds parted as G-20governments set up major stimulus packages in April 2009. And soon it seemed thatthe downturn was over:

• Companies set to work to build new plants, to take advantage of the expected ‘pent-up demand’ from the downturn
• Executives happily accepted ‘stretch targets’ that would pay out big bonuses whilst volumes and profits were recovering

Most were surprised, therefore, when demand began toslow in 2010. But experts and senior government officials arguedthat ‘just a little more time, and a little more money’ would solve theproblem. So QE2was launched in November 2010. And inQ1 2011 demand seemed to improve.

But by the end of April 2011, markets began to slow again,causing the blog to launch its Downturn Alert. Its argument wassimple. The western babyboomers whose demand had powered theSuperCycle were now ageing, and so demand patterns were changing. 55-year-olds can’t become 35-year-olds again. And 55-year-olds are a replacement market, as they already own most ofwhat they need. Plus, their incomes reduce as they move into retirement.

This seemed like a statement of the obvious. Butit still seems lost on governments and central banks, who have now wasted $33tn in a vain attempt to turn back thetide. Only China has woken up to the stupidity of its previous policies,with the new leadership announcing “It is time to deflate bubbles andrestore normal practice. The road-map is clear. ”

The chairman of the Federal Reserve, Ben Bernanke, seesthings differently, of course. Back in August 2007, he had told Congress that thesub-prime losses were significant, but would be no more than “between $50bnand $100bn”. Today, he continues to wear his rose-tinted spectacles,and believes he will retire next year having solved the crisis.

He has thus encouraged financial markets to believe that theUS economy is now in full recovery. That it is strong enough to dealwith the negative impact of the $1.2tn sequester. And that the housingmarket can deal with long-term interest rates that are moving back to 4% andhigher.

But chemical markets are telling a different story. Asthe chart shows, most of its benchmark products have never recovered theirpre-29 April 2011 price levels. Benzene (green line) was the exceptionthat proved the rule, as a by-product whose supply was dramatically reducedby external factors. But now, its price is also again lower.

Only the two financial bubbles are still bubbling away,supported by the last of the Fed’s QE3 programme andrecent Japanese/European liquidity. The S&P 500 (purple) has setnew records, whilst the US$ (orange) is climbing strongly versus the Japaneseyen.

Of course, Mr Bernanke may be right this time. But theblog puts more faith in chemical markets as an accurate reflection of the realworld where the rest of us live and work. It fears that many people willbe disappointed, and alarmed, when they return from their summer holidays inSeptember to find the Fed’s promised recovery has failed, once more, toappear.

The chart shows latest benchmark price movements since theIeC Downturn Alert launch on 29 April 2011, with ICIS pricingcomments below:

NaphthaEurope,black, down 21%. “Fundamentals are weak as oversupply and flat demand persist”
PTAChina, red, down 20%. “Demand for imported cargoes is expected toshrink further in July”
Brentcrude oil, blue, down 16%. “Losses reflect continued weakness inboth the US and Asian markets”
HDPEUSA export, yellow, down 13%. “Demand in the export market isgenerally weak”
BenzeneEurope, green, down 4%. ”Demand was low because oflimited buying interest from the derivative sector”
S&P 500stock market index, purple, up 20%
US$: yen,orange, up 24%