Market and product

There has been “$33tn in fiscal and monetary stimulus” since thefinancial crisis began in 2007 according to Bank of America Merrill Lynch. Yet global chemical operatingrates (OR%) remain well below their 91.1% average since 1987, and are alsolower than in 2012, as the above chart from the American Chemistry Councilshows:

The USperformance is particularly disappointing, as the ACC note:

“As export demand has weakened due to the recession in Europeand slower growth in key emerging markets, demand for manufactured goods hasslipped and manufacturing activity has slowed.”

If the blog were still running a major business, it would expect this reportto prompt major debate at Board level about the viability of theexpansions now being planned in the USA. Spend on these is now estimated at $72bn,and they clearly require buoyant export markets if they are tosucceed. Yet demand growth today remains slow, and is focusedon the Middle East/China – where local production is also expanding.

Some producers argue that higher-cost plants in both regions will shutdownif new UScapacity comes on stream. Others hope European/Latin American plantswill close if their economies continue to weaken. But closing downexisting plants is a difficult and long drawn-out process.

The key issue is that most producers, and investors, are still operating inSuperCycle mode. They assume strong global demand growth, andthat lowest-cost producers will always achieve sustained profitability. Sadly, however, these arguments no longer apply in the New Normal.

Instead, $33tn of government stimulus has created major over-capacity inmany industries, including chemicals. Whilst ageing populations meanthere is little sign of any pent-up demand or likely future market shortages.