There has been “$33tn in fiscal and monetary stimulus” since the financial crisis began in 2007 according to Bank of America Merrill Lynch. Yet global chemical operating rates (OR%) remain well below their 91.1% average since 1987, and are also lower than in 2012, as the above chart from the American Chemistry Council shows:
- Global OR% were 87% in May, compared to 87.5% in May 2012
- US output was up just 0.9%, despite the shale gas advantage
- Latin America was down 1.2%, and Europe down 0.3%
- The major increases were the Middle East/Africa, up 4.2%; China, up 6.7%; Asia, up 5.6%
The US performance is particularly disappointing, as the ACC note:
“As export demand has weakened due to the recession in Europe and slower growth in key emerging markets, demand for manufactured goods has slipped and manufacturing activity has slowed.”
If the blog were still running a major business, it would expect this report to prompt major debate at Board level about the viability of the expansions now being planned in the USA. Spend on these is now estimated at $72bn, and they clearly require buoyant export markets if they are to succeed. Yet demand growth today remains slow, and is focused on the Middle East/China – where local production is also expanding.
Some producers argue that higher-cost plants in both regions will shutdown if new US capacity comes on stream. Others hope European/Latin American plants will close if their economies continue to weaken. But closing down existing plants is a difficult and long drawn-out process.
The key issue is that most producers, and investors, are still operating in SuperCycle mode. They assume strong global demand growth, and that 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 in many industries, including chemicals. Whilst ageing populations mean there is little sign of any pent-up demand or likely future market shortages.