A slowdown in petrochemical growth expected as economies recover unsteadily

25-Sep-09
The collapse of the global petrochemical industry has brought about a major shift in behaviour. According to ICB, Central banks kept interest rates low to encourage consumption, in the belief that inflation was under control. Individuals in Western countries were able to borrow money very easily, secured by the ever-rising price of their homes. Emerging economies such as China lent vast sums of money to the West, to support manufacturing employment at home. Much of the resulting boom was focused on areas such as housing and autos, where petrochemical demand is strongest. In turn, this led to a belief that demand was not only strong, but would remain so. Massive capacity increases seemed not only manageable, but essential. The rise seemed unstoppable in housing prices in many Western countries. And it became more self-sustaining as more parts of the global economy came (knowingly or not) to be dependent on it. When the housing bubble burst, it has resulted in a total wealth loss of US$15 trillion. The global petrochemical industry saw 4 years of robust growth, before the unprecedented collapse in Q4-08. A downtrend continues in this sector, initiated by drastic destocking that built up when prices touched record highs in 2007 and H1-08. Key industries such as housing, automotive and electronics have temporarily stabilized, helped by government stimulus packages. This has triggered restocking. Orders have started trickling from downstream users, although uncertainty persists about the underlying outlook of end-user demand. However, with new capacities coming onstream in the Middle East and China in the next few years, amid the estimated slow pace of demand growth, will the industry be faced with overcapacity? Will oil and feedstock prices stay relatively high, due to the lack of investment in exploration and production during the boom period? If so, will customers dispose the idea of global supply chains, and start to relocate their factories closer to demand in the West? The new mantra for at least a generation is expected to be higher savings, lower consumption, and growth closer to 2% than the historical 3.5%.
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