Global markets slowing down

09-Jun-11
The four major factors impacting global markets as per Paul Hodges for ICB are: The battle against inflation China, which is connected to the power crisis. One of the reasons why electricity supply became constrained in the first place was due to the economy overheating. This week's decision to raise non-residential power costs by 3% might ease the crisis by encouraging loss-making generators to run harder. But the downside is that it is expected to add 0.5 percentage points to inflation). Petrochemical producers, with the exception of those in the Middle East, may not see much benefit in the future from China's growth. If China's economy stumbles, then this new capacity could prove a major threat, as China is unlikely to cut back volumes if domestic demand disappoints. Bank lending was doubled to US$1.4 trillion in 2009, and remained at US$1.2 trillion in 2010. Yet the total size of the economy last year was only US$5.9 trillion. It is hard to believe that such a sudden increase in lending could have all been profitably applied to worthwhile projects. Some may question whether China's US$725 bln of property investment in 2010 may be storing up problems for the future. They may worry that we have been witnessing a repeat of the US sub-prime boom of 2003-2007, only on a larger scale. The knock-on effects of supply-chain disruptions caused by the Japanese disaster. (The supply of auto components, many of which are made from copolymer PP, is likely to remain disrupted for many months to come, leading to reduced production at auto plants everywhere. Toyota's CEO has warned it will be the fourth quarter, at the earliest, before normal production is resumed. He also noted that "the ­damage has been so widespread in this ­unprecedented calamity that its economic effect is being felt throughout Japan and in every industry." In time, rebuilding efforts will boost chemical production. But for the next few months, the disaster seems likely to ­create more downside than upside risk for the global economy. Several manufacturing plants in this region continue to be plagued with electricity problems. Lack of electricity has led to major lifestyle changes across the Tokyo region, responsible for 40% of Japan's economy. Latest government thinking suggests power rationing could be required over the summer, with companies forced to cut peak-hour usage by 20-25%. Austerity in the western world as sovereign debt is cut. Europe has abandoned its stimulus programs. Countries such as Greece, Ireland and Portugal are instead cutting government spending to try to satisfy their creditors. Even if one assumes they will be able to avoid outright default, which seems increasingly unlikely, these cutbacks will reduce growth rates for years to come. Optimists point out that Germany is the engine of the European economy, and it is still expanding. But the pessimists will respond by noting that Germany's strength has been based on its ­exports to China. Domestic growth has been very slow, as a result of its rapidly ageing population. Oil prices and the impact on demand: "Buying forward" down all the chemical chains, not just in polyolefns, no longer makes sense when the direction of crude looks so uncertain. From Q4 last year up until February-March, crude seemed to be heading in only one direction as everyone stocked-up in an attempt to hedge against further cost rises.
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