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PAINFUL RETURN TO

Blend Images/REX/Shutterstock

REALITY
BECKONS
Huge challenges face chemical
companies as central bank
stimulus comes to an end and
markets return to supply and
demand fundamentals.
Written by Paul Hodges

S

lowly but surely, reality is returning to
oil and feedstock markets. Brent crude
prices are returning to their historical
level of around $25/bbl and price
discovery is returning to currency markets,
with the dollar rising strongly against most
other major currencies. Yet there is no going
back to the future in terms of demand.
Instead, a paradigm shift is under way in
this vital area. For the first time in history,
domestic demand growth in most countries
is being driven by the needs of the lowerearning, lower-spending “New Old” 55+
generation. As the chart shows, 1bn people are
becoming “New Olders” between 2000–2030.
By then, they will be more than one in five
of the global population. In export markets,
China’s New Normal economic policy has
become the basis for its Five Year Plan for
2016–2020. This sets out a clear pathway
towards self-sufficiency in many value chains,
meaning that the country will no longer
provide a home for surplus domestic product.
Consensus wisdom has thus failed us,
yet again. But as I have long feared, it
will be chemical companies and investors
who have to bear the costs of this failed
analysis. The coming year is therefore

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The flow
of artificial
stimulus money
is drawing
to an end

likely to prove very uncomfortable:
• Boards that have sanctioned export
oriented projects are going to have
to consider whether to proceed, or
cut their losses. They face binary
decisions, with no middle ground.
•C
 an they be sure that these projects can
instead be sustained by increases in
domestic demand? And are they really
clear about the potential drivers for this
demand in the future? The Financial
Times summarised new research from
the US-based Pew Foundation thus:
“Companies struggle to adapt to an
over-60s group that is set to drive half
of all US spending growth” (Middle
class meltdown, 10 December 2015).

Pumping up prices
This is the Great Unwinding of policy maker
stimulus in action, as I have described in
previous issues (ICIS Chemical Business 3–9
November 2014 and 2–8 March 2015). The
problem we face is that over the past decade,
via ever-increasing amounts of stimulus
and quantitative easing, the world’s major
central banks have deliberately pumped up
prices for financial assets. The aim of this