Conference review: Economy, energy and uncertainty in the air at Chemical Summit
Economists, buyers share strategies for managing volatile chemical markets
By Richard Weissman -- Purchasing, 9/19/2008 9:38:00 AM
On a day where the stock market once again dropped more than 400 points, the ballroom of delegates to The Chemical Purchasing Summit remained reserved, yet seemingly optimistic. This Boston based-event, organized by Purchasing magazine and ICIS, brought supply chain professionals from around the world to try to get a handle on the volatile chemicals market. They learned that the handle is tenuous at best, at least well into 2009. And, maybe beyond.
The economic news is not good. “The U.S. economy is on thin ice,” said Scott Anderson, vice president and senior economist for Wells Fargo Economics. “And the current credit crunch is like a raging forest fire at the whim of the wind.” If not in a recession, Anderson feels at least we are operating in a recessionary environment. “I’ve been speaking about economic trends for two years and I see no signs of relief,” he said to the subtle groans of the audience.
Anderson sees some economic issues intensifying in 2008 and not resolving until 2009, or even later. “There are higher costs for raw materials, energy, and freight, and while the price of crude oil has moderated recently, there is continued uncertainty of future price trends,” said Anderson. “Also, business conditions are rapidly eroding in Europe, the U.K, and Japan in addition to the United States.” Anderson also saw an intensifying credit crunch with bad news breaking seemingly by the hour.
Anderson shared some insights on chemical industry trends. “There has been a consolidation in the plastics and the chemical industry in the past 10 years,” said Anderson. “There is also globalization, with operations moving to Asia and the Middle East.” Anderson also spoke of the consolidation in the industry, where the greater capital and customer requirements have boosted plant efficiency and allows for some hedging of energy price risks.
Demonstrating that the consumer and business economies are intertwined, Anderson tied the economic upheaval we are experiencing to the sub-prime mortgage mess that is playing itself out in the financial marketplace. “As the economy weakens, job losses increase,” said Anderson. “In some families one of the wage earners has lost their job, leading to uncertainty and cash flow issues, which of course, causes less spending.” Anderson also pointed to various other economic trends such as increased debt ratios, mortgage foreclosures and negative credit spreads as contributors to the current economic conditions.
Anderson did say a bright spot in today’s market is the reduced risk of inflation. “Inflation was yesterday’s big story,” he said. “Inflation expectations are lower due to the decrease in crude but core inflation improvement will lag for another year.”
Hurricanes, lack of structure, impact the market
Having just experienced the ravages of hurricanes Gustav and Ike, Stephen Burns, the Houston-based managing editor of the Americas for ICIS, told the crowd that a number of situations were causing very fluid economic conditions in the chemical industry. “There were more than 100 chemical plants damaged by the past couple of hurricanes,” said Burns. “The good news is they were not damaged too badly and the impact of the storms actually helped cause a balance in an oversupplied market.”
Burns noted that lack of power was the main issue with the blackout conditions affecting millions, including Burns himself. “The social impact of Katrina still lingers on in this storm and we see a trend of the power companies resupplying the consumer before industry,” said Burns. “This will have a negative impact on the market because of delayed start-ups.”
Burns says the volatility in the oil market is being overshadowed by the current economic news. He pointed out that there could be some gasoline shortages caused by post-hurricane refinery outages. “Twenty-two percent of the nation’s gasoline refining capacity comes from the areas recently hit by the storms,” said Burns “And that will impact the chemical industry, at least in the short term. Additionally, crude oil prices may be down now but like many others Burns thinks this dip is part of a slingshot approach, and at some point they may rocket back up.
Burns urged the conference attendees to gain as much knowledge of the chemical markets as possible, as there are no formal industry market structures, or what Burns called “referees” to manage things. “Contract relationships are often defined by the historical pattern of buying, not by precise future legal obligations,” said Burns. “Prices are more likely in a range than a single level.”
Commodity chemical markets tend to be “opaque” he said while “liquidity, found on markets indexes provide a point of reference absent in the chemical industry.” Burns added that buyers are subject to the same cost pressures as producers, but many have less response flexibility. Citing the big box pricing effect, Burns sees some end users so large that they actually create the market. “Most smaller buyers are price takers not price makers.”
Burns sees delayed settlements in the market where negotiations go on far after material is delivered, adding that “accountants and lawyers are now part of the negotiating team. Buyers want certainty of pricing and it is just not available at this time. They really need to educate themselves in this market. The suppliers are just as confused.”
Other news from the Chemical Purchasing Summit:
Deloitte economist: Link risk management and purchasing
POET gives update on cellulosic ethanol plants
SOCMA chief tells buyers: Be prepared
Credit crisis and economy are bound to worsen
Organic chemical buyers need to be vigilant on quality
Strong long-term polyethylene demand expected
Global resins oversupply seen by 2015
Tough times foreseen for petrochemical suppliers
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