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Current downturn historically bad, but not Great Depression II

Article-Current downturn historically bad, but not Great Depression II

Houston, TX—Presenters at Chemical Market Assoc. Inc.’s (CMAI; Houston, TX) Global Petrochemical Conference (March 25-26; Hilton Americas Hotel; Houston, TX) laid out the gruesome details of the industry’s performance in 2008 and the start of 2009, but also stressed that while the slowdown was the worst since the Great Depression, it would not replicate that lost decade.

How bad did things get in 2008? CMAI reports that chemical and plastics strongholds—ethylene, polyethylene (PE), and polypropylene (PP)—all saw demand contractions, historic in and of themselves, even in go-go markets like China.

“Never in the history of CMAI’s record keeping [which goes back to 1979] have we recorded a year-over-year drop in China’s PE demand,” said Nick Vafiadis, CMAI’s global director of polyolefins. China actually overtook the U.S. as the top consumer of PE in 2008, but did so as its demand fell by 5%. Worldwide PE demand contracted by 3.9% last year. Vafiadis believes forecast PE demand for Western Europe and North America will not recover to 2007 levels until the 2014-2015 timeframe.

Mark Eramo, director of light olefins for CMAI, said worldwide ethylene demand contracted in 2008 for the first time since the early ‘80s, with the global operating rate for ethylene expected to register only 82% in 2010.

Polypropylene, which also contracted in 2008, is forecast to undergo a “sideways move” in 2009, according to Esteban Sagel, CMAI’s North American polyolefins director. He believes growth will not return until 2011, and at that time, there could be 17 million tonnes of excess capacity—equivalent to 25% total demand—on the market.

Arved Teleki, CMAI’s chief economist, who has lived through eight business down cycles, told the audience the downturn is the worst since the Great Depression, and similarly is “globally synchronized,” but was emphatic that this is not another Great Depression. Laying out the numbers, Teleki pointed out that while the Great Depression lasted 10 years, the current downturn, by nearly all accounts, will be around for one-and-a-half to two years; and while employment contracted by more than 20% in the 1930s, unemployment will likely only reach 10% in this instance. “We severely underestimated the violence and the depth of the contraction,” Teleki said, before adding, “The natural state of the world economy is to grow, not contract, and that’s important to remember.”

CMAI, which revised all its reporting and forecasting in January when the scope of the downturn became evident, is predicting two or three more down quarters, with this downturn’s “trough” occurring in the third quarter of this year. Teleki believes there will be some slight recovery starting in the fourth quarter of 2009, but the world won’t get back to pre-down-cycle growth rates until the fourth quarter of 2010. In an alternate forecast, which takes a more negative tact and is less likely to occur, Teleki said the trough wouldn’t come until the first quarter of 2010, with the global economy not regaining the previous peak until a year after that, Q4 2011. In terms of global GDP, CMAI is forecasting a contraction of 2.2% for 2009, an increase of 2.0% in 2010, and growth ranging from 3.1-3.7% in 2011 using the old exchange-rate system.

Teleki said that governments all around the globe are doing everything they can to stoke demand, acting most aggressively via monetary policy—another key difference between 2008-2009 and 1929-1930.

All the Group of 7 members have cut interest rates, with the highest rates being 2% in the Euro zone, while the U.S. and Japan hover near zero. In terms of direct fiscal stimulus, Teleki said $6 trillion in total has been pledged, with $2 trillion from the U.S., $2.5 trillion from other developed countries, and $1.5 trillion from developing nations. In addition, Teleki said the precipitous price drop in commodities like plastics, steel, and even gasoline has acted like a “tax cut” for many businesses. He estimated the total global benefit between $1 and $2 trillion.

Abdulaziz M. Judaimi, VP new business development at Saudi Aramco, gave the keynote address for the event, saying that in spite of the investment boom going on in the region, the Middle East has suffered as well. “The current quarter is definitely worse than the last quarter of 2008,” Judaimi said, pointing out that with oil prices down 75% from last July, “Oil-producing countries have not been immune from this crisis.” [email protected]

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