Summary

Chemicals specialist, Paul Hodges, discussed how a deep analysis of the chemicals sector shows that there has been a big paradigm shift occurring from a supply-driven to a demand / consumer-led environment. This has been a phenomenon occurring over the last few years and has been accelerated by the pandemic. We are seeing behavioural changes on family life, there are now a record number of 18-29 year olds living at home - 52% in the US! - hasn’t been seen since the Great Depression. Paul discussed the demographic shift led by the baby boomers who are leaving the Wealth Creator 25-54 age group (which powers consumer spending) and joining the Perennials 55+ generation, as increasing life expectancy means people no longer die at pension age. The chemical industry boomed whilst the Boomers bought cars, houses, electronics etc. But Perennials are a replacement economy as they already own most of what they need. They will account for more than 50% of population growth in the West over the next decade, whilst the number of Wealth Creators actually reduces due to lower birth rates. Central Bank stimulus has therefore effectively been trying to ‘print babies’ to generate spending and inflation, but has ended in producing record debt levels. According to the Bank for International Settlements, around 20% of large US/European companies are now zombies, whose earnings do not cover interest expenses. Paul is therefore expecting deflation, due to the transition from demographic dividend to a demographic deficit. One little-remarked impact of this is that the cost of servicing debt will rise as interest rates go negative. Global chemicals capacity utilisation (CU%) has an excellent correlation with GDP growth, due to chemicals being the third biggest industry in the world, with its products used everywhere. This data shows that the downturn began in June 2017 and it fell off a cliff in December 2019 - before the pandemic kicked in. This is quite a different picture from 2008/9, when the CU% picked up very quickly after the crash, particularly in China. We are not seeing such a rebound this time round. Paul discusses specific parts of the chemical industry such as the severe drop off in coatings and specialties, whilst plastics and fibres have held up due to virus-related demand. One key paradigm shift is a reshoring of supply chains as more and more problems have appeared in global supply chains, so we are seeing de-globalisation. It is easier today to manage risk by being closer to your customers. Evidence from the smartphone market (a big user of chemicals / plastics) shows that markets are also polarising between high perceived value (e.g. Apple) and low-cost (e.g. the main Chinese suppliers), whilst some players such as Samsung are caught in the middle. Sustainability is also becoming a major focus for the industry, replacing globalisation, with areas such as waste reduction, lower emissions, renewable energies and healthier lifestyles offering major opportunities. Whoever wins in the recycling space will win big. Interestingly, the upcoming European Petrochemical Association virtual conference is titled ‘Beyond the New Normal’, with the focus on adapting to the major paradigm shifts now underway. As a result, oil prices are no longer a major focus, and Paul expects we will revisit $25/bbl as companies reposition themselves for the New Normal.

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