Business outlook

WORLD ECONOMIC REVIEW AND OUTLOOK

While petrochemical experts had assessed the down cycle of the petrochemical industry as a whole a few years before, such prediction was largely based on capacity rises, particularly in the Middle East. Little were they aware of the economic troubles that would deprive the market of petrochemical demand. So when the worldwide economic crisis hit in the latter half of 2008, the petrochemical industry was hit by both the supply side with big rises in capacities, and the demand side with much lower demand. Add to this the impact of plunging crude oil prices by more than 60% within a few months.

Also, during the latter half of 2008, together with people’s lower purchasing power and demand for goods, this indicated entry into the first phase of the down cycle, causing sliding prices of petrochemicals. Meanwhile, lower crude oil prices also quickly made petrochemical operators suffer from heavy losses due to depreciated inventories, especially during the last two quarters of the year.

The factors affecting world market prices and capacity utilization for each region consisted of:

  • Petrochemical demand, which varied with short-term business expectations
  • The price of naphtha, one of the two core feedstock for the industry, which varied with the world oil price
  • Inventory changes on the part of downstream petrochemical producers, distributors, and users worldwide
  • Timing and purchasing patterns of Chinese importers in this biggest petrochemical importer in the world.

As regards the medium-term outlook for the industry, this varies with projected demand figures, which in turn varies with the medium-term economic outlook. This last variable dictates investment plans - both capacity expansion and new investments.

Short-term economic outlook (2009)

Much uncertainty rules the economies of the world in 2009, notably the efficiency of passing on the effect of the downward adjustment in the policy interest rates of Central banks worldwide and that of the support measures given to US and European financial institutions over the past year. Still, the very low policy interest rates in countries like the US and Japan have imposed limitations to future interest reduction worldwide. Therefore, the speed and efficiency of the implementation of treasury measures to stimulate the spending by consumers and public investment, notably in the US, Europe, Japan, and China, will become increasingly crucial to the world economic outlook in 2009.

The world economy, which has been projected to shrink by 0.6% in 2009, a vastly different picture than the 2.2% expansion in 2008, has prompted the IMF to project that the global trade would shrink by 2.8% against the 6.2% expansion registered in 2007. As a result, the export revenue of each country is looking downward, which means the world economies, particularly Asian ones, cannot rely on exports to drive their economies as in several previous years.

The world economy’s expected recession in 2009 stems from the fact that the economies of the US, Europe, and Japan are all in a recession at the same time, while the Asian economies are expected to register healthy growth rates, but the 5.5% for overall growth is a far cry from 7.8% of 2008. Apart from the severity of the recession in industrialized countries, what will dictate things is the expansion of the Chinese economy. If it is lower than the 6.7% projection by the IMF, the Asian economy would expand at a lower rate than expected. If this were to happen, it would hurt the export sector and the overall economy of each industrialized country. And this would imply greater shrinking of the world economy in 2009.

Medium-term economic outlook (2010-2013)

While the Central banks in much of the world has implemented relaxed monetary policies in 2008 with the tendency of continuing on in 2009, countries in certain regions could still go down further in policy interest rates, notably Europe and Asia. And while governments around the world have resorted to more relaxed treasury policies, particularly as monetary policies were running out of steam, with more limitations because the policy interest rates were approaching zero, the world economy of 2009 remained largely uncertain - slipping between instability and recovery. This is due to the magnitude and complexity of problems and repercussions of the worst economic crisis since the end of World War II. As a result, the world economy in the next stage would continue to be highly uncertain in the timing and magnitude of recovery, especially in 2010.

At any rate, if monetary and treasury measures around the world were to successfully raise the purchasing power and confidence of consumers, it is expected that the world economy would start picking up around 2010, led by the US, Japanese, and European economies. On the other hand, Asian economies, particularly the Chinese economy, would expand more. On the whole, the world economy would gradually improve (see table below):

  2008 2009 2010 2011 2012 2013
World Economic Growth (%)* 2.2 -0.6 2.1 2.8 3.5 3.8

*Based on fixed market - prices exchange rates
Sources: IMF, PTT Chemical Plc

World economic recovery risks

Although the world economy has been projected to significantly recover from around 2010 onward, the risks are there to pull it down in 2009 beyond expectations, meaning that the recovery would be delayed beyond 2010. Most notorious of these risks are delays, inadequacy, and inefficiency of the public sector’s investment push and of stimulus packages of each country around the world, particularly the US, Europe, Japan, and China. Should such risks become real, new purchasing power will not build up adequately to replace what was lost. As a result, capacity utilization in the real sector would dip below its potential or capability; this would in turn prevent adequate employment to bolster the confidence and add to the purchasing power of labor workers, who are also consumers. This causes further sapping of the economies around each region and the world, thus delaying any recovery.


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