The End of "Business as Usual" (w/ Paul Hodges) | Expert View
Most. Of the data is pointing in the same direction and, it's not terribly optimistic can. Cause it's an obvious problem area, simply because you've. Got this major capacity. Build going on at the moment because of shale gas I think, that the role of stimulus, is played out I think. That China will continue, to. Deleverage. So. I'm Paul Hodges from the pH report and we. Look at the, world and the world economy through. The lens of the chemical industry why. Do we do that because the chemical industry is the third largest industry in the world after, energy. And agriculture. It gets into, every, corner of the world, everything. In the room which, you'll be watching this interview is going to have chemicals, in it and the. Great thing is we have very, good almost, real-time data on what's, happening so our friends at the American Chemistry Council have. Data going back on, production, and capacity utilization, since, 1987. So, 30 years of data, and, we, get we get that within, around six to eight weeks of the, the end of the bottle so, whereas, if you look at IMF, data just looking at the history, if you like we're, looking at this is what's actually going on as, of today you look obviously. Upstream, as we would call it at the oil and feedstocks, markets. So, we understand, what's happening in that area but, we also because. The chemical industry is in the middle of the value chain you, have to be like janus you have to look up and down at the same time otherwise, one. Of these big boys catches, you out and so. We look down the stream and we particularly look at autos. At, housing, and electronics, because those are the big three applications. And of course they're pretty big for, investors, as well so, this we, see. The relative, balance between what's happening upstream, what's, happening downstream, where, is demand going and then we see what's happening in the middle of that chain because, that's where we're getting our data from. So. Our data match is on really well to earth saying to IMF data so. Changes, in capacity. Utilization which, is our core, measurement. If. You go back and plot that against, history from the IMF very very good correlation. So. What, we're seeing at the moment and really we've been seeing this since we did the interview in November, is. A pretty, continuous downturn. One. Would have hoped you. Know when we talked in November we were we were talking about the idea that, things. Have definitely cooled, off some, of that early due to the oil price coming down some, of that was due to end of year destocking, some. Of that was due to worries about trade policy lots, of different things but, you would normally expect the first quarter, to be fairly strong and reasons. For that are that the first, quarter this year particularly, was. Completely. Free of holidays Easter. Was late so.
There's Nothing to interrupt you there there was a usual Lunar New Year in China but always, happens so there's nothing unusual about that, and normally. What happens is that in the beginning of the new year people, restock, they've got their stocks down in December for year-end purposes, here are tax purposes now they restock again and, of course they build stock because, the construction, season is coming along in the spring and people, tend to buy more cars in that period in electronics, and so on so everything, in the first quarter, was very positive and you. Know one wouldn't normally be surprised, to, start seeing stock-outs in the industry, particularly, after a quiet period. In the fourth quarter and, unfortunately, we haven't seen any of that, we've. Seen and, this this is this is worth thinking about from home we've, seen a 25 percent rise in the oil price because. Of the OPEC Russia the, deal but we haven't seen the, normal, to, stock build that goes along with that and, just to explain this is a bit counterintuitive. When. The, oil price goes up people. In the chemical industry know, that, the prices of chemicals is about to go up as well because oil is so important, so it's gas so, they tend you know we're sitting in April they will tend to say oh look the prices going up we, need to buy an April because the price in May we'll be higher and, now that should have happened but. It didn't and this is the first time I can ever remember that not happening and the. Only reason that one can come up with for that is, because, obviously interest, rates aren't high so finance, directors wouldn't be saying oh no we can't afford that can't do that or anything it could only be that end user demand, is, actually quite weak and, so the sales team are actually saying you know we've, got quite a stockpile already would probably don't need to add to it that's. That's where we are at the moment what, we were talking about in the back end of last year that the smartphone market has gone into recession for the first time, so. Clearly that trend, which, was very very powerful over. Three or four years and followed, on from previous, our, trends has now run. Its course and there isn't actually anything else that. We can see coming, along and you. Know what we are seeing, notice. This you know that orders, from, Apple, and so on into China are weak and we're getting you know adverse. Reports. Coming out about my future market demands there yeah when when, Apple said last. Year or we're not going to publish our sales figures anymore not. Usually because they're so good to the people might get too excited, so. Something, has clearly happened there that we've seen that since, if, you look at autos we. Follow, the top seven markets. And which. Are sort of 7080 percent of the total and. All those only one was. Up in the first couple of months this, year so Brazil all the others, China the states Europe, Brazil. Russia. India so. On they open Japan they were all down. Some. Of them not by very much China, down by quite a lot, but. You know so the there, isn't anything out, there.
That, Says ah well, wait a minute this, means, you might, be at a turning point at, the moment most, of the data is pointing in the same direction and, it's not terribly optimistic. When. We saw the lending. Numbers, for January. It. Was understandable. I think that a lot of people jumped to a conclusion that said Oh stimulus. Is back as, absolutely. No right no doubt that in if you look at what happened in after. 2008. If you looked up what happened after 2015. Both, times Chinese, government, was panicking, for certain reasons, so it's panicking, because 24, million people are unemployed after. The financial crisis afternoon. Lunar New Year in February, 2009, massive. Stimulus. Again. Not quite panicking, but, wanting. To bolster the, position because, you had the party Congress coming up and the reappointment of all the top officials, who don't want any unrest, or a disturbance, ahead of that in 2017. So you. Know and, I think the markets were absolutely right the time to say well you know we're going to see a big, increase in consumer, spending and so on so all of that went. Through we've. Had a record level of lending. Not so, much in February but you take the first two months ago then you have to do that because of Lunar New Year the West cook comparisons, are meaningless but you do that so yes it was definitely a record level of spending but, we also had, auto. Sales housing. Sales and. And. Smartphone. Sales, and auto. Sales are down and, that continues, after 2018, which was the first year that, the Chinese auto market, had been down since. 1990. So, this is a big break, going. On here and themselves. Are down in the double-digit numbers. Similarly. In smartphones sales are down in double-digit, numbers, in. Housing. We don't have such detailed, data, but, China daily in the state-owned. Media. Reported. That Evergrande which is one of the big three. Property. Developers, in, January, and February saw, it sales down 43 percent now. They. Weren't reporting, that as an exception, they were reporting, that as part of a downbeat thing about housing so, it really does look to us as if. The. Consumer, market. Turn down here. What, would please don't, get me wrong we're not talking about the collapse or the implosion of the Chinese economy or anything like that we're, talking about a restructuring. Of the economy, here, I think that's going on and one does have to distinguish, between the wealthy the very wealthy spotted a city the, very poor parts, in the in the west where there's. Still 80 million people in China living. Below on an income of below poverty level below, two dollars a day I've still 80 million so, we can, focus on the skyscrapers. In the wooden Shanghai, but there is another side to the story and, I think that could be your Communist Party is trying to redress some, of that balance that's, going on but, the other thing is where, where has this lending gone then and. Again. Where we're searching, for for. Answers a bit but, we do have data about. Industries. Like China, rail where. We know that. They. Have their interest, payments. Have been larger, than their income since. The data was published since 2015, we, know that as part of the stimulus, program this time around it's more focused on infrastructure. And we. Can we can see therefore that if they already have a, major, five, trillion remember. Debt. That, this is going up and that, probably they're unable to meet interest. Payments going forward and therefore, they need support, similarly. One. Of the big areas of concern are we're not the only ones who've focused. On this in the past of course is, the local government financing, vehicles and, the.
Issue Here is that local. Governments, tend to get their money from property sales so, the Communist Party owned or the government owns all all land and so, if you want to make your buck numbers in the, local region you sell land to your friend the developer, and he, then pays, you some money which goes into your coffers and boots GNP, he then builds, some, some, housing blocks and again, you get some revenue from that and. So. If. If housing market is slowing down that's. When. Local governments start to run out of cash to, pay their bills and, particularly these off-balance sheet local, government financing, vehicles, so it looks to us, we're baby wrong but we've been here this a long time looks, to us as though the stimulus money hasn't, gone to. Spark. New consumer, spending as what. Might have thought as before as market seemed to pursuit it's actually, gone to meet these headwinds that. You get from debt because, I thought in the end of the day what does that do, Dec brings forward demand, I can, either wait and save up and then buy it or, buy. It today and. Pay it back afterwards either. Way it's the same thing I don't need two cars to, drive at the same time and. So. So. It looks as though this. Is what's happening that we're getting these headwinds, kind, of again please, be clear I'm, not saying the economy is imploding, or anything like that I'm just saying there is this necessary, restructuring. And it's very sensible, for President, Xi in, the SEC in a second term you, know he had to he, wasn't in charge of the economy in the first term it was premier nee we're doing the stimulus and so on now he's got it so you have to do that at the start you term you don't want to be doing that it's, three or four years time you, know you can have it in the position you know deal with it you take the pain move on and of course President Trump is providing, him with an ideal excuse, that we. Have to tighten our belts because we don't know what, the Americans are going to do. We're. Seeking to in two areas on with the more areas we can see it in the better really of course so, we've seen the downturn, take, place o the second half of last year in chemical, capacity, utilization and. This isn't because there's been a massive amount of new Hailie, - just that the, demand, is not being used, tentacles weaken talkity companies, Chinese, companies our Western companies and get an anecdotal view from, them which is usually pretty reliable, - so, there's that but then if you look at some of the basic chemicals, that. Are around things like acetone, and so on you can see we have data for these stop storage. And so on and these, are at record levels so. There, is there, is a consistent, picture here, that, within, the basic chemical. Market, there is not a lot of strong, demand that. Production, is ahead of demand, and that stocks are building. If. We were going to be consistent, with our story then, one would have to see a downturn, in Germany because, obviously the German economy has been heavily dependent, on export, sales to, China far, more than anybody else and, yes indeed we, are seeing that and, we've just seen you know very recent data which all.
Of The major economies. In, terms of, chemical. Production, so, Germany France Spain or, are down with just one exception, which we can come to in, a moment and they're continuing. To go down and, so. What does that mean, well if. If, Germany. Is the motor, of the European. Economy and, if, the motor was firing on all cylinders, when, stimulus, was underway and China, was going strongly. Well, if the, motor isn't going, to fire so strongly but, then when, China, starts to slow and, that's what we're saying it's very hard you've, got an ageing population as, we know across Europe particularly. In Germany median. Age of 46, or so and you. Know Europe has not replaced, its population, since, 1970. So we're coming up to 50, years of not, so. The number of people in what. You might call the wealth creation. Age. Group 25, to 54, where, people will tend to sort of get, to start their careers their salaries will move up there very often settle down perhaps have children, they'll buy houses they'll buy cars and so on it's a relatively. Small number of people in that group and. Of course we've got this older, group the perennials, if, you die who will be, sort of from. Unfortunately. From an economic point. Of view and from a central bank point of view instead, of getting their gold watch or their clock and retiring. And dying next, week on the golf course as they should have done they're. Actually living now for another 15 or 20 years but they're not economically, active and you, look at spending across the world for. People, age sort of 65, to 75, it by the time you get to 75 it's half the level of when you're 45 to 54 for very obvious reasons so, you've got these two big, headwinds, in Europe, where as you do in course in Japan. Where you, have the profit the problem of. An. Older perennial. Generation, that really isn't contributing, very much and a relatively, small wealth, creator 25. To 54 so all of this is very. Consistent what. Would have made the difference well obviously China doing, what he did made a fantastic difference. But, if China is taking its foot off the accelerator. Well Europe. Is now going to have to face those those, issues and, I did say there was only one country that didn't. Buck the trend and that, of course is the UK. Where. Everybody. Had, feared that, we might have fallen out of the European, Union you know already we've. Now got to April 12th before, we fall out maybe. We won't who knows but. Almost. Every, company that could has, stockpiled. Wheat, we talked a lot of people and every. Warehouse in. The UK every village, hall is stacked. Full of stuff I mean the that. The car companies, are, right unfortunate, in the middle of the, storm because they've all decided to, bring forward their summer shutdowns, to, this fortnight in, order to avoid the worst effects, if there wasn't no deal but. Of course there, isn't a no deal so they could have been running normally now, they'll be coming back and, if there is a no deal that, starts on the 13th of April they'll, just be stopping us now you know this is not very clever so, but anyway you know if you build stockpiles, at this extreme, level, you. Can either assume the brexit is going to be the most wonderful thing for the economy and, we'll never say you, know never see a downturn again or you, say well, it's going to be a pretty rough second and third quarter, because greater unwind at all I know. Where I put my money. We. Tend, to look at these things that I suspect a lot of people too in, terms of you know what's. The trend, going. On here are we going up are we going flat are we going down and, what. Is it that's going to come along I, mean if you like what, we've done is we've talked about the, why we, might be going down and the, what in terms of how we see it in terms of the. End-user, industries, in chemical industry and so on so now you get on to the interesting question, of how. And when. Which. Is where you can make, or lose money. And. Yeah. So but I've been or the trader you know in Houston Texas so. You, know I'm pretty keen on, the how, and when side, of this rather than just see the high level analysis and so. One's. Looking at indicators. To, see whether the. Downturn, becomes. Exponential. If, you like and, if. The oil market, seems, to us to be playing. That role at, the moment in, that you. Know make. You and you saw a great clip I'd just say we're. In one of those moments where the oil market is clearly going in the wrong direction compared. To supply, demand dynamics, know, Saudis. Cutting, by 1.2, million barrels, the, Russians are cutting a little bit now and again but of course it's very cold in Siberia, so you can know they'll who would have thought he can be cold in Siberia, you.
Know So here are the usual excuses for everybody else but the Saudis, as usual. Also are picking up the slack and they, want the $70, a barrel price. Because, they've got some very extravagant, budget, needs. To. Restructure. The autonomy so that's what they want and. The. Problem of course is that if, the. Market, now starts. To fall away if China Chinese. Demand really does continue. To slow and if, India, continues. To slow well, what, are you going to get those, are your two main sources of growth for. The, oil our, oil demand we. Do know that. Saudi. Is not the, swing producer a. We, know that the u.s. is now the largest. Producer. Russia is up there - yeah, I'm, very happy to discuss it with anyone but you know I don't believe that Russian will never cut back its. Meaning for me they've never done it in the past they never do it in. The future it might my view doesn't suit their strategy at all but they'll talk a good talk so. You've, actually got more and more oil coming. Out some. Of us has been delayed in the staged in terms of hitting the market because of infrastructure. Shale, came out so quickly that, the pipelines, and everything just couldn't get there in place but, they are coming in place so, the answer to your question, what, would I see, as being a catalyst. For this is the. Oil price if, the, Saudis can continue, to hold it around today's, level, maybe, they have to cut some more and so on and so forth then, you probably, say okay, you, know it's not looking green this, but you know on imbalances. You know this is happening there and that's happening there and so on okay it, you know we've gotta wait for a catalyst, which could be Apple it could be down if, however, and, this is you, know if I had to have, a base case that this is what I'd say if. However towards the, end of. Some. Of the quarter we. Start to see that or a price slipping, then, I'm saying you know we could well be into, that pit because once you go past the. Driving season in the States and the driving season you, know ever ends. As, far as the refiners, are concerned on. On. A Memorial Day at the end of May because. You've got to have your your, oil through, the refinery, and out through the distribution network in. Order for when people's get in the car and start driving to the Grand Canyon that is there so, driving, season end end May up till July for carry, on a bit after that -. Thanks -. Intercepted. September but, you. Know if you normally, if you see a collapse. In oil prices tends to come about that time, so, if China isn't picking up the slack if we're not seeing a strong recovery and, if the states is starting to come out with more and more oil but you will do at these prices very.
Profitable, To be producing. Oil in the States and these numbers. Then that, will turn us that we're on the way down which is where I fear, that we're headed you could almost see in in. Two, stages, so you can see that the oil demand growth is, not surprising. On the upside anymore which is why OPEC, and Saturday, are having to intervene. In order to take product off the market. I said, tells you the first things are not as powerful and, strong as people think the second thing of course is can. They maintain that position. Given. What is going on in, the rest of the market and, have. This is said and no we. May come back and talk about this another time if we look at producer, price inflation, in. China, it, needs touching, zero at, the moment and, it's really it, wasn't for the swine fever problem. Keeping, pork prices up it, would probably be negative, now, China is still the manufacturing, capital of the world now, if you put together a, you. Know I'm saying if I'm not saying when if, you put together a, resolution. Of the swine fever problem, and therefore it moves by China into. Into. Deflation, together. With a fall in the oil price you. Will have deflation across. The, Western world and across about the main economies, and, you will have that as you go into the. End, of the year so and. There'll be nothing nothing. The central banks can do about that so, all this ten years of don't worry we've solved the problem, unfortunately. Though, their credibility will, not be that high now I don't think they'll stop I'm sure we'll get helicopter, money you, know I'm sure that's what we're talking about with modern monetary theory and so on but yeah that, to, me as. Somebody who deals with the. Nitty-gritty of what's, happening in the markets and how much of people actually buying and selling things and, services. And so on that, could we cover services as well as as well as good so we cover the whole piece you. Know if that starts to happen then I think, we've got to see this problem. Chemicals. It's an obvious problem area, simply because you've. Got this major capacity. Builder going on at the moment because of shale gas, essentially. You have to extract Ethan. From, natural gas in his wet, as its horn because otherwise he goes into if, you keep Ethan, as high, constant, quantities over three or four percent in, the natural.
Gas Steam it gets into the condominium, in New, York you like the oven or the hole and it explodes and you know guys like these coasts are really really fussy and if. They don't like that so you have to extract it because. Of that what else can you do with it absolutely nothing you could only make ethylene from it if we could only make polyethylene, and so on so you're getting this wave, of new capacity which. Is you, know really distressed, product. Got nowhere else to go and there's, almost no way that he's going to stop because the economics, of closing. Down there and get a gas, well I mean, you'd have to have a price of -, goodness, knows what yeah. Nobody would ever do it so, so. It's going to keep coming and of course if he can't go to China which was the original idea because, demand is down there because you've got 25% tariffs, and all of these things where else can it come it comes to Europe and so from. A chemical industry point of view you. Know we are seeing yeah, major price, wars starting, to develop now and you, know companies like right now are issuing, profit warnings and so on because of this so, that's, you, know that I'm afraid is already part of the landscape and priced. In I think, the. The. The the other areas, obviously. People. Are hoping that the the oil price will will. Move up, capital. Goods of course as you say will be will, be affected, if you. Know how much more investment, do we need if we've already got too, much these. Are the kind of questions that we're sizing but also is is definitely, also. Is for us is is, it has been a cell for about nine months now also a. Because, we, think that new car sales are coming down be because. Of the enormous investment, needed for battery, vehicles and the three because, we had such boom conditions, over. The past four or five years that. The second hand now the used car market is, looking extremely attractive. But, if we talk about China for example you go about ten years there wasn't two used car market in China because, the. Caste last more than three or four years they were all Chinese built now, China they're still not coming up to the eleven or twelve years that you expect in the States but they're coming up that way and, there's a very strong so.
The The used car market in, in in China last, year grew a twelve percent when, the new car market fell and. Then if it bends quite interesting, IPOs of people, like you shame and so on which, are putting, together you, know rather, than your year olds second-hand, car dealer yeah come on come on course lobbies call for you oh yeah right, you've. Got online with. Insurance, with, guarantees. And, warranties and, so on so it completely much, more sophisticated kind of thing and of course this does key in with government, policy because, you, know people, are not going to be able to afford a new car in some of the poor areas but they could well afford the. Used car and, that would be a tremendous, bonus. For, people in the poorer western. Provinces. And, so the government has been removing the barriers on moving, cars, between the, provinces from the rich to the poor accomplished so it's taken some time but it's been done so, we can see good growth in the, second-hand car market and that's the thing you know we're. Almost and. I hesitate, to get too excited about this but we're, almost getting to the point where we're, moving beyond all. Assets. Go up because central banks pump out large amounts of money to stop, picking kind of Marcus naturally that market, is going to do really well or almost, whatever happens. But. Were at the point as we, were saying where. The. Market I wouldn't say it was balanced, at the moment I would say it's, trending, downwards. And, therefore, it's quite vulnerable to something. That will push it over. The edge if, you like one, of the things that of course is quite worrying, is, that the. Central, banks are still trying to interfere, in, the workings of the market and, therefore they're producing, very distortionary. Pictures. You know that so that stock markets are going up when in the real world things are not doing that well they, I, feel, maybe the stock market is leading indicator maybe all this is for him I don't, believe that at all I don't think most people live has just that you know our decided, that he was going to you know stop quantitative, typing and so everybody says well don't worry we're off to the races again I, think. I think, that the role of stimulus, is played out I think, that China will continue to. Deleverage. In. A kind of sensible way over. The next year to 18 months I think we will see areas. Where we have to look at things in more detail like where, is the money going that they lend is he going to pay, off debts or is it going for new spending and so on and I suspect that's going to be a trend that we're gonna have to look at we haven't talked today about corporate. Bonds but. You know if you want something that I think could blow up quite, nicely for. The second half of this year its, corporate bonds because, if I'm right about deflation. And if I'm right about the. Potential. For earnings to decline then, that sort of from near, half of bonds which, are triple, B could. Easily get downgraded to junk and, we know that investors, can't, from any of investors, can't hold junk so. So. That but we're not there yet and, there's, money to be made no matter what as long as you I would, use this time to think, clearly about whereby we end up in 18 months time and what would I do today if I thought that was going to happen. You. You.