Chemistry & the Economy: 2014 Mid-Year Update

6/5/2014

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Upcoming ACS Webinars www.acs.org/acswebinars

Thursday, June 13, 2014

“Digitally Pulling Proteins: Molecular Dynamics Simulations” Dr. Rigoberto Hernandez, Professor of Chemistry and Biochemistry, Georgia Tech Dr. Stephen Quirk, Global Director of Life Sciences, Kimberly-Clark Corporation


“Endangered Elements: Critical Materials in the Supply Chain” Dr. Paul Chirik, Professor of Chemistry, Princeton University Roderick G. Eggert, Professor of Economics and Business, Colorado School of Mines Dr. Avtar Matharu, Deputy Director, The Green Chemistry Centre


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Chemistry and the Economy: 2014 Mid-Year Update

Paul Hodges Chairman, International eChem

Mark Jones Executive External Strategy and Communications, Dow Chemical



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CENTRAL BANKS HAVE CREATED A DEBT-FUELLED ‘RING OF FIRE’ WITH MULTIPLE FAULT-LINES RECORD NYSE MARGIN DEBT

RUSSIA ENERGY SUPPLIES

RECORD LONDON HOUSE PRICES

EUROZONE DEBT

ARAB SPRING BRAZIL UNREST

CHINA PROPERTY/ BANKING

ABENOMICS

SEA UNREST

AUSTRALIA MINING S AFRICA MINING

13 CREATIVE ENERGY FOR IMPORTANT ISSUES

CHINA’S SLOWDOWN IS ALREADY PROVIDING WARNING TREMORS OF THE EARTHQUAKE(S) AHEAD


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2014 Mid-Year Review The Debt-Fuelled ‘Ring of Fire’, and Afterwards 5 June 2014

CREATIVE ENERGY FOR IMPORTANT ISSUES

INTERNATIONAL eCHEM  Founded 2001. Independent, trusted commercial advisers to the global chemical industry and its investment community.  Work with the world's major companies and financial institutions.  Aim to bring Creative Energy to Important Issues, and create value for clients in business/functional leadership roles, by personally assisting them to implement robust strategies that deliver sustainable profit  Team has an in-depth understanding of the issues, and of the ‘real world’ in which clients operate  Former senior managers from leading major companies  Provide judgement supported by robust data analysis  Co-author of ‘Boom, Gloom and the New Normal’, published by ICIS  Write the ‘ICIS Chemicals and the Economy’ blog 16


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AGENDA  Update from December – the recovery disappoints, again  China’s new direction and its implications for the rest of the world

 Opportunities from rising life expectancy and falling fertility rates


GLOBAL CHEMICAL OPERATING RATES HAVE MOVED INTO A CLEAR DOWNTREND SINCE 2008 April 2014’s rates of 84% are a long way below the 92% long-term average

Page 18 CREATIVE ENERGY FOR IMPORTANT ISSUES

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DEMAND, NOT SUPPLY, IS NOW BECOMING THE CRITICAL SUCCESS FACTOR FOR NEW INVESTMENTS US ethylene and derivative production is below SuperCycle levels, despite shale gas economics Co-products produced with each ton of ethylene


Audience Question How long do you think the economic benefits of shale gas will last? • • • • •

1 year 5 years 10 years 20 years It’s here to stay


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US PARTICIPATION RATES PEAKED AS WOMEN JOINED THE WORKFORCE, BUT ARE NOW DECLINING Co-products produced with each ton of ethylene


USA HAS VERY DIFFERENT EARNINGS AND AGE PROFILES; THE HIGHER-EARNING WHITES ARE NOW RETIRING White Boomers are similar to Europeans with median age 42 years, income $42k Co-products produced with each ton of ethylene


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US HOUSING DATA SUGGEST WE HAVE ENTERED A NEW NORMAL 36% of Americans aged 18 – 31 now live Co-products at home, the most with since 1970s produced each ton of ethylene

Pew Foundation


THE BABYBOOMERS’ ‘FLIGHT TO THE CITIES’ IS CHANGING HOUSING AND AUTO MARKETS HOUSING MARKETS Co-products produced with  US housing demand was worth $33bn/year each ton of ethylene for the chemical industry during the subprime boom, when starts peaked at a record 2.2 million level. Housing was also directly responsible for 6.5% of GDP  Subprime was the ‘final hurrah’ for the days when millions of new Boomer families wanted to set up home in the suburbs and raise a family. The rule was simple – if home prices were too high, you just drove 10 miles down the freeway to find a new suburb where prices were $10k cheaper AUTO MARKETS  Today, the kids have left home, and the  Boomers are also driving less as they return Boomers are entering retirement, and so to the cities, and retire from their jobs don’t need family homes in the suburbs  Car-sharing is taking off, with BMW  Falling fertility rates mean there are not suggesting the industry is following the enough younger families to replace them music business into a ‘pay per use’ model Page 24 CREATIVE ENERGY FOR IMPORTANT ISSUES

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AGEING POPULATIONS DRIVE LESS AS WORK AND FAMILY COMMITMENTS REDUCE USA

GERMANY Co-products produced with each ton of ethylene


US VEHICLE MILES TRAVELLED HAVE REDUCED SINCE 2007 FOR THE FIRST TIME IN HISTORY


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THE SIZE OF THE US AUTO FLEET HAS PLATEAUED, AND CARS ARE BEING KEPT FOR LONGER PERIODS Co-products produced with each ton of ethylene


Audience Question What would it take you to give up your car? • • • •

It’s never going to happen. I love my car A good car sharing program Better public transit, it’s not there yet I don’t currently have a car


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THE WEST IS NOW MOVING INTO DEFLATION Inflation meant it made sense to borrow and buy ahead as the real value of debt was decreasing

Deflation means it makes sense to pay down debt and defer purchases as the real value of cash is Oldest Boomer increasing joins New Old

2001 China in WTO

1990s Capacity expands to meet demand

2000s Central banks create stimulus economy, debt

1980s Boomer savings and demand rise

2010s Boomer demand slows as debt rises


AGENDA  Update from December – the recovery disappoints, again

 China’s new direction and its implications for the rest of the world  Opportunities from rising life expectancy and falling fertility rates


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NEVER BEFORE IN ECONOMIC HISTORY...  China did more than half of all central bank lending since 2009

 China’s new policy is therefore a much bigger deal than Fed tapering


CHINA’S PROPERTY BUBBLE CREATED A ‘WEALTH EFFECT’ WHICH WILL NOW DISAPPEAR  Average prices for central Shanghai apartments are 29x earnings - several times the US sub-prime peak  This created a ‘wealth effect’ during the 2000s, and created the impression that China had suddenly become ‘middle class’  It also led to greater social inequality and massive corruption - the richest 1% of urban households own around 30% of all real estate assets “Since the beginning of 2014, faced with complicated and severe economic environment at home and abroad, the Central Party Committee and the State Council have stood firm, launched their actions and made their efforts to take reforms and innovations, to transform and upgrade the economic development model, and to improve people’s well-being.” Summary statement from the Q1 2014 GDP announcement CREATIVE ENERGY FOR IMPORTANT ISSUES

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THE NATURE OF BUBBLES....  In 2007, $1 of credit added 83c to GDP  By 2013, $1 was only adding 17c  2014 estimates suggest $1 will add just 10c  The PBOC would have to allow lending of more than Rmb 19tn ($3.14tn) to create GDP growth of 7.5%

 “But that amount of total social financing would represent 12% year-on-year expansion, much faster than last year’s gain of 9%. An increase of that scale will cause massive macroeconomic risk” China’s Academy of Social Sciences CREATIVE ENERGY FOR IMPORTANT ISSUES

CHINA IS NOT “MIDDLE CLASS” BY WESTERN STANDARDS  Average per capita urban incomes were Rmb 30k ($4769) in 2013  Average per capita rural incomes were $1276 in 2013


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AFFORDABILITY BASED ON INCOME, NOT THE PROPERTY WEALTH EFFECT, WILL BE KEY TO FUTURE GROWTH  In rural areas:  Every household has a mobile phone and a colour television  2 out of 3 households now own a washing machine and refrigerator  2 out of 3 households now own a motorbike, and bicycle ownership has halved since 1995  But only 1 in 5 own a computer  By comparison, in urban areas:  Every household owns a mobile phone, colour TV and air conditioner  Everyone owns a washing machine and refrigerator  1 in of 5 households own a motor bike and the same proportion own a car  Almost every household owns a computer and water heater


IMPROVING THE ENVIRONMENT IS NOW MISSION-CRITICAL FOR THE GOVERNMENT  Investment-led growth a major contributor to problems such as chronic air pollution  5 million older cars to be removed from the roads this year to reduce pollution  “One-sixth of China’s arable land — nearly 50 million acres — suffers from soil pollution. More than 13 million tonnes of crops harvested each year are contaminated with heavy metals” Ministry of Environmental Protection


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AUTO SALES WOULD STILL BE BELOW 2007 LEVELS WITHOUT CHINA The ‘top 7’ are >80% of total world demand


AGENDA  Update from December – the recovery disappoints, again

 China’s new direction and its implications for the rest of the world  Opportunities from rising life expectancy and falling fertility rates


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6/5/2014

THE TRANSITION TO THE NEW NORMAL IS CREATING A VUCA WORLD

"I use the term VUCA to describe the world – volatile, uncertain, complex and ambiguous. It is very difficult for people to get a total picture.” Paul Polman, Unilever CEO 39


LIFE EXPECTANCY HAS INCREASED BY 50% SINCE 1950 AS FERTILITY RATES HAVE HALVED AS


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TODAY’S AGEING POPULATIONS ARE CREATING A REPLACEMENT ECONOMY AS PEOPLE RETIRE Co-products produced with each ton of ethylene


HOUSEHOLD SPENDING CHANGES WITH AGE


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THE NEW OLD 55+ GENERATION ARE NOW 38% OF US HOUSEHOLDS


LABOR BUREAU DATA HIGHLIGHTS THE DRAMATIC CHANGES THAT TAKE PLACE


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COMPANIES NEED TO RECOGNISE THE MIDDLE GROUND IS DISAPPEARING AS THE BOOMER SUPERCYCLE ENDS HIGH P E R C E I V E D

V A L U E

NICHE

MIDDLE GROUND OF ‘AFFORDABLE LUXURY’ DISAPPEARING

AFFORDABILITY, LIFETIME COST, NOW KEY TO SUCCESS MASS-MARKET

LOW HIGH

DELIVERED COST

LOW CREATIVE ENERGY FOR IMPORTANT ISSUES

WINNERS WILL CREATE THEIR OWN VUCA FOR SUCCESS  Volatility  Developing a road-map requires Vision  Uncertainty  Strategic Understanding of the changes underway is essential  Complexity  The planning process requires Clarity over implementation  Ambiguity  Unforeseen events will place a premium on Agility 46


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Audience Question What’s the next big thing in chemistry? • • • • •

3D printing Carbon fiber Synthetic biology Distributed manufacturing Personalized medicine


INTEGRATING FORM AND FUNCTION IS THE NEXT BIG THING THAT NEEDS TO HAPPEN IN 3-D PRINTING  The chemistry and machines needed to create a wide variety of different materials are now being created  At the moment, 3D technology is limited to certain plastics and metal alloys  Research is focusing on a wide variety of different materials, ranging from living cells to semi-conductors  The potential exists to print objects from ‘the ground up’, precisely adding materials that are useful for their mechanical properties, electrical conductivity and optical traits

Objects that can sense and respond to their environment are the next frontier for 3D printing

SOURCE: MIT, Jennifer Lewis http://www.technologyreview.com/featuredstory/526521/microscale-3-d-printing/


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SHARED VALUE IS A STRONG MODEL FOR THE FUTURE, AS IT COMBINES ECONOMIC, POLITICAL AND SOCIAL VALUES

CHINA

THE WEST Prof Michael Porter OPERATES HERE OPERATES HERE Harvard University “Shared Value will drive the next wave of innovation and productivity growth in SHARED VALUE the global economy”

OPERATES HERE

MIDDLE EAST OPERATES HERE 49 CREATIVE ENERGY FOR IMPORTANT ISSUES

OUR SERVICES BLOG & BOOK www.iec.eu.com

EXECUTIVE BRIEFINGS

KEYNOTE SPEECHES

Senior Management

Conferences

WORKSHOPS Strategy/Planning

PROJECTS Making It Happen

PAUL HODGES [email protected] +44 20 7700 6100 50 CREATIVE ENERGY FOR IMPORTANT ISSUES

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Disclaimer Strictly Private & Confidential This Research Note has been prepared by IeC for general circulation at the ACS webinar on 5 June 2014. The information contained in this Research Note may be retained. It has not been prepared for the benefit of any particular company or client and may not be relied upon by any company or client or other third party. IeC do not give investment advice and are not regulated under the UK Financial Services Act. If, notwithstanding the foregoing, this Research Note is relied upon by any person, IeC does not accept, and disclaims, all liability for loss and damage suffered as a result. © International eChem 2014. All rights reserved







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Mark your Calendars for the 2014 Year-end Chem & the Econ update!

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Thursday, December 11 @ 2pm ET

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ACS International Center

June 24, 2014; 3:00pm EDT

Dr. H.N. Cheng Chair, ACS Committee on International Activities

www.acs.org/ic

ACS Office of International Activities Speakers from the office will provide tips on activities, events, and opportunities to watch out for!

Are you attending the ? This fall’s theme of global stewardship means we have a lot of international activities in store for you! For this webinar, Dr. H.N. Cheng, Chair of the ACS Committee on International Activities (IAC) will join speakers from the ACS Office of International Activities (OIA) to talk about international events, activities, and opportunities taking place in San Francisco. Listen to learn about how you can get involved!

29

6/5/2014

Have you discovered the missing element?

www.join.acs.org Find the many benefits of ACS membership! 59

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Chemistry & the Economy: 2014 Mid-Year Update

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