Gary Adams had just wrapped up a speech in China after last year's Olympics when he got a pretty clear indicator of where the global economy was going.
“When I got done with my speech, all these Chinese executives asked me, 'Gary, what's happened to our demand?'” Adams said at the CMAI World Petrochemical Conference, March 24-26 in Houston. “Consumers had stopped buying.”
Adams serves as president of Chemical Market Associates Inc., a Houston-based consulting firm. He added that global plastics and petrochemical markets “have entered a structurally long period, which coincides with the worst economic conditions in our careers.”
In January, Chinese exports tumbled 17 percent vs. the same month in 2008, while the country's imports sank 40 percent, meaning it wasn't bringing in raw materials to make products for export.
As similar scenes are repeated in economies worldwide, Adams said that the petrochemicals market will have “lots of surplus capacity” to 2011. “It will be like the mid-1980s all over again,” he said. “Units will be shut down as the industry rebalances itself.”
As the industry works toward a comeback — fueled by lower energy prices and trillions of dollars in stimulus spending — participants have to be realistic in their outlooks and not expect the market to return immediately to its previous highs, Adams added.
“Capacity and demand growth are out of sync because of the recession,” he explained. “So higher-cost capacity will have to close in the U.S., Western Europe and northeast Asia. These closures will be critical to the industry's recovery in 2012 and 2013.”
Adams anticipates the overall global economy starting to trend upward by late 2010. “The patient is sick, but not dead,” he said.
CMAI senior economist Arved Teleki was quick to point out that the current global recession “is not the second Great Depression.”
“Policy response is slightly tardy, but it's catching up,” Teleki said. “Enormous assets are being mobilized to fight the recession. This is far from what happened in the 1930s.”
But Teleki confirmed that the current downturn is “the most severe contraction since the 1930s” and that its “magnitude and violence were underestimated by most.”
He also pointed out that technological prowess, demographic growth and world economic integration — factors he described as “forces underlying strong economic growth” — remain in place.
Teleki assigned two-thirds probability to a scenario in which the global economy shrinks 2.2 percent this year before rebounding to 2 percent growth in 2010. He then expects global gross domestic product growth to average between 3.1 percent and 3.7 percent from 2011-13.
“Commodity price reductions are a bonus,” Teleki said. “Energy prices were a burden, but now they feel like a tax cut. This is a much underestimated factor that adds $1.5 trillion per year worldwide.”
Globally, Teleki said, various governments have committed a total of $6 trillion for tax rebates, bailouts and direct investment to fight the recession.