industry/Business
Chemical firms tight with investment money Combined spending for R&D and capital investment has been dropping for several years and likely will not turn up this year Michael Heylin Most basic chemical makers are behaving like men with short arms and long pockets these days when it comes to investing in their own futures. They are just not spending much money this year. And they didn't spend much last year either. A C&EN survey of 22 major domestic chemical companies including Allied Chemical, American Cyanamid, Celanese, Dow Chemical, Du Pont, Monsanto, and Union Carbide indicates that the industry's worldwide capital investment in new plant and equipment will total an estimated $2.92 billion in 1972. Last year's spending was $2.93 billion. In 1970 it was $3.08 billion. The high was $3.15 billion in 1966. This means that basic chemical industry capital investment, in terms of current dollars, has been on something of a plateau for eight consecutive years since it reached $2.86 billion in 1965. In terms of constant dollars, 1972 spending will be almost 40% lower than it was at the 1966 peak. Erosion. This pattern of decline is similar to the erosion of basic chemical industry R&D spending in recent years (C&EN, Jan. 17, page 7). In terms of constant dollars, R&D expenditures have been declining since 1965. They are now back to about the 1960 level. In fact, they will fall more during 1971 and 1972 than in any other two-year period. The industry's total investment in its' future this year in terms of new plant and equipment (capital investment) plus new knowledge (R&D expenditures) will represent about 12% of sales. In 1965 such combined spending represented 17.5% of sales. All this is, of course, very bad news to the chemical profession—a profes6
C&EN JAN. 24, 1972
sion faced for the first time since the depression of the 1930's with a surfeit of members and a shortage of jobs. The chemical industry is the largest single employer of chemists. And it won't be increasing its professional manpower until its rate of investment in both plant and equipment and in R&D starts to turn upward sharply. It is now evident that this won't happen until 1973 at the earliest. Upturn. This cautious approach to investment in both 1971 and 1972 is coming in spite of a reasonably sub-
stantial upturn in chemical industry fortunes. Financial figures aren't yet available for all of 1971 and they won't be for another week or so, but sales will likely turn out to have been up about 8% over 1970. After-tax earnings may have gained as much as 10%. And there is some confidence in the industry that similar or even better gains will be posted this year as the election-year economy continues to strengthen with a little help from its friends in the Administration. However, two factors throw some
Chemical capital spending stays at low ebb in 1972
Rank in C&EN's Top 50 a
1 2 3 4 6
Du Pont Union Carbide Monsanto Dow Chemical Celanese
Worldwide capital spending (Millions of dollars) 1971b 1972 1970 (Esti(Pro(Actual) mated) jected)
WorldOverseas capital wide spending spending (Millions of dollars) as per 1971*> 1972 cent of (Esti(Prosales mated) jected) 1971
$ 471 394 301 348 132
$ 450 363 205 340 170
$ 450 313 213C 350 170
$ 70 93 62 187 30
$ 90 100 na 158 30
12% 12 10 16 15
7 8 10 11 12
W. R. Grace Allied Chemical Hercules American Cyanamid FMC
110 142 91 93 71
115 150 50 100 87
120 180 85 85 87
35 5 2 20 0
50 8 10 17 0
6 12 6 9 7
15 16 18 25 28
Stauffer Chemical Rohm and Haas Ethyl Corp. Diamond Shamrock d Olin
47 85 39 33 90
50 100 25 35 79
50 67 43 30 85
na na 3 0 3
na na 4 0 7
10 22 5 10 7
38 39 40 42 43
Air Products Koppers Akzona Air Reduction Chemetron
46 40 46 52 23
68 23c 67 35 19
49 40c 66 35 19
35 0 1 5 3
15 0 1 5 3
17 4 13 7 6
45 50
Pennwalt Reichhold
32 23
20 20
20 6
2 0
2 0
5 10
Total for 22 companies
$2709
$2574
$2564
$590
$600
10%
Estimated total for basic chemical industry6
$3080
$2930
$2920
$660
$670
10%
a Ranked in terms of chemical sales in 1970 (C&EN, April 26, 1971, page 12). Companies listed are SIC 281 companies (basic chemicals), b Company estimates, c C&EN estimates, d Data for chemical operations only, na = not available
Chemical industry is investing less in future than it used to
10
15
20
Per cent of sales Capital investment
R&D spending
light on the reasons behind chemical makers' continued reluctance to increase their rate of capital spending. First, the industry's current recovery is from an extremely poor 1970. That year earnings plunged 16% below the already unsatisfactory level of 1969, and profit margin (after-tax earnings as a percentage of sales) fell to an alltime low of 5.0%. And second, capital investment is traditionally a lagging indicator of industry fortunes. It is one of the last parameters to turn up when business improves. This is proving to be the case in 1972 when sales will be up as much as 18% over 1970 but investment will still be below the 1970 level. This decline in chemical industry spending runs counter to an expected strong pickup in total industry spending this year. According to data gathered jointly by the Securities and Exchange Commission and the Bureau of Economic Analysis of the Department of Commerce, capital investment in 1972 for all industries will be $88.9 billion. This will be 9.1% higher than in 1971 and up 11.5% from 1970. However, much of the increase will be in mining, air transportation, utilities, and other nonmanufacturing operations. Cyclical. Historically, the rate of chemical industry capital spending has never progressed evenly in step
with increasing chemical demand. Instead it has been very cyclical. Since 1950, there have been three periods when chemical industry capital investment has about doubled within two or three years. Each of these upsurges has been followed by a period of relatively flat spending. However, these cycles are getting longer as the industry gets bigger. The first upsurge started in 1951. The second got under way five years later in 1956. The third started seven years later in 1963. And it is now apparent that the fourth cannot start until 1973 at the earliest, some 10 years after the previous one. Chemical industry capital investment represented just a little more than 11% of sales throughout the 1960's—the industry's growth decade. The peak was reached in 1965 at 13.7%; but it has been in a general decline ever since. This year it will be down to 9%, only the second time it has dipped below 10% since 1960. This year's data for chemical industry capital investment come from the most exhaustive survey of such spending ever conducted by C&EN. All 22 firms on the magazine's Top 50 listing (C&EN, April 26, 1971, page 12) that are classified as basic chemical makers by the Securities and Exchange Commission were contacted. All have definite, or at least reasonably firm,
I projections of what they will be spending this year. These companies account for 86% of the industry's sales and an estimated 88% of its total capital investment. They had capital investments of $2.71 billion in 1970, $2.57 billion last year, and they expect to invest a total of $2.56 billion this year. Surprise. Last year's drop was something of a surprise. At midyear 1971 it still looked as though spending for the full year would be up about 3% over the 1970 level. But it turns out there was a decline of close to 5%. This year looks much like a standoff. Eight of the 22 companies in the survey expect to spend more this year than they did last, seven expect to invest less, and seven say their spending will stay at the 1971 level. Major advances are planned by Allied Chemical, $180 million in 1972 compared with $150 million last year; Hercules, $85 million compared with $50 million; and Ethyl Corp., $45 million compared with $25 million last year. Union Carbide is planning to spend about $50 million less this year than the $350 to $375 million it spent last year. And American Cyanamid will also drop its spending, from $100 million last year to about $85 million this year. When it comes to the relative rate of investment, Rohm and Haas was ahead of the pack last year with investments equivalent to 22% of sales. Other high steppers were Air Products at 17%, Dow Chemical at 16%, and Celanese at 15%. Among those pulling in their horns last year were Pennwalt and Ethyl Corp. with investments at only 5% of sales, and W. R. Grace, Hercules, and Chemetron with spending at only 6% of sales. The survey also gives the first detailed breakdown of the extent of U.S. chemical industry capital investment overseas. All but two of the 20 companies covered in the survey revealed how much they spent overseas last year and 19 gave an estimate of what they intend to spend this year. These data indicate that the total basic chemical industry invested about $670 million overseas last year. This is equivalent to 23% of their total investment of $2.92 billion. This is in line with the C&EN estimate that 21% of the industry's sales are overseas (C&EN, Dec. 20, 1971, page 16). Three companies will account for more than half of this overseas spending in 1972—Dow Chemical with about $160 million, Union Carbide with $100 million, and Du Pont with $90 million. JAN. 24, 1972 C&EN 7
