Chemical plant construction slows down - C&EN Global Enterprise


Nov 7, 2010 - Chemical plant construction slows down. High interest rates, tight money, and proposed tax credit repeal have caused low capital spendin...
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Chemical plant construction slows down High interest rates, tight money, and proposed tax credit repeal have caused low capital spending Chemical industry expenditures on new plant and equipment this year will be a patent disappointment to chemical construction firms. Capital spending may be up from last year's $2.69 billion total, according to a C&EN poll of these firms. But it won't come close to reaching the benchmark $3.15 billion estimated by the Securities and Exchange Commission. When a final tally on 1969 capital spending is made, most companies expect only a 5r/c improvement over last year. Chemical companies simply aren't spending the way they planned and reasons for the foot dragging aren't hard to find. "There is a lot of nervous money around," is the way one construction firm's sales manager explains the situation. Managements aren't sure what's going to happen to interest rates, tight money policies, and the 7% investment credit. We've made a lot of definitive proposals that any other year could have been moved to the sales column but this year were canceled," he adds. President Nixon has asked Congress to repeal the 7% investment tax credit. But there is so much opposition to the Nixon proposal that it may not be enacted. Even if the tax credit is suspended or repealed, chemical contractors are in agreement that many projects will be shelved. M. W. Kellogg says that it expects a definite short-term slowdown as people reassess projects in the light of tight money, high interest rates, and possible repeal of the tax credit. Fluor chairman J. R. Fluor told his company's shareholders at the annual meeting, however, that only marginal projects should be affected by elimination of the tax credit and that Fluor should feel no change in its operations as a result of the repeal. The possible loss of the investment credit and the increase in construction costs, which have been running about 5% a year, prodded some 20 C&EN MAY 26, 1969

firms to speed up their construction timetables and start building now. The net effect of repeal of the investment credit, however, will be a spending slowdown which should only last about a year, say firms contacted by C&EN. The long-term outlook for the plant builders is sanguine. Mr. Nixon linked repeal of investment credit to an offsetting removal of the corporate surtax on profits. Most chemical contractors say the early 1970's should be boom years. The investment credit spurred chemical construction more than is generally realized. The explosion in spending by the chemical industry followed hard on the passage of the investment credit in 1962, reaching a peak of $2.99 billion in 1966. Since 1966, capital spending by the chemical industry has been dropping and 1969 was to be the turnaround year. It now seems clear that it won't be. In passing the tax credit, the Kennedy Administration and Congress invited corporations to expand their productive capacity by giving them an immediate 7% credit for investment in productive units against their tax bill. The remaining 937c of the investment in plant and equipment could be written off over the useful life of the asset. This, combined with a reduction in corporate taxes on earnings, was a powerful stimulus in the 1963-66 period. Dun & Bradstreet, Inc., finds in a survey taken the day after the President made his proposals on tax revision, that repeal of the investment credit can be expected to cool off the economy. American corporations with combined sales of more than $100 billion constituted the sample. Nearly three quarters of the respondents expect a cooling effect. Solid projects will not be derailed by repeal of the investment tax but borderline projects will go by the boards. The same number of respondents who foresee a cooling of the economy in the Dun & Bradstreet sample indicate their company's plans for capital spending will not be affected by repeal of the credit. One fourth of the respondents do see a reduction in planned capital expenditures but expect it to be minimal. Schweickart & Co., a New York brokerage firm, estimates that if the investment tax credit is fully eliminated, it can mean a reduction in corporate

profits of about $4 billion annually. Opposition to repeal of investment credit is mounting. A number of executives scrutinizing investment credit developments say that even if the credit is repealed or suspended, other compensating credits will be introduced by Congress. Among those on record as opposing repeal is U.S. Steel's finance committee chairman Robert C. Tyson, who warns that, "Those who advocate the suspension or repeal of the investment credit are in effect proposing a reduction in depreciation charges, and depreciation is the real seed corn which per-

mits industry to keep existing plant intact and modern. To treat and tax real depreciation costs as though they are profits is triple folly." Ian MacGregor, chief executive officer of Amax (American Metal Climax, Inc.) says that he fears repeal of the investment tax credit will have an adverse effect on the U.S. economy and seriously impair the capacity of American industry to deal with some of the nation's specific urgent social needs, such as providing 14 million new jobs during the 1970's for the country's expanding labor force. Overseas business, too, is harder to come by. While there is increased activity in construction overseas, it isn't being translated in sales for U.S. equipment makers and design engineering companies. Foreign exchange rates and curbs on overseas spending are working against U.S. firms. In addition, competition from

Experts assess synthetic rubber outlook, see changing industry, new investments

XYLENE PLANT. Workers build one phase of an o-xylene plant owned jointly by Hercules and Commonwealth Oil & Refining Co. at Penuelas, P.R. 5LYCERINE SAMPLE. Production vorker takes sample of glycerine from distillation tower at FMC's newly built )lant at Bayport, Tex.

Japanese and European contractors is increasing greatly. Scientific Design says that spending on chemical plants by European firms including Great Britain will be up only slightly this year. Activity in East Europe and South America should surge though. Confronted with a problem of finding money and having to pay high interest charges once it is found, the chemical industry and individual experimenters are looking for other avenues for obtaining needed equipment. One such possibility is that of leasing. Scilease, Wethersfield, Conn., says it is now prepared to lease all specialized scientific, medical, and educational devices. Complete laboratories have been leased by the firm and president Barry P. Bronfin says that in particular cases the answer to high interest rates and tight money may be the leasing of entire chemical plants. Although charges are relatively high, they can be included as an operating expense for the year and thus lower tax charges. In short, it is a difficult year for forecasting. The firms queried by C&EN-Babcock & Wilcox, Badger, Bechtel, Chemico, Chemtex, Fluor, Foster Wheeler, Kellogg, Leonard Construction, Lummus, and Scientific Design—reach a consensus that many estimates of spending on chemical plant and equipment are too high.

Synthetic rubber producers around the world are headed into the 1970's with production split about equally between North America and the rest of the non-Communist world; with growth in U.S. exports having leveled off; with rubber technology merging more and more with that of plastics; and with the political-economic interplay with the underdeveloped world becoming increasingly troublesome. So w7ent some assessments by rubber experts at the meeting of the International Institute of Synthetic Rubber Producers. The meeting, held at Ft. Lauderdale, Fla., earlier this month had as its theme elastomers in world trade. Shell's Gordon W. Atkinson, IISRP's outgoing president, said in his departing address that by the end of the 1970's western Europe and the "new industrial nations" each will have pulled about even with North America in consumption of all rubber, both natural and synthetic. If growth projections for the transportation industries hold up, emulsion SBR (styrene-butadiene rubber) will begin losing its position as synthetic rubber leader to solution rubbers, which are more convenient to ship. The use breakdown, Mr. Atkinson continues, will be natural rubber 2 5 % , emulsion SBR 3 0 % , and solution rubber 45%. With the predominance of these new rubber forms, new worldwide investment requirements by 1975, Mr. Atkinson says, should hit about $700 million, with an added $200 to $300 million for corresponding monomer production facilities (for ethylene, propylene, butadiene, isoprene, and styrene). "Whilst we polymer people may be impressed with the magnitude of our task," he says, "consider the decisions facing the rubber consuming industries/' These industries will have to

make capital investments of at least $6 billion by 1980 to convert the additional rubber available through the 1970's into finished products, Mr. Atkinson predicts. Paul J. Lovewell, of URS Research Co., Palo Alto, Calif., predicted that in the 1980's, the rubber market attitude will no longer be natural vs. synthetic. The spotlight, instead, will be on synthetic vs. synthetic and plastic vs. elastomers. Polymer scientists are more and more integrating basic chemical structure with performance, he continues. For example, chlorosulfonated polyethylenes have replaced polychloroprene; also, synthetic foams and plasticized polyvinyl chlorides have replaced rubber soles in shoes. Despite such changes, " . . . many in the synthetic rubber industry believe that the industry's technological progress is being held back by the inability or unwillingness of end product manufacturers to keep pace. Raw materials manufacturers may have to give more help, both technological and possibly financial," Mr. Lovewell asserts. Some synthetic rubber economists regard natural rubber as doomed despite costs for natural that are now at their lowest levels in history, and despite development work by scientists at Malaya's Rubber Research Institute. Such comments brought consideration of special social problems stemming from the fact that natural rubber is produced principally by the less developed countries. According to the Bank of America, the capital needs of the poor countries amount to about $30 billion a year. Current inflow is only $7 billion a year. "These financial pressures compound the political and social impact of any further decline in the natural rubber industry," Mr. Lovewell says.

By 1980 world demand for rubber may reach 11.4 million tons per year 10 8 6

Millions of tons

1958 1968 1980

4 2 0

Natural rubber production

^i

I Natural I Synthetic I Total I I rubber I rubber I rubber I | consumption I consumption I consumption I

**Required operating capacity.

Synthetic rubber capacity

Source: Shell International Chemical Co. MAY 26, 1969 C&EN 21