Chemicals in commerce - Journal of Chemical Education (ACS

Chemicals in commerce. Williams Haynes. J. Chem. Educ. , 1935, 12 (3), ... Article Views: 21 Times. Received 3 August 2009. Published online 1 March 1...
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CHEMICALS in COMMERCE WILLIAMS HAYNES* 25 Spruce Street, New York City

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HEMICAL prices tend to approximate the cost of production. They fluctuate because supply and demand are constantly and in varying degrees subject to change. Prices, which are the practical expression of that relationship, shift higher when demand becomes more insistent or supply less abundant, and lower if demand weakens or the supply is increased. During the War, for example, the price of toluene rose sharply because manufacturers with lucrative munitions contracts were bidding for the limited supplies of this essential raw material. These eager buyers did not raise the price to encourage production. They were willing to pay high prices that they might make profits by manufacturing toluene into T. N. T. The result of their demand and their ability to pay high prices was that eventually many of the old-style beehive coke ovens were replaced by ovens of the modern by-product recovery type. So eventually the supply was increased. This property of price that enables it to regulate supply is extremely important to the chemical industj. Among industries selling the public for direct consumption the checks upon free competition are both more numerous and more effective. The action of price upon the supply of industrial raw materials is more direct. Consequently, chemical prices are more quickly responsive to these fundamental economic influences and, by the same token, less subject to control and manipulation. These interrelationships are aptly illustrated by white arsenic. This material (AszOs) is produced in the United States chiefly as a by-pfoduct recovered from the flue dust and flume a t smelting operations in the western states. Prior to 1915, at a price of about 3c a pound, it was not profitable for our smelters to install the necessary recovery equipment. As a result our arsenic supplies were imported. From 1900 to 1910 our annual production averaged only 975 tons while we were bringing in some 10,000 tons each year from Mexico, Japan,. Spain, and Germany. A potential domestic output of from 15,000 to 20,000 tons was allowed, because of the low price, to go to waste. War demands, intensified by the difficulties and high cost of ocean transportation, raised the price to 8c in 1916. Then the western smelters installed recovery plants. At this time the normal demand for white arsenic was roughly 10,000 t o n s 4 0 0 0 tons used as insecticides, 1200 tons for weed killers, 1500 tons for sheep dips, 2000 tons in the plate glass industry, and 1000 tons

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* Publisher of

Chemical Industries.

for various miscellaneous and unclassified uses. In 1917, however, a big but highly uncertain demand suddenly appeared. Calcium arsenate was discovered to be the best means of keeping the cotton boll weevil in control. This market expanded rapidly, so rapidly that it created famine in 1922 and 1923, and the price of white arsenic ran up quickly to 181/2c. As a result calcium arsenate (made from white arsenic) soon cost the southern planter 25-30c delivered. This high price, combined with the low price of cotton and weather conditions adverse to the propagation of the weevils, cut this sudden demand so sharply that by the end of 1924 the price of arsenic had dropped back to 61/rc. These obvious price changes resulted from a large, unexpected demand; but conversely, if supply varies while demand is constant, prices will tend to fluctuate widely. The prices of those chemicals produced as by-products exemplify this principle. Their supply is governed by factors which have no bearing upon their demand. This is exactly the case of benzol and sulfate of ammonia, by-products of coking operations, which in turn are dependent upon the activities of the steel industry. To increase considerably the output of the by-product requires expansion of the main product operation. Few industrialists are as willing as Charles Lamb's Chinaman to b m down the house in order to roast a suckling pig,'and this natural disinclination to tamper with an established operation for the sake of its by-products finds expression in the exceptional sensitiveness of by-product prices to any increase in demand. On the other hand, the supply of a by-product, produced willy-nilly' pr recovered to prevent a nuisance, is almost insensible to curtailed demand. To cut the output of the by-product necessitates a curtailment of the main product, which would constitute a case of the tail wagging the dog. Accordingly, by-product prices drop quickly to abnormally low points if demand slackens. When either supply or demand is comparatively fixed o r rigid-"inelastic" as the economist saysprice fluctuations will be a t once wider and more frequent. Change in price, in order to adjust differences between supply and demand, must be proportional to the difficulty with which this balance is struck. Being manufactured goods, the supply of chemicals can be increased or decreased almost a t will; but the demand of the country's industries for these raw materials is comparatively constant and little affected by changes in price. When there is a large chemical overproduction, as of alcohol in 1926, and of most industrial chemicals in the 1929 depression, and consumers are already

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using all that they normally need, no price reduction will encourage them to consume greater quantities. They may be tempted by the low price to store a limited quantity; but this is merely postponing the evil day for the producer. Moreover, new buyers of chemicals are not so quickly or simply created as in the case of pork or wheat, motor cars or shoes. For chemical demand depends upon the needs of industrial consumers for use in their manufacturing operations. It is only to be increased by indirect methods. One of the great chemical consumptions of the country is the use of caustic soda in the soap industry, a demand that runs into vast tonnages; but a demaud that will not increase by a single drum until the public uses more soap. msetting this inelasticity of chemical demand is the very great stability of that demand. This is a marked industrial advantage. It lays down a solid foundation upon which the industry is able to build a production program. It sets a fixed point below which prices will not fall. It frees the chemical maker of the horrid bugaboo of styles. I t is compensation for inelastic demand, variable costs, and technological competition in both process and product. However, seasonal variations in chemical demaud are fairly common, but they are pretty clearly defined and so may be anticipated. The use of denatured alcohol as an anti-freeze in automobile radiators, which accounts for about half of the total gallonage, is obviously confined to the colder months and restricted to the northern states. Calcium chloride is sold as a dust layer only during the spring and summer. Fertilizers, insecticides, fungicides all have short seasons of use. Seasonal demand is the exception in the chemical field; but variations in the character of demaud among d l e r e n t types of chemical consumers are quite important. The demand for caustic soda from a soap factory and a laundry are different both in degree and intensity. The soap factbry buys in carload lots; the laundry, in drums. The soap factory must have caustic soda or shut down. The laundry can substitute tri-sodium phosphate, borax, bicarbonate of soda, metasilkate, half a dozen different modified sodas, or any one of a hundred different proprietary cleansing compounds. The demand of the manufacturer of patent leather for collodion is different from the. demand of the photo engraver or lithographer, and each differs from the demand of the makers of surgical supplies and of photographic films. The price that any one of these consumers will pay is influenced not only by the use to which he puts the chemical, but also by the price which he will eventually receive for the goods into the manufacture of which it has entered. Formaldehyde is an essential in the manufacture of embalming fluid and in the production of Bakelite. The undertaker uses small amounts and its cost is but a tiny fraction of his charges. If the formaldehyde price rose to five, even to ten dollars a pound, but few of his bstomers would object. The

manufacturer of plastics, however, consumes vast quantities, and his product is in direct competition with other materials used largely in further manufacturing operations. To him, an advance of but ten cents a pound for formaldehyde might shut his finished product out from effective competition, for example, with hard rubber in the great electrical field. Finally, within a single industry there are differences in the demand among individual consumers. Not only are there close buyers and careless buyers; but there are also differences in financial strength, in cousuming capacity, in manufacturing or marketing efficiency, which create real differences in the price that two firms, using the same chemical for the identical purpose, are able and willing to pay. When we discuss the law of supply and demand in the abstract, i t appears deceptively simple. When we deal practically with its problems, i t then becomes dangerously remote. True causes and inevitable effects are obscured. Selfish interests and the pressure of competition, the threats and promises of the immediate business situation, hope, pride, greed, and fear--these are the motives that drive us to action. In good times we seek to "stabilize" business, that is, to maintain "the present level of prices," and this price level is likely to be too high. We have forgotten the corrective influence of price upon the relationship of supply to demand. On the down swing of the business cycle we make frantic efforts to check, not the force which causes the depression, but the regulator which would most promptly and most surely readjust the uubalance of supply and demand. Prices are pegged. Tariffs are raised and taxes are spent on ill-considered public works. Doles and 'subsidies are granted special groups a t the expense of the whole people. Rents are held up by long-term leases. Wage reductions are violently resisted by organized labor. Even when we teeter on the brink of economic ruin we do not remember that safety lies, not in maintaining price, but in reestablishing the equilibrium of supply and demand. Such crass stupidity has its excuses. The compensating forces of supply and demaud often work very slowly. It is not a difficult matter temporarily to distort their interactions. But in spite of delays and exceptions, supply and demand are positive, irresistible forces which in the long run control, if they do not a t the moment compel, economic activities. Under our economic system of individual initiative and responsibility, profit is the practical measure of reward for business success. The primary object of every chemical manufacturing enterprise therefore, is to establish the most favorable possible margin between what it costs to produce and market a chemical product and the price for which it can be sold. The value of the finished goods, however, does not depend upon the cost of manufacture. Simply to invest money in land and plant, raw materials and labor to produce a certain chemical a t the cost of one dollar a pound would not make a pound of that chemical worth one dollar, either if there were no demand for

it, or if it were being produced in sufficient quantities a t 80c. Neither the money invested, nor the raw materials consumed, nor the human labor expended, create value. The first two facts are pretty generally recognized; but the fallacy that labor creates the only real, added value is an economic heresy persistently fostered in certain circles. This intriguing error is stripped when one determines accurately just how much value a man would add to a pretty blue crystal of copper sulfate by polishing it carefully for a week. Nor will the most powerful corporation create value (regardless of what sums it invests, regardless of the patents or processes it controls, no matter what brains and energy it employs) if it manufactures a chemical which cannot be sold. The chemical manufacturer may increase value by producing a chemical which has a greater utility than the chemical raw materials consumed in its manufacture. Sulfuric acid-itself made from pyrites or from brimstone--is used in turn to treat phosphate rock; the phosphate rock is mixed with potash and nitrates to produce a "complete fertilizer." Each manufacturing process has added to the value of the materials used. The vast majority of the chemical operations of industry increase the value of the goods through chemical reactions resulting in an increase in form utility. Value may also be increased by adding new utilities. Hence the constant, painstaking search made by alert chemical manufacturers for new uses for their products. Sulfur in rubber vulcanization, chlorine as a direct bleaching agent in the paper and textile mills; benzol added to gasoline as an anti-knock; alcohol as an anti-freeze; acetic anhydride in the manufacture of artificial silk; bntanol in cellulose lacquers are all familiar instances of new uses which in their time profoundly affected markets and prices, even the manufacturing processes and sales policies, of important branches of the American chemical industry. So vital to commeraal success is this search for new uses of chemicals, that the sales department end research staff are regularly employed in this work. The hunt for new chemical markets, however, differs in one important respect from similar efforts by manufacturers of goods going to the public. The ultimate consumer seldom originates the demand for either new commodities or new conveniences. On the other hand, chemical manufacturers are called upon to supply a demand, be it old or new, which already exists. So almost universal is this condition that it has come to be an aphorism of industrial research that it is easier to make a new chemical for a given use than to find a commercial use for a new chemical. For a hundred years the chemical industrialists of the world have striven to make greater profits by paring down their raw material and plant costs, improving their yields, and increasing their sales volume. Every success has been but another incentive to greater sales effort. No group of economic goods is sold in more diversified markets than chemicals. Compris-

ing such extremes as codeine sulfate sold by the ounce and copper sulfate delivered in carload lots, chemicals reach a wide range of consumers of most diverse types through a great variety of trade channels. Even a single chemical has commonly many different uses and is often marketed by different men and methods. Copper sulfate is at once an agricultural insecticide and a raw material of the electrical, tanning, printing, textile, paint, paper, and chemical industries, while it is used also as a laboratory reagent, a medicine, a hair dye, a wood preservative, and a water purifier. Methylene blue is a dye and a medicine; carbon tetrachloride is a solvent and a fire extinguisher; calcium chloride is used in refrigerating machines and on the roads to lay dust; ethylene glycol is an anti-freeze, but it is also sold to the manufacturers of dynamite and of fruit flavors; sulfuric acid proverbially plays a part in every modem industry. This multiplicity of chemical consuming fields makes the chemical marketing problem extremely complex. As the economic purpose of manufacturing is to increase the form-utility of goods, so the service of marketing is to give to goods greater utilities of time and place. Sulfur at the mine in Texas and aniline oil at the plant in New Jersey must be brought to the factory in Ohio before they can be compounded in rubber to be used in fabricating automobile tires. Plainly this involves more-much more-than the actual act of selling these industrial raw materials to the rubber company's purchasing agent. About 96 per cent. of our total production of chemicals is consumed in industry and agriculture; but from the marketing point of view, this is not the most distinctive feature. Coal, iron,.,an'd steel, copper, zinc and lead, wood, rubber, wool, silk, cotton, all enjoy widespread industrial markets; but none of them, as do chemicals, find their principal consuming field right within their own industry. It has been estimated that 60 per cent. of all chemicals are consumed in the operations of the chemical industry itself. This figure includes chemicals sold for use in further chemical processes and chemicals consumed in operations within the plant of their origin. This intra-industry consumption of chemicals influences their marketing. Silk, wool, and cotton, for example, are all caught up and flow together to the consumer through the textile industry and dry goods trade. Dyes, bleaches, mordants, soaps, reach the textile mill each from different sources of supply, while the chemical plant producing caustic soda, liquid chlorine, and soda ash distributes each of these products through different channels to scores of consuming fields. These intricacies of chemical distribution arise from two causes. First, most chemicals have many uses in widely different industrial fields. Second, practically a11 chemical plants produce a number of different products. The producer of tri-sodium phosphate finds important outlets to tanneries and sugar refineries, to laundries, to makers of water softeners and boiler compounds, photographic developers, and pharmaceutical

manufacturers; a fairly cosmopolitan group of industrial customers. If he also makes di-sodium phosphate, which is likely, he will also sell to the potteries, to the dyest& makers, to the textile printing trade, to makers of baking powder and self-raising flour, and to the paint mixers. Complexities such as these are inevitable. Obviously, they do not simplify the marketing problem of the chemical industry, although this extreme diversity of uses -does have a favorable effect in spreading demand evenly throughout all seasons of the year and steadying the market during periods of fluctuating business activity. As in other fields, the distribution system of the chemical industry has expanded and diversified with the growth of American industries. In the past i t has been successively modified to meet changing conditions in consuming fields. The original distributive organization was based upon the selling agent who was taken o v e r ~ f t e nbodily-by the youthful American chemical industry from the foreign manufacturers. These sales agents were our first chemical firms. At Atlantic seaportschiefly Philadelphia, New York, and Boston-they carried stocks of imported chemicals. Sometimes they traded as merchants, buying their supplies abroad, and importing them for their own account. More often they acted as representatives of foreign producers and as such received goods on cousignment selling them on commission. Frequently, a single firm acted in both capacities. They acquired expert understanding of market conditions, a good practical working knowledge of the industrial uses of chemicals, and close personal contact with chemical consumers. They were admirably equipped to serve a chemical maker, and as soon as an American producer was in a position to compete effectively with imported materials, he was glad to choose the easiest way of getting his chemical wares on the market. The professional chemical sales agent relieved him of most of his sellmg problems and left him free to perfect his plant operations. 'The distributor, who is always forced by competition twget his supplies as cheaply and quickly as possible, had economic, as well as patriotic reasons for making connections with a domestic source of supply. As the country expanded industrially, there sprang up similar selling agencies a t the different inland centers of manufacturing activity. At the beginning they bought their supplies from the general sales agents a t the seaports, but the more aggressive of them soon began to import direct or to buy in carload quantities from domestic manufacturers. In this manner, the business of the general agents, who by this time had centered in New York, would have shrunk eventually to a local business in the metropolitan area, had not the tremendous industrial expansion following the Civil War brought the carload industrial buyer into the market. These big consumers demanded to buy direct from the general agent or the maker in carload quantities and as cheaply as the local agent. The general agents welcomed such an arrange-

ment, and throughout the heavy chemical group it came to be recognized that the manufacturer or his direct sales agent handled the carlot business, while the local distributors, either as agents or merchants, served the needs of the less-than-carload buyers in their own territory. To make up for the loss of business when local industries grew into carload consumers, the local distributor maintained his position by adding new chemicals and by developing new outlets. Continually the chemical distributor has played the part of chemical missionary. He has been forced constantly to introduce new chemicals and to instruct new chemical users. The World War gave further impetus to the more direct sale of chemicals. Not only has the general sales agent almost disappeared from the marketing organizations, but manufacturers have invaded local markets with their own salesmen, establishing branch offices with warehouses to handle direct even the less-thancarload business. As soon as a chemical manufacturer has a volume of sales in a given territory that justifies the costs of carrying spot stocks, of maintaining a branch office, of employing his own salesmen, of assuming local credit risks, he is prone to shoulder for himself these functions. He has done so in order to win greater volume of business by concentrated selling effort under his own control and direction as well as to gain the obvious benefits of direct contact with customers. A collateral result of this tendency has been the almost complete elimination of that old distributing servant, the broker, or professional buyer. Even before the War he had slipped into a comparatively insignificant position. Market conditions, during the war period, created temporarily a very real need for the broker's function. Demand for chemicals so far outran supply that successful purchasing was mainly a scramble to locate available stocks of materials. The seller's price quotation on scores of important materials was "What will you pay?" Government requisitions, allotments to industries, and shipping regulations, all changed overnight. Transportation was demoralized and deliveries accordingly uncertain. Amid this market turmoil the broker flourished. His constant contacts with both buyers and sellers gave him an expert knowledge of current prices and of available supplies often only obtainable second hand .from obscure sources. This knowledge was a t that time .undoubtedly a practical economic service. But these war-time markets were stuffed with temptations for the broker. Double commissions, collected from both buyer and seller; orders diverted to later, higher bidders; misrepresentations as to quality which the broker had neither the time, nor the knowledge, nor possibly even the inclination to verify, led to easy adulterations and eventually to substitutions; always the seductive chance to speculate by buying not for a client but for the broker's own account-all these undermined the honest broker's legitimate economic service. This sticky jampot drew a swarm of flies. Young men

with just sufficient capital to rent office space and engage a typist reaped a golden harvest. Their heaviest expense was the telephone. Often they worked with two or three instruments on their desk, and their toll bills for long-distance calls were often a thousand dollars a month. A few of them had had some chemical experience; but many of them had never even seen the materials which they sold and resold in ton lots. Such an irresponsible and ignorant new drove the brokerage business on the rocks. Their disgraceful dealings abroad brought disrepute upon the entire American chemical industry. Their sharp dealings at home convinced both chemical makers and chemical consumers that just as soon as they might be dispensed with, the broker's services were not needed in our chemical markets. They vanished during the ddatiou period of 1920 in an evil-smelling cloud of repudiated contracts and bad debts. In fact, they gave further impetus to the tendency toward direct dealing between producers and consumers. Despite this war-time abuse and in the face of the economic trend toward simplification, in certain chemical fields, the broker's services are legitimate and useful. Many chemical raw materials, usually the products of extractive industries or agriculture, often brought from distant, foreign sources of supply, are largely purchased through brokers. The mark* for such products as arsenic, phosphate rock, pyrites, mercury, chrome and other ores, vegetable oils, gums, resins, etc., fluctuate sharply. Stocks on hand, or afloat, or at primary markets; quotations on the spot or for future shipment; the current production or local crop conditionsscore of factors have so direct a bearing upon price and enter so largely into wise and skilful purchasing that consumers find it to their advantage to rely upon the expert advice of brokers. Moreover, shippers far from their consuming customers find the services of the brokers in bringing their goods to the buyers a true economic c'onvenience. Certain industries which consume a variety of chemicals and which are concentrated within a restricted area furnish a highly specialized local market. The paint and varnish industries of Cleveland, the rubber industries of Akron, the leather industries of Gloversville, N. y., are all served by dealers who specialize in their peculiar chemical requirements. Such specialized markets combime a demand for a wide variety of chemical products and a consumption from a considerable number of small, prosperous factories. If the consuming units are very large, or if the industry takes in but a few chemicals, direct buying in carload shipments will predominate. Thus the paper, soap, and glass industries, although each has well-marked centers of activity, do not offer great opportunities for the local distributor. On the other hand, an outstanding example of the specialized local market is furnished by the textile groups. In Boston, Providence, Fall River, Passaic, Philadelphia, Charlotte, and Greenville, and even at the smaller textile centers, are chemi-

cal dealers who depend wholly upon this trade. They carry bleaches, mordants, soaps, sizes, dyes for silk, wwl, or cotton goods, whatever the local mills require. When the German dye manufacturers controlled the American situation before the War, although several of them maintained branch offices in the United States with large staffs of salesmen and technicians, uevertheless, their actual sales were largely made through these local dye dealers. The boss dyer at the mill was the dye buyer, and the Germans shrewdly sold this man through a local distributor who talked his own language, belonged to his own lodge, played with him, gave him Christmas presents, holding his business on a basis of personal friendship, and who, if need be, was an ideal paymaster for those more direct forms of commercial bribery which the Germans did not hesitate to employ. These local dyestuff dealers continue in many instances to render a real service. For the smaller mills they test colors, mix dyes, match shades. Thus they relieve the management of the direct expense of maintaining their own laboratory. They take most of the technical work and a great deal of the responsibility off the shoulders of the dyer. For these services and because of their great practical experience, they continue to serve the textile industry. Our larger American dye manufacturers, however, prefer to sell direct to the consumers, calling on them with their own sales forces, rendering technical service through their own laboratories Some of them have made rather determined efforts to confine their dealings exclusively and directly to consumers, and so assure themselves that the user receives their dyes unblended and undiluted. It is often to the advantage of the local dealer to sell a. spkcial mixture of dyes, with particular instructions and specific formulas for their use. He alone can immediately duplicate such an order and by selling a given color effect, rather than a given dye, he is able to command premium prices. Thus the interests of the local .dealer are cemented to the smaller dye maker and the dye importer who do not have a full line of colors, enabling them to sell a mill all its requirements. These specialized dealers are further encouraged by the many, various chemicals this industry consumes in great quantities. Soaps, bleaches, sizes, mordants, fillers, acids, finishing materials, all serve to round out his line and give him not only additional income, but also a competitive advantage over the dye manufacturer's salesman who sells colors only. Nevertheless, even in this specialized field the trend toward more direct dealing between maker and user is notable, and it is significant that the General Dyestuff Corporation-American representative of the German dye trust--expends much more direct sales effort than the individual German companies did before the war. This policy of direct selling is a perfectly natural outcome of the consolidation of the smaller iirms into the I. G. Corporation. Concentration of chemical production is as effective as expansion of chemical consumption in widening the market for the individual chemical manufacturer.