FINANCE
Competition in the Chemical Industry C.
P. N E I D I G , White,
Weld
& Co., 40
Wall St., Newr York, Ν. Υ.
Is it so different now from in the past? Com plexity of the industry makes this difficult to answer XT RIOR τ ο
W O R L D W A R I I the
ticket
of admission to t h e chemical industry w a s a good research laboratory—one c a p a b l e of developing products a n d processes permitting the company to c o m p e t e with others in the field. Now t h e ticket of admission is dollars. Even these can b e largely obtained from t h e general public if the proposed project looks sufficiently attractive. This di r e c t c h a n g e can b e attributed almost entirely to the acquiring of technical know-how b y construction companies. D u r i n g the war 10 anhydrous ammonia plants were built for the Government. Of this total, four were built b y com panies who never made ammonia be fore, three were built by D u Pont and Allied which together had nearly 9 0 % of t h e prewar ammonia capacity, one w a s t h e Tennessee Valley Authority plant, and two w e r e built b y companies w h i c h previously h a d m a d e relatively small quantities of ammonia. The know-how which t h e construction com p a n i e s acquired in building these plants h a s been p u t to good use in t h e past 1 0 years. For a n "outsider," ammonia h a s been t h e easiest way to get into t h e chemical industry. It has been used b y petroleum companies, trading companies, natural gas companies, farm cooperatives, and others. Processes for producing ethyl alco hol, ethylene oxide, and ethylene gly col have b e e n available from construc tion companies a n d have been used b y companies wishing to enter t h e glam orous petrochemical industry. Now technical magazines are carrying in teresting articles and advertisements: You can b u y know-how to make acety lene, chlorinated solvents, vinyl acetate, vinyl chloride, acrylonitrile, ethylene, acetone, acetic anhydride, fatty alco hols, chlorine—the list is virtually e n d less. Obviously m a n y firms a r e taking a d vantage of these opportunities to ex p a n d in t h e chemical field without h a v i n g t o do the costly and, w h a t is far m o r e important, time-consuming r e search which in the past was the p r e requisite t o making chemicals. I t is reasonable to expect t h a t plants built i n such a manner will n o t b e as effi cient initially as those which were b a s e d o n extensive pilot plant work. H o w VOLUME
33,
NO.
10
·
·
ever they will certainly produce prod ucts which will be salable. This is one example of how competition in t h e chemical industry increases. Products generated by research h a v e been major contributors to t h e impres sive growth of t h e chemical companies. In fact, the relatively high profits of these new products have maintained the good profit margins. T h e question naturally arises: How will competition affect new products of t h e future? Based on a number of factors it seems reasonable to expect that the length of time for maximum profits from n e w products will become shorter because of competitive forces. Stated another way, it seems likely that return on in vestment in the chemical industry will tend to taper down in the next decade. Organic Researchers: 2 5 0 0 in 1 9 4 0 , 1 0 , 0 0 0 in
1951
T h e number of people engaged m synthetic organic chemical research in the chemical industry has increased substantially in the past 15 years from roughly 2500 in 1940 to 10,000 in 1951. Likewise, dollar expenditures were u p from $15 million in 1940 to $145 million in 1951. Knowledge is being generated at a much more rapid rate by many more companies in the chemical industry n o w than it was 15 years ago. Also m a n y more companies are able to finance t h e new plants now than was the case before t h e war. Several examples should illustrate this point. W h e n D u Pont carried out its research on nylon in the early thirties, very little research was being done b y anyone in the polymer fieldeither in plastics or fibers. Now literally dozens of companies both large and small are doing research in poly mers. Nylon was, and still is, a miracle fiber. Not only was it t h e first truly synthetic fiber b u t it may turn o u t to be the best. At least, after 15 years during which it was a D u Pont exclu sive, there is no other synthetic fiber which is even close and t h e odds are that sales of nylon will exceed 400 million pounds before any other syn thetic fiber reaches 100 million pounds. Thus far Dacron is also an exclusive to D u Pont (although the British and Canadians are building plants to m a k e
MARCH
7.
1955
a comparable fiber) b u t such is cer tainly not the case with t h e acrylic fibers. After a rather shaky beginning, first Orion and then Acrilan have shown real improvement volume wise. If the market continues to increase, further expansion of these fibers would certainly be logical. But on the side lines are American Cyanamid, Dow, Goodrich, Allied, and Eastman Kodak with acrylic fibers in the pilot plant stage, some being produced at a rate of approximately 1 million pounds a year. Union Carbide with its dynel, a modified acrylic fiber, has been con templating a large plant for several years. If all eight companies make acrylic fibers, the level of profits prob ably will not be high. Even if only a few enter the field, it will remain quite competitive particularly since it is im practical to build a small fiber plant. A plant to produce 30 million pounds a year is probably a minimum. With total capacity of around 75 million pounds in the industry now, even one n e w plant could result in excess ca pacity for some time unless the market develops rapidly. Yet, if research has been successful and acrylonitrile raw material is available, why shouldn't a company enter the field especially since it can usually get a share of the market? Such reasoning is logical but may result in rather tough competition if several companies reach t h e same conclusion at about the same time. Polyethylene—Maximum Profits for Short Time
Polyethylene provides another ex cellent example of the reduction in time for maximum profits from new products. If the industry h a d been forced to develop research know-how before building a plant, few n e w poly ethylene plants would n o w b e under construction. However, t h e court de cision breaking u p the Imperial Chemi cal Industries—Du Pont p a t e n t agree ment has effectively opened up the polyethylene field to all comers. Until very recently, Union Carbide and Du Pont shared the polyethylene market which probably reached 200 million pounds in 1954. With selling prices above 40 cents a pound t h e profit mar gins were good and the return on in vestment high. Late in 1954 Eastman Kodak brought in its n e w plant built under license from I C I . I n April Spencer and National Petro-Chemicals ( 6 0 % National Distillers, 4 0 % Pan1033
FINANCE
1955 Estimates ~ Eight ΛΊα/or Chemical Qqmpghiës^ I n e s t i m a t i n g t h e r e s u l t s f o r 1955 f o r t h e e i g h t c h e m i c a l cbnpah'iës^" v ;ï?t^ seems l o g i c a l t o d i v i d e t h e d i s c u s s i o n , i n t p ; s e v e r a l . p a r t s i n c l u: c l i n g s s ^ o p e r a t i n g p r o f i t , - d e p r e c i a t i o n c h a r g é s , prfe^•ta^^âriïariigs,; taxes/ Srid^pe^^hlaiteS ; earnings. -'...'V •'':"',_••' ,:• ^-+ij. '\3^f;;£fe S a l e s — I n g e n e r a l t h e chemical i n d u s t r y i&'&tf&ppecf by t h é • g e n e r a l I%v:èli3b©;ïfe)!f b u s i n e s s a l t h o u gr h t h e o v e r - a l l s a l e s ' - ί ο i ^ t h ë ^ ç ^ e s t i n c r e a s e i n 1 9 5 4 -whereas i n d u s t r i a l ;p;&pduc:Î;ion n e a r l y 7%. Most^Sèfeimomists seem. iiivagrèëmeï^^^ f o r t h e g e n e r a l economy.. ' .Since Ι ^ ϊ β ϊ ϊ ^l f o r t h e l a r g e r chemical companies,. .ë>
[email protected] lÎy>-^^^ seems r e a s o n a b l e . • to- ^expect * t h a t · tlii^;:p^Mp-^^M^6)iiiilnm: ΐώ;,Ϊ955^Κ*Μ^Κί®Β§ p o s s i b l e e x c e p t i o n o f American C y a n a m i d ^ a l l s t h e ; , e i g h t majors;are;4exp;ected-%fe|| to-show t h e h i g h e s t s a l e s i n ' h i à t O ' f ^ ^ â Ô S ^ Ï f i a i n f c r ë a s ë s ' * ô ^ ^ S S 5 ^ ^ ^ 1 * s h o u l d b e i n t h e range of S V t o ^ ^ c e p E ^ p i c k up by 13% t o more t h a n .make,.:υρ.,^^ s a l é s p i c t u r e i s ' d i f f i c u l t . t o ! es't-imàtè^b'ë£a^ volume o f t h e b r o a d s p e c t r u m a n t i b i p ^ t i c s . ^ . e t r a c y c l i n i n g from i n c r e a s e d c o m p e t i t i o n frem•• JUpjionn "andf Squibb ( Ô i i n MaM^ës^n^wnlÈcnïl a r e m a r k e t i n g t h e B r i s t o l t e t r a c y c l i n e ^ ; ' ·*.. :>-C,:;"V'"'- >"Λ• V.'" ^^^Μ^^ΜΨΜ$ΐΜ Operating Profit—The expected increase in sales-should bene^it^bjj^ profit margins. At the same time the" sfiLl £ub&t^ cnemicai i n d u s t r y WILL c o n t i n u e t o put; ^ r e i s s u r a - o n v p r r c e s . r T i ^ ^ i i K e d ^ ; ; ; ç a n ^ ^ d i d a t e s f o r p r i c e ^ d é c l i n é e ' i n 1955 ! ' ; a;r% l ^n^ may *also~bé' r è d u c e d ^ ^ S i l ï c ^ ob c e n t s ) , t o r m a l d e h y a e has .gone; v dôjjra^jreear^ and polystyrene---was·;'put- ••ànot'fte'r oe^ tô mount and other • Operating--costs^ -while o p e r a t i n g \ p r o f i x margins a r e expect ed>tb&imp^ • -chemical • compairiesv-^tiemnbtease-^ Depreciation—As, i s indiOated^b.eZ.ow;,,^^ ,. .;•"• r i n c u r hi.gher!Vdôp-t!e:QÏà¥fo^^ rrM-
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