Business outlook
For chemical producers a year of subpar earnings David M. Kiefer, Senior Editor, Washington, D.C. s recessions go, the current one is relatively moderate. Mod erate, but painful nonetheless. Pain ful, certainly, if you work—or worked —in Detroit's auto industry, or the aerospace industry on the West Coast, or the home-building industry just about anywhere. For chemical producers, it's a year of definitely subpar growth. A year in which price trends showed a modestly encouraging firmness, but a year in which profits, by and large, slipped dishearteningly. Sum it up as a no-growth year, which hopefully lias set the stage for sturdier perfor mance next year and beyond. The overall slide in business ac tivity, which has been under way for roughly a year now, has already lasted longer and gone deeper than most economists—especially in govern ment agencies—had been predicting as the year began. Unemployment, for example, has climbed to about 5% of the labor force and may rise to 5.5 or even 6% by year end. Thus the average for the year will be closer to 5% than to the 4.3% that had been the official line last winter. That's a definite weak point in the nation's economic framework. Even so, at 5% the unemployment rate is considerably lower than in any earlier postwar recession. Meanwhile, industrial production has dipped less than 4% since its peak 14 months ago. In the mildest previous recession of the past quarter of a century—196061—industrial output was off by more than 1% after 12 months. Gross national product continues to expand at a relatively strong pace. For the year as a whole, GNP is likely to average between $975 and $980 billion, an increase of about 5%. This growth stems from still undampened inflationary pressures, how ever. Measured in constant dollars, GNP is not likely to show any in crease this year and may even fall a shade below last year's $727 billion; the long-heralded goal of a $1 trillion economy seems less and less attainable in 1970. Put it off, rather, until early next year.
A
Chemical companies post a modest sales gain this year . . .
. . . but net income fails to keep pace .
Met sales Billions of dollars
Met profit Billions of dollars
60
β
40
4
20
2
0
1967
1968
1969
1970a
0
1967
1968
1969
19703
. . as profitability continues to fade Net profit, % of stockholders' equity
Net profit, % of net sales
15
μ.
10
J
3
0
1967
1968
1969
1970a
0 1967
1968
L
1969
1970a
Chemicals and allied products Basic chemicals aC&EN estimates. Sources: Federal Trade Commission; Securities and Exchange Commission
SEPT. 7, 1970 C&EN
11A
Business recession is mirrored in production indexes Chemicals and other selected industries, 1957-59 = 100 1967
Total index Manufacturing, total Nondurable manufacturers, total Chemicals and products Industrial chemicals Basic inorganic chemicals Basic organic chemicals Plastics materials Synthetic rubber Man-made fibers Soap and related products Paints Fertilizer Petroleum products Rubber and plastics products Tires and tubes Miscellaneous rubber and plastics Paper and products Pulp and paper Converted paper products Textile mill products Cotton yarns and fabrics Man-made fabrics Durable manufacturers, total Primary metals Blast furnaces and steel works Iron and steel products Nonferrous metals Clay, glass, and stone products Glass and pottery products Cement Structural clay product^ a Preliminary,
Production index 1969^ 1968
158.1 159.7 154.6 203.8 236.0 237.4 216.2 348.6 161.6 281.9 149.0 120.4 139.8 133.4 193.5 !Γ>3-?. 214.1 153.6 146.8 160.4 142.0 121.3 231.8 163.7 132.5 130.8 122.3 153.6 138.7 148.0 120.4 111.8
172.8 173.9 170.6 239.0 283.0 263.0 233.9 468.1 188.2 398.9 162.0 135.9 132.1 143.8 238.7 194.9 260.9 175.6 167.3 183.9 154.2 109.6 311.1 176.5 149.1 144.3 136.0 184.7 156.0 169.5 131.5 115.9
165.5 166.9 163.3 221.7 262.0 249.5 226.8 401.5 179.5 365.4 156.7 129.2 134.1 139.6 222.0 187.8 239.4 163.8 156.0 171.6 151.5 114.1 291.2 169.8 137.0 134.3 176.7 159.1 146.2 156.3 127.2 114.4
19701
171 170 171 242 285 276 228 475 190 408 163 128 135 148 236 193 259 176 169 184 151 107 315 169 143 138 134 190 153 168 120 107
b C&EN estimates.
Source: Federal Reserve Board
. . . but not in wholesale price indexes Chemicals and selected commodities, 1957-59 = 100 1967
All wholesale commodities Industrial commodities Chemicals and allied products Industrial chemicals Drugs and pharmaceuticals Fats and oils, inedible Plastic resins and materials Agricultural chemicals and chemical products Prepared paint Paint materials Other chemicals and allied products Rubber and plastic products Crude rubber Tires and tubes Miscellaneous rubber products Textile products and apparel Man-made fiber textile products Pulp, paper, and allied products Wood pulp Paper Paperboard a C&EN estimates. Source: U.S. Department of Labor
12A
C & E N SEPT. 7, 1970
106.1 106.3 98.4 97.4 94.0 81.3 89.0 103.6 109.3 90.9 108.3 96.9 85.2 96.0 102.7 102.0 86.5 103.8 98.0 110.0 95.0
Price index 1969 1968
108.8 109.0 98.2 98.4 93.3 73.9 81.8 99.6 114.6 92.2 110.0 100.2 84.6 98.7 107.7 105.8 90.8 104.9 98.0 112.2 91.1
113.0 112.7 98.3 97.7 93.8 88.7 80.7 89.8 119.2 92.8 112.9 102.1 89.4 98.2 110.8 108.0 92.2 108.2 98.0 116.6 94.4
1970?
117 117 100 98 95 105 80 92 123 92 117 104 87 102 115 109 90 112 105 122 95
With debate over whether 1970 will go into the record books as a year of recession pretty well settled in the affirmative, the prime economic ques tions now are: How deep will the slump go? When will business begin to improve? Since no two business cycles run quite the same course, one cannot look to history for a clear answer. The length or severity of a business decline cannot be predicted merely by over laying charts of earlier recessions on current trend lines. This is especially true today. Nearly a decade has passed since the U.S. last experienced a full-fledged recession. Since then the nation has changed—politically and socially as well as economically. Turning points in a business cycle, moreover, are notoriously difficult to foresee. Certainly, there are no clearcut signals yet that the present de cline has touched bottom. The very mildness of the correction to date, in fact, can be cited as evidence suggest ing that it still has a long way to run. Nevertheless, the consensus among economists seems to be surprisingly strong on the side of optimism. Any number of factors are pointing, if only hesitantly so far, toward a renewal of expansion. Among them: • Moderate improvement in home building. • A continued high ( if scaled down ) level of corporate capital spending. • Relaxation of federal monetary and credit restraints. • Increases in consumer buying power spurred by a cut in taxes and rising wages and welfare benefits. • A better tone to auto and other consumer durable sales. • Some initial indications that pro ductivity may have reversed its down trend. The fact, too, that the economy in the past few months has weathered several severe strains—domestic un rest, heightened uncertainties abroad, a crisis of confidence on Wall Street, the derailment of the Penn Central and several lesser corporations—without undergoing further erosion suggests considerable underlying strength. Nobody is really looking for a new burst of expansion, to be sure. In fact, it is still far too early to talk in terms of anything but broad probabili ties. Nevertheless, the odds seem favorable that from here on out the business climate will improve, if only very gradually. This will be a year of lagging busi ness for most of the chemical indus try's biggest and best customers. Steel production probably will trail last year's record high of 141 mil lion tons by about 4%, with shipments of steel products down 2 to 3% to 93
How companies in t h e chemical process i n d u s t r i e s ranked in 1 9 6 9 : (Based on financial data for 130 leadingchemical process companies)
These companies earned the most per dollar of sales. . .
These companies had the highest return on stockholders 1 equity . . .
Net income, % of sales
Net income, % of net worth
Texas Gulf Sulphur
A. H. Robins
G. D. Searle Freeport Sulphur Merck Eli Lilly
Miles Laboratories American Home Products G. D. Searle Smith Kline & French Bristol-Myers
Lawter Chemicals Eastman Kodak
Schering Merck . Rorer-Amchem Sterling Drug
International Flavors & Fragrances Texaco Rorer-Amchem
0
10
20
. . . whereas these earned the least
30
0
10
30
40
. . . and these had the lowest return
A.E.Staley
Β. F. Goodrich
Borden
GAF
GAF
W. R. Grace
Commercial Solvents W.R.Grace Cook Paint Stein-Hall Detrex Chemical Industries Essex Chemical International Minerais & Chemical
Standard Oil (Ohio) Cook Paint Detrex Chemical Industries Essex Chemical Foote Minerai Commercial Solvents International Minerals'& Chemical I
10
or 94 million tons. Total sales of new cars probably will fall below 1969's 9.6 million by 6 to 10%, with output of U.S. factories off by 500,000 or so from last year's 8.2 million. Although housing starts are expected to in crease gradually during the second half, total starts for 1970 are likely to fall behind 1969's 1.5 million by 10% or a bit less. Output also will be down this year, if only moderately, in such chemical consuming industries as tex tile products, rubber, and glass. The result is a decidedly lack luster year for the chemical industry, and a consequent continued severe pinch on the industry's profitability. Production of chemical and allied products, as measured by the Federal Reserve Board's indexes, was up by about 2% during the first half of 1970. For the past year, however, output has fluctuated within a relatively narrow range of ± 2 % of 240 on the index scale (1957-59 = 100). Although the trend line may start to edge up ward during the fourth quarter, for the year as a whole production probably will average only about 1% greater
20
than last year's level. That would mean the smallest rate of growth for any year at least since 1958 and per haps since 1954. In 1969, by con trast, production of chemical products climbed by nearly 8%, in line with the annual growth rate rung up by the in dustry during the past two decades. On the other hand, this year's belowaverage performance will result more from a one-and-a-half-year-long trend rather than a marked dip of short duration such as took place during such earlier recessions as 1953-54 and 1957-58. Production of industrial chemicals alone likewise has slowed. The yearto-year increase probably will be less than 1% for 1970. The dollar volume of shipments from chemical plants, too, will edge only slightly higher this year. In 1969, shipments rose by nearly 5% to an all-time high of $48.7 billion. This year's first half showed a gain of about 3% from the like period of 1969. For the year as a whole, total shipments are likely to rise no more than 2 or 3% to approximately $50 billion.
20
30
40
Bolstering dollar volume to some extent this year will be a slight im provement in price levels for chemical products as a whole. The Bureau of Labor Statistics' index of wholesale prices is a less than perfect mirror of what is actually happening to the industry's price structure; it is based largely on list prices (which fre quently are steeply discounted) and has no provision for such important product areas as man-made fibers, synthetic rubber, and many significant plastics materials. At midyear, though, the overall BLS chemical price index was up by about 2% from a year earlier—an increase smaller than that recorded by most other ma jor industrial commodity groups—and the average for the full year will likely increase by a similar amount. Most of the increase, however, will be in consumer chemical products, such as paints, pharmaceuticals, and spe cialty items; prices of the workhorse commodity chemicals, on the average, will be practically unchanged. With prices and production edging only slightly higher this year while SEPT. 7, 1970 C&EN
13A
Chemical s h i p m e n t s edge slightly higher Manufacturers' shipments Chemicals and allied products Billions of dollars
60 m
M 1967
1968
1969
1970*
a C&EN estimate. Source: U.S. Department of Commerce
operating costs—for labor, raw materials, power and fuel, freight, maintenance, and the like—in general are markedly higher, the pressure on the chemical industry's profits is sharper than ever. The industry, too, continues to spend heavily for new plant
and equipment. Capital spending is slated to hit an all-time high of $3.35 billion, according to the most recent government survey (made last spring); compared with $3.10 billion last year and $3.26 billion (the previous high) in 1966. The current business climate being what it is, that estimate is probably an overstatement, but actual outlays are likely at least to match last year's. That means earnings this year will be penalized again by a considerable burden of plant startup costs, as well as by the remarkably high costs of borrowing new capital. Last year the overall chemical industry earned $3.6 billion, a record high but less than 2% above the previous year. This year's profits will be about the same—or perhaps a shade lower. They will hold up that well thanks largely to the strong year being turned in by the pharmaceutical segment of the industry, which is living up to its reputation for being recessionproof. The drug makers seem headed for a 10 to 15% increase in net income this year. Elsewhere in the industry the profits picture varies from spotty to poor. Net income for producers of basic chemicals sagged by about 10% dur-
in g the first half. For the entire year, despite an increase of 2 to 4% in sales volume, their profits are likelv to be off by 6 to 8% to $1.5 billion. That would put their after-tax net at the lowest level since 1963 and about 20% under the 1966 peak. Profit margins (about 5.5 cents per $1.00 of sales) and return on stockholder's equity (about 9.5%) will be lower than at any time in recent history. The overall chemical and allied products industry's profit margins and return on equity will dwindle to about 69c and 12%, respectively. You have to go back more than a decade to find less favorable results. Barring the totally unexpected, next year can be expected to bring a modest degree of improvement, although the path upward may be long and tedious. Production and sales of chemicals, for example, are likely to increase at a rate close to their historic growth trend, but the verdict is not yet in on whether the chemical industry is finally resolving its chronic problems of excess capacity and price erosion. Plence the day in which profitability is restored to a level anywhere close to what it had been even five years ago, especially in industrial chemicals, seems off in the future.
Financial data David M. Kiefer
T
he following pages present four years of significant financial data for 130 leading companies in the chemical process Industries. The figures are for the calendar years 1966-69 unless otherwise indicated. C&EN has published similar data for earlier years in each of its annual Facts & Figures supplements since 1956. One company has been added to the section this year: Cook Paint and Varnish Co., a leading producer of coatings, synthetic resins, and related products. It replaces Wyandotte Chemicals Corp., which has been acquired by the West German firm, Badische Anilin-& SodaFabrik, A. G.
The primary sources for the data on the following pages are company annual reports. Because companies do not report financial information in a uniform manner, C&EN has adjusted figures in many instances to make them as comparable and consistent throughout as possible. Intangible assests ( goodwill, value of patents, and the like) have been deducted in determining total assets and net worth. Contingency and other reserves for which no definite purpose is stated have been included in net worth. Prepaid expenses generally have been deducted from current assets in calculating die current ratio. Nonrecurring or extraordinary gains and charges have
been excluded from reported net income insofar as possible, but have been indicated by a footnote. Figures presented on a per-share-ofcommon-stock basis have been adjusted for stock splits for all years. No adjustment has been made in past years' figures as a result of stock dividends, however. For comparative purposes, the last page of the tables summarizes similar financial data for the major chemical process industries on an industrywide basis. The source of these data (except for capital expenditures) is the Quarterly Financial Report for Manufacturing Corporations, which is prepared jointly by the Federal Trade Commission and the Securities and Exchange Commission.
[Explanation of table headings
Capital expenditures. Money spent for new fixed assets-plant, equipment, land-and to replace or modernize facilities. Net sales. Gross sales, less discounts, allowances, returns, and excise taxes. Net income. Net sales and other income, less operating costs, nonoperating charges, depreciation, depletion, interest, and taxes. Net income (breakdown). Per cent of sales: net income divided by net sales. Per cent of worth: net income divided by net worth. Dollars per share: net income, less preferred dividends, divided by number of shares of common stock outstanding.
Dividends per share. Cash dividends paid or declared on each share of common stock during the year; excludes value of stock dividends. Dividend yield (per cent of price). Dividends per share divided by average of high and low prices of common stock during calendar year. Stock price range. High-low market prices of common stock during calendar year. Price-earnings ratio. Average of high and low prices of common stock during calendar year divided by net income per share of common stock.
Total assets. Year-end sum of current assets, investments, prepaid expenses, net plant and equipment, and other tangible assets. Current ratio. Current assets-including U.S. securities but excluding prepaid expenses-divided by current liabilities. Met worth. Year-end equity of preferred and common stock holders (includes contingency reserves). Net plant and equipment. Year-end value of fixed assets at original cost less accumulated depreciation, amortization, and depletion. 14A C&EN SEPT. 7, 1970
