THE CHEMICAL INDUSTRY'S Capital JOHN
M. \\
KISS.
Requirements
John M. Weiss and Co., 50 East 41st St. New York 17, Ν. Υ.
The future growth and progress of the chemical industry, in fact all industry, is threatened by the shortage of equity capital . . . If such capital can not he obtained, a slower growth based on reducing capital requirements by means of improved technology may be necessary J. HE growth of the chemical industry in the United States over the past decade nas continued to be spectacular. Alr hough new detergents, insecticides, and rubber chemicals have contributed in no small measure to that growth, syn aptic resins and plastics have been the major contributor and they are dis cussed in this article as an illustration • >f factors which affect ail chemical prod•ic:ts to a greater or lesser degree. The figures for production have in creased to an extent where it seems rnore logical to talk of tons rather than pounds. In 1938, the United States pro duced about 77,000 tons of synthetic resins and plastics, and in 1948, 720,000 'ons, an almost tenfold increase. Although this is only about 0.8% of '.he' 1948 steel production of 88,534,000 nous, it is nearly three times zinc, 250,000 tons, and has passed lead with 545,000 tons and aluminum with 622,000 tons production. It is within striking dis tance of the copper production of 1234,000 tons. As an industrial raw material, synthetic resins and plastic? nave progressed beyond the stage of adolescence. It is quite interesting to give con sideration to the approximate capital requirements for such expansion. Recent estimates made in connection with the η crease of our steel capacity indicate m investment of approximately $300 per vearly ton of steel. With resins and plastics, we have quite a different situa tion. The resin-making operation itself is just a glorified mixing process, the capital requirements for which are of the order of $40 to $50 per yearly ton of product, specifically in the case of phenolic resins. This, however, is only a minor part of the story. Every ton of phenolic resin requires around 0.95 ton of phenol and about 0.85 ton of 40% formaldehyde, for which production facilities must be available. The capital requirements for these two raw materials are many timee 2549
greater than the resin operation itself. The phenol operation alone needs about $285 plant per yearly ton of resin. More over, the raw materials for phenol pro duction—benzene, caustic soda, and either sulfuric acid or chlorine—add con siderably greater plant investment than 'hat for the phenol production itself. On the formaldehyde side, we need the production facilities to make it, and further plants in the background to pro duce the methanol from which the for maldehyde is made. All in all, the ronnage of chemicals required to make phenol resin is at least six times the tonnage of the resin itself. The products of as many as eight separate companies may be involved in a single resin opera tion. When all this is considered, we find that the chemical industry as a whole must invest about $1,000 per yearly ton of phenolic resin production. Other types of resins have not been calculated closely as to their ultimate «•apital requirements but on the average it would undoubtedly be not far from the $1,000 figure. Except for modified rosins and the cumarone indene resins from coke-oven light oil fractions, the phenolic resins are the lowest cost large ronnage products of this general class on the United States market. The figure of $1,000 as the chemical industry investment per ton resin per year means that if capital costs—interest, depreciation, and obsolescence—are taken on a 10-year basis, the cost of capital included in the finished resin cost is about $0.05 per pound. Since many of these resins are sold in the range of S0.25 to $0.30 per pound, it is obvious that this part of the cost is a very sub stantial proportion of total cost, es pecially in plants built with the present high costs of labor and materials. Looking at the matter from another standpoint, the 1948 production of syn thetic resins and plastics represented an investment in chemical industry of some where between $700 million and $800 CHEMICAL
million at today's replacement coftt» The increase in plant account (at cost) of the six largest chemical companies over the period from 1938 to the end of 1947 amounted to something over $1.2 billion A large part of this, directly or indirectly, must be attributed to the synthetic plastics and resins. The need for new capital may result in a bottleneck of certainly no lesser importance than the supplies of raw materials in the future growth of thf industry. A 10% yearly increase in the plastics business based on the present state of technology would require aD investment of the order of $70 million to $80 million per year. I t is a question as to where the industry could obtaiD the money, in addition to all the other requirements in many other lines of products. It can not be obtained solely by plowing back earnings, and the us*of loans or bonds would tend to produce an unsound top-heavy financial struc ture. It indeed appears on the face of several balance sheets that the companies in question have gone just about as far as possible in this direction as is consonant with a sound and reasonably conservative financial structure. The extent of future growth of résine and plastics, therefore, appears to depend on two alternatives. One is financial— that is, the development of a broad market for equity securities, so that capital needs may be obtained by the issuance of common stock. Then the needed expansion would not be loaded with fixed charges so as to imperil solvency during periods of business reeepsion. The other alternative, which would be much more constructive, lies in the possibility of substantially decreasing capital requirements by means of improved technology. Phenol, for example, is made chemically by the addition of one atom of oxygen to one molecule of benzene. The present available processes to do this involve treatment of the benzene AND
ENGINEERING
NEWS
with sulfuric acid or with chlorine and the further treatment of the intermediate product with caustic soda. T h e reaction mixtures in both steps are corrosive in nature and the second step requires high temperature. Both of these factors tend toward high plant costs and high depreciation rates. Were a way found t o use the oxygen of the air and combine it directly with the benzene, probably by means of an as y e t undiscovered catalyst, we would not only have no need for the plants to produce the inorganic chemical»—caustic soda and chlorine or sulfuric acid—but the synthesis plant would b e simpler and cheaper than those of the present technology. It is easily conceivable that such technological advance would reduce the capital costs per ton of resin to around the $300 figure required per ton of steel and make the same amount of capital, production-wise, go about three times as far as at present. It would have a further effect that the simplicity of the process would reduce labor substantially in the production of phenol and eliminate entirely the labor, utilities, overheads, and raw products of the mines used in the materials now used to add an atom of oxygen. A very substantial reduction in the costs of phenol itself above the capital saving would inevitably result and, of course, this would be reflected in the selling price of resin. Such reduction would undoubtedly be a great stimulus to further uses and would result in a growth
of the phenol resins at a substantially greater rate than has as yet existed. The possibility of such improvements is not academic. All our phthalic anhydride, another resin material, is produced by a process where oxygen from the air is reacted with naphthalene, using a catalyst which lasts without replacement for 10 or more years. Had phthalic anhydride depended on the old prior process using sulfuric acid to carry the oxygen, the large alkyd resin production we have today would never have come into existence. There are, of course, limits to the extent to which technological advance can continue to reduce capital and operating costs. Old established products such as sulfuric acid and soda ash have developed over the years to a point where further improvements are of necessity minor in nature and not likely to cause the obsolescence of the methods and equipment now in use. T h e same static condition may be eventually expected for most large tonnage chemicals with major changes depending on t h e variability in basic raw material costs. Quite a few of the raw materials required b y the synthetic resiD and plastic industry are approaching thi^ condition and further improvements depend on devices to save labor which, in itself, will require substantial further capital expenditures. In any case, regardless of the technological progress which is reasonably to be expected, it seems that the major
retardant effect on the chemical industry is the scarcity of equity capital. Of course chemical industry is not alone in this respect since need of further capital exists to a greater or lesser degree in all industry. The chemical industry, however, is peculiar in that at all times a substantial part of the operations is in the position of a brand new industry with the high rate of obsolescence which such a position entails. Therefore, plants must be charged off at a considerably higher rate than allowable for tax purposes, if industry is to keep itself in a financial position to take advantage of the improvements which research and development invariably bring into existence. If the factor of unrecognized obsolescence is combined with a heavy factor of debt, a very serious situation could develop in any extended period of recession in business activity. If equity capital can not be obtained, a slower growth would be a healthier condition for the long pull. Our tax laws should be made to recognize this factor of obsolescence in the same general way ae was used in amortization of essential wartime facilities.' This would greatly encourage the construction of new plants. Equity capital, in the chemical industry especially, must be encouraged in every way reasonably possible. Otherwise the advantages which accrue from a changing, ever-progressing, and increasing industry will not be available for the general good of the Ampriean public
Record Number of Papers to Be Heard at Atlantic City Meeting A. NEW high in number of papers, presented will be reached at the 116th ACS Meeting in Atlantic City, Sept. 18 t o 23, when 1,064 scientific offerings will be laid before the N convention. T h e trend toward specialized groupings and s y m posia on specific topics continues t o increase with 43 programs being directed along specified lines. T h e High Polymer Forum, as usual, is the symposium drawing the cooperation of the greatest number of divisions. A large program of 33 papers is being offered pertaining t o high polymers this year through the combined efforts of the Divisions of Cellulose ; Colloid ; Organic ; Petroleum; Physical and Inorganic; Rubber; and Paint, Varnish, and Plastics Chemistry. Paul O. Powers, of the last group, is the chairman this year. T h e papers cover a wide range of topics in the polymer field. Particular attention is given to descriptions of new polymers, including vinyl polymers of long-chain fatty acids, polyvinyl sulfonates, and the V O L U M E
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ester lactones. Several papers are offered on t h e correlation of physical properties with the structure of plastic materials and considerable interest is shown in copolymerization studies and the related depolymerization process. Studies reported on the mechanical and electrical properties of plasticized polymers will show that the over-all length of the molecules determines the properties in compatible systems. It will be shown that in polystyrene the number average molecular weight measures many of the properties quite well and the distribution of molecular weight is not critical. In polyethylene it is found that the molecular weight determines the strain energy above —20° and the torsional and tensile values agree well. Vinyl esters of long chain saturated fatty acids are shown to polymerize readily while the unsaturated esters polymerize less readily and form lower polymers. Other subjects in the high polymer group include multilinked polyamides.
SEPTEMBER
5,
1949
whose behavior is compared with vulcanized rubber; it is shown that the size of the networks determines the physical properties as it does in synthetic rubber. Turbidimetric methods will be shown to orSr promise in showing the distribution of polymer bands in plastic materials. A new polymer containing free aldehyde groups will be described as a water-soluble film-forming material which can be insolubilized by heating. A description of nonradical mechanisms will offer evidence of carbonium and carbanion mechanisms. An extensive range of other topics promises a polymer forum of exceptional interest this year. Paint9 Varnish, Plastics Twelve papers will be offered by the Paint and Varnisk group dealing with protective coatings. Four of these deal with polystyrene: copolymerized with butadiene in flat paints, reacting with drying oil fatty acids and dehydrated castor oil, and in alkyds compared with 8549
