Dschabir ibn Haiian, famous Arab alchemist of the eighth century, may have suspected it. Francis Bacon, of the Renaissance
Period, may have fancied it. Other scholars doubtless speculated on it. But except for a handful of intellectuals, and an equally limited number of industrial crusaders, few people until recently would have made the sweeping generalization that,
. . . CHEMISTRY
..
TOUCHES EVERYTHING,
N O T H I N G E S C A P E S I T , I T S PURSUIT OFFERS UNLIMITED P R O M -
I S E I N M O L D I N G M A N ’ S ENVIRONMENT TO HIS O W N NEEDS
America’s economic scene and are rightfully being recognized as the leading group in United States industrial effort. Yet because this group’s most ROBERT S. ARIES, R. S. Aries & Associates, New York, N. Y. impressive growth has been both recent and swift, the exJOHN W. SPENCE, Merrill Lynch, Pierce, Fenner & Beane, New York, N. Y. tent of its contributions-and of its over-all influence upon chemistry deals with the make-up of matter, the health, well-being, prosperity, and defense of our nation and because everything in the physical universe is ma-is even now only partially appreciated by the general pubterial, the growth of chemical knowledge affects civilization in lic. Even the business and financial world was slow in recthe most profound way. But not many realized this as reognizing its importance and vitality. cently as 50 years ago. Conceived in the dark alchemy of anToday the American chemical process industries group is tiquity, nurtured by Renaissance pedants, courted by 18th without parallel in the world-in contributions to modern livand 19th century zealots, and put to work by latter-day entering, in earping capacity, in stability, in influence, or in future prise, chemistry now directly influences the personal life of prospects. While it is true that the investing public has each of us. In the last decade alone of America’s history, lagged in its realization of the practical dynamic expanse of chemistry, there are already several hundred chemical process chemical research and engineering and chemical business industries stocks listed on the exchanges or traded over the management have together created an industry now possibly the chief generating force in the United States social and counter. A $1000 investment in Du Pont in 1919 would by economic pattern, indeed if not of the world. now have grown to $10,000, or a comparably farsighted one Now at the halfway mark of the twentieth century, the in Celanese would have climbed to 25 times its initial value, chemical process industries have secured a firm foothold on not to mention annual dividend payments averaging 6.3%
E CO NOM IC A N D F I N A N C IA L D E V E LO PMEN’f OF T H E C H E M I C A L P R O C E S S I N D U S T R I E S
BECAUSE
938
INDUSTRIAL AND ENGINEERING CHEMISTRY
companies last year was accounted for by products undedeveloped in 1935. Although to date only one chemical company (Du Pont) has entered the billion-dollar sales league, the significant aspect is that 60% of that company’s current sales is in products unknown, or a t best in their commercial infancy, two decades ago. Such new chemicals eventually provide the impulses forcing other industries to change or to improve existing outputs. New chemical products are replacing old raw materials in every manufacturing line. Plastics have displaced nonferrous metals and wood in many common notions and household goods; synthetic fibers are supplementing and competing with cotton, wool, and silk; nylon threatens to eliminate inner tubes in pneumatic tires and is even finding its way into typewriter ribbons. The list is endless, the effect immeasurable. American industry can no longer ignore the influence of chemistry, for every industry group is now a customer for chemicals. The dynamics of the enterprising, free economy of the chemical process industries are, thus, changing everythingand fast. They have improved the implements of everyday living. Agricultural sections of the United States, notably in the Southwest, are being industrialized. Every day the progress in synthesis is making this country more self-sufficient in vital raw materials. And there are few who now can foresee what valuable contributions may come from the exploitation of nuclear chemistry. But the alchemist’s speculations, if they ever existed, have in fact come to pass. The basic principles of chemistry and chemical engineering, put to work by progressive management, are transforming the shape of American industry.
Swift Growfh Since World War I In 1900 not a single chemical process company was included in the twenty-five largest manufacturing corporations, based on reported assets. But in 1949 three chemical firms and ten petroleum and oil producers dominated the list [Chem. Eng. News, 27,3782 (1949)], Whereas in 1939 only eight chemical companies had net sales over $25,000,000,more than nineteen chemical corporations were well beyond that point by 1949. Before World War I, the American chemical industry was a rather loose agglomeration. The manufacture of products such as acids and alkalies was already extensive, and some wood distillation products and naval stores enjoyed an export trade. Even with the limitation that the manufacture of nitric acid, and hence of explosives and other nitrogen compounds, depended on imports of sodium nitrate from Chile, the heavy-chemical side was far better developed than was the manufacture of synthetic organic chemicals, for which, indeed, facilities hardly existed. This country was largely dependent on Germany for supplies of many essential products, particularly dyestuffs, drugs, and other fine chemicals. The chemical industry of Germany, on the other hand, was in 1914 both comprehensive and well organized. It was already producing a wide range of synthetic organic chemicals 2nd had in fact attained such a lead over other nations in the manufacture of dyestuffs and drugs as to enjoy a near world monopoly in many of them. Moreover, in the production of heavy chemicals Germany had been enormously strengthened by the then recent development of the Haber-Bosch process for the synthesis of ammonia from atmospheric nitrogen. She thus became equipped for the manufacture of nitric acid, explosives, and nitrogenous fertilizers independent of Chilean nitrate, theretofore the world’s principal source of combined nitrogen. The Badische Aniiin, the company responsible for these important developments, was even then a much larger unit than any in the United States, and it later became the nucleus of the great German chemical combine, or dye trust, the Interessen Gemeinschaft Farbenindustrie.
Vol. 42, No. 6
The outbreak of World War I, therefore, found the United States in a serious position from the chemical point of view. Many products essential for the wartime economy were lacking, as were also the technical information and eqiipment needed for making them. Drastic steps had to be taken to correct these grave deficiencies. Brilliant improvisation made it possible to solve the more immediate problems, but a t great cost. By the end of the war the vital importance to the national economy both in war and peace, of a strong organic chemical industry was fully recognized by the Federal Government, and accordingly legislative steps were taken in the form of tariffs to assist future development. The years between the wars saw much integration in the industry. The end of World War I had brought pressing problems of reorganization, in particular to manufacturers of explosives, who were faced with the task of reducing excess manufacturing capacity created by the war and of developing new products for peacetime use. Underlying the formation of larger companies was the need (1) t o promote efficiency of operations by desirable reorganization and sufficient centralization to effect reduction in manufacturing costs, thus improving the competitive position of the industry in home and overseas markets, (2) to pool the resources of the constituent companies so as to undertake projects otherwise beyond the reach of the individual companies, and (3) to strengthen and coordinate research and to exchange technical knowledge. Foreign competitors of the chemical industry were already organized into large units before the first large United States chemical amalgamation. I. G. Farbenindustrie, which included among its products not only dyestuffs but also most heavy and fine chemicals, was created in 1925. Its nitrogen factories were producing vast quantities of sulfate of ammonia and other fertilizers and creating keen competition in world markets. In Great Britain, Imperial Chemical Industries, manufacturer of explosives, had broadened its base in the chemical field and was becoming increasingly competitive in world markets. In France and in Italy large chemical units were operating, and they competed in some of the overseas markets, including the United States. Thus from all sides competition was increasing. The formation of such strong units as Du Pont, Union Carbide, Allied Chemical, and American Cyanamid was hastened by the threat that foreign combines might become the chemical suppliers of the world. The competitive power resulting from amalgamation of some chemical companies along with some tariff protection enabled American industrial leaders to meet foreign rivals on equal terms, and from the 1920’s the United States chemical industry was no longer at a disadvantage a t home or overseas. From these beginnings the chemical industry pursued a vigorous policy of research, development, and expansion. Development of new sites was undertaken with the large financial and technical resources of the larger units, and consolidation further made possible long-range research programs whose future consequences could not then be clearly foreseen. The part played by the chemical process industry during World War I1 was commensurate with its great resources. When the war clouds gathered in the late 30’s the United States could thank its lucky stars for its strong chemical position. Without it this country could never have fulfilled the role of “Arsenal of Democracy.” The research and development inaugurated 20 years earlier made possible much of the production that provided the sinews for victory. The process industries group was entrusted with much of the work involved in the design and construction of new plants for war purposes. Furthermore, these companies were in many cases charged with the responsibility for operating new factories, sometimes for products to all appearances only remotely associated with the output for which a company had been noted,
June 1950
INDUSTRIAL AND ENGINEERING CHEMISTRY
939
strictly differentiated from the purely mechanical industries, which merely change the shape and size of materials and assemble them into marketable products. A list of the chemical process industries might, for example, include such manufacturing categories as: 1. Alcoholic Beverages 2. Cement, Lime, and Rook Products
3. Chemicals 4. Coke, Gas, and Coal Tar 5. Explosives 6.
Fertilizers
7. Food Processing and By-Products 8. Glass, Ceramics, and Refractories 9. Leather, Linoleum, and Oilcloth
10. 11. 12. 13. 14. 15. 16. 17.
18.
19. 20. 21.
Table I
Wartime expansion of the chemical industry was by no means confined to the manufacture of its customary products on a greater scale. New products were high-balled from test tube to tank car-butadiene, styrene, and others. Research and development activities greatly increased. A number of products developed by the industry just before or during the war have since shown themselves to be of permanent value in peacetime, among them the plastics polyethylene, methyl methacrylate (Lucite and Plexiglas), and polyvinyl chloride. Many other new discoveries had, however, to await the end of hostilities for release of the resources needed to develop them.
Metallur ’cal Oils and %ats Paint, Pigments, Varnish, and Inks Paper and Pulp Petroleum Pharmaceuticalfiand Cosmetics Plastics Rubber Soap and Detergents Storage and Dry Batteries Sugar Textiles
Standard government statistical classifications do not do justice to the magnitude of chemical endeavor. The magazine Fortune, recognizing this, recently said : Some visionaries predict that most industry will eventually be absorbed into the chemical industry, and at the rate chemicals is going this may not be far-fetched. Whether it is or not, many an industry might learn much, as some already have, from a closer study of the chemical group’s growth and motive power. Government might well study it, too. There’s nothing mysterious in it, and the industry is neither superhuman nor without fault, but more than any other it has found the power to create for itself and for men everywhere illimitable frontiers,
Boundaries for the various chemical procetis industries are breaking down. Constant integration and diversification are cutting aciom any artificial barrier imposed on these vast Larger Than You Think industrial mechanisms. Petroleum companies, of c o w , The chemical process industries group is now far larger than have long used basic chemical and physical data and chemical engineering principles in their processes. More recently the statistics indicate. It is composed of individual units differing in process details but all closely linked by the science of trend of the major petroleum companies is to get into chemichemistry and chemical engineering. Its activities encomcals production aa such. For examples, there are Shell, pass a far greater portion of our economic fabric than is inPhillips, Lion Oil, and the Standard Oil Companies of New Jersey, Indiana, and California. The Carthage Hydrocol cluded in the various classifications of the government statistical agencies called “Chemicals” or even “Chemicals and AlCo., aa a by-product of its synthetic gasoline production, has plans to make 760 tons of Chemicals per day. Simultanelied Products.” The latter usually includes only inorganic ously, leading chemical firms have invaded the petrochemical and some organic chemicals, paints and varnishes, plastics, field in the Southwest. Du Pont, Monsanto, DOW,Cyanamid, and synthetic fibers. But chemistry has penetrated far beyond these artificial boundaries. The wide field of the process and Union Carbide are tapping the rich potentials of natural industries is permeated with the activities of chemists and gases. Process companies, mainly those which produce cyclically fluctuating products, are stabilizing their outputs by chemistry. Their influence, gaining stature every day, extends to industrial gases, food, ceramics, glass, fertilizers! dyediversifying. Eastman Kodak, Glidden, Libbey-OwensFord, Pittsburgh Plate Glass, Goodrich Rubber, Swift, Genstuffs, medicinal and fine chemicals, explosives, resins, insecticides, and myriad others. I n fact, AMERICANCHEMICAL eral Mills, and Corn Products Refining all are making chemicals. Amour, the meat packer, has recently completed a SOCIETY membership records show that more than twice as many chemists and chemical engineers work in industries outmagnificent new plant at McCook, Ill., for the chemical processing of 100,000,000pounds of raw fats and oils per year side the narrowly defined chemicals manufacturing industry and the production of a whole line of chemicals. Even fertilthan work within it. izer companies are now marketing pure chemical compounds. The concept of the chemical process industries has been Conventional distinctions between the process industries are, championed for many years by a small group of realists. Rein short, rapidly fading. cently it has received more recognition and has been adopted by many technical publications and other organimtions. A Beyond this development, chemical producers have teamed up with other process industries in joint ventures. Dowchemical process company is by modern definition any manufacturing enterprise which employs chemical change at one or Corning is in silicones; Monsanto is developing synthetic more stages of its manufacturing activity. As such it is yarns with American Viscose; the Jefferson Chemical Corn-
940
INDUSTRIAL AND ENGINEERING CHEMISTRY
Vol. 42, No. 6
paiiy, ow~iedby American Cyanamid and the Texas Conipany, is turning out glycol antifreeze and other products. At Brownsville in Texas, Carthage Hydrocol oxidizes natural gas into gasoline and oil, and pumps the liquid wastes to neighboring Stanolind Oil and Gns for recovery of chemical coniponents, themselves in turn processed further and marketed by U. S. Industrial Cheniicals next door. Mathieson and the Tennessee Gas Transmission Company have formed a company for joint exploitation of natural gas for chemicals production. Rigid separation of the chemical industry into its component parts has little justification today. The real contribution of the industry to American progress, and its present position in American economic life, cannot be measured realistically by a system of statistical compilation which excludes petrochemical activity, separates pharmaceuticals fitom the production of other chemicals, makes a distinction between processed food and, say, paints, or invokes any other arbitrary clussification not existing in fact. The narrow concept of “chemicals” is gradually being scrapped, and it is safe to predict that the various process industries will gradually become classified in a group as the cliemicnl process industry. Economic Aspects of the Industry
The chemical industry is characterized by singular production and distribution methods, all affecting its economics. In the first place, chemical products and processes are typically short-lived because rapid technological changes effect rapid changes in the picture of who uses what, when, and where . . . and how it is best made, A change in one chemical product, because of a new laboratory development, may make another obsolete. This may affect EI whole chain of reluted raw materials and chemical intermediates. Certain basic chemicals, such as sulfuric acid, will always be necessary, but technological changes do change methods of manufacture of even the most basic materials. In many cafies chemicals are obtained as by-products or joint products under conditions which allow them to drive prime-product processes out of the market or effectively cut down the volume produced through these methods. External conditions, such as war, give rise to new shortages, intensify old shortages, and hasten the development of products which may partially or completely replace the old ones. Large capital investment, although often necessary, does not ensure against rhort life of process. New laboratory developments may make production possible with much smaller capital investment, cheaper raw materials, or lower operating costs. A good many products or processes, chemical or otherwise, eventually become obsolete; but in the fast-moving chemical industry the rate of obsolescence is greatly accelerated. In fact, it sometimes is of an entirely different order of magnitude than other industries. A second distinguishing feature of the industry is the lower ratios of wage costs and of number of workers to value of products than in industry as a whole. I n many chemical operations the worker never sees the product during the entire production process. He operates through valves, automatic controls, and instruments. Because the chemical industry is close t o science and engineering, the average worker must be unusually intelligent and highly skilled. Individual wages of workers are therefore relatively high compared to industry as a whole. So also is the average investment per chemical worker, now estimated a t $14,000. The chemical industry is less affected by business cycles and seasonal changes than other major industries. The greatest effect comes from technological change rather
Table II
than from changes in business conditions. Of course, the chemical industry, as does all industry, responds to long-term trends, but it customarily experiences yearround production, any minor seasonal change being smoothed over by storage of product. Violent cyclical change is minimized by diversity of production and variety of customers in other industries. Changes in consuming industries tend to balance each other. Indeed, many previously “nonchemical” companies have entered the field during the past two decades to obtain this stabilizing influence. Relative price stability of chemical products, as compared to the natural products they replace, is an especially significant factor. While silk as a natural product was greatly influenced by natural conditions and the hazards of the export trade, nylon as a chemical product sells a t a relatively fixed price under fixed quality standards. During periods when the supply of chemicals has been short-for example, 1941-45-chemical managers, themselves mindful of the tricks of the trade, have preferred to allocate or ration their products rather than let prices rise to the point where they would eliminate demand. Because of the nature of chemical change, production of the material desired frequently involves the unavoidable manufacture of a by-product, a joint product, or a waste product. A by-product is one which comes out of the process along with the main product but has less value. A joint product results from a chemical operation in which two or more products obtained have equal or nearly equal value. Disposition of any unwanted effluents from chemical operations is always a matter demanding attention, no matter how valueless the coproducts may prove to be. Included in the production cost of every marketable item is the expense of by-product or waste disposition. Frequently even waste products must be sold or processed because they cannot be thrown away if they are dangerous t o health, cause stream pollution, or contaminate the atmosphere. Waste hydrogen chloride gas, as a common example, must always be absorbed even if, as is sometimes the case, the cost of collection is greater than can be recovered by sale of the resulting acid.
June 1950
INDUSTRIAL AND ENGINEERING CHEMISTRY
Evaluation of every chemical process, and selling prices of principal products, both always involve consideration of incidental, if unwanted materials. There is in the, chemical industry an unusual emphasis on research. As much as 3 to 4% of the sales value of products may thus be plowed back, as compared to about 1.6% for industry as a whole. Chemical products are sold on a basis of function. It is axiomatic in the chemical industry that a chemical is only as good as its use, and quality must bear a relation to that use. A quality satisfactory for one use may not be so for another. Chemicals have no counterpart for fanciful advertising or snob appeal. They have no “sex appeal.” Broader application for any given chemical product can be achieved only by finding new uses. Nor is price always a factor. Reduction in price does not necessarily result in increased consumption, for a given application may be unable to absorb a larger quantity of material even were that material free. For 20 years or more the oil industry junked and burned countless tons of gases and other materials for want of suitable uses. Before Runge discovered phenol in coal tar (1834) the latter had been only a worthless and, what’s more, troublesome product of the gas works. High percentage of sales goes directly from producer to consumer in the chemical industry. Fully two thirds of chemical sales are made through factory distribution. The chemical industry is its own best customer. It buys over half of its raw materials from other chemical companies. Modern trends toward direct sale of retail consumer products have created new problems with which some units of the industry have had to cope. Chemical sales are usually not a one-shot proposition. Producers continue to sell to the same customers year after year because markets are relatively narrow as compared to the vast retail markets in consumer goods. The producer must maintain quality of product in relation to use and must serve the customer as well as sell him. There is a great diversity both in products and in customer industries. It is brought about by necessities of production (in which joint products, by-products, and waste products are obtained whether desired or not), advantages in use of raw materials (when more than one product can be produced from the same raw materials), and the close interrelationship of markets. Service is one of the best means of sales promotion. Unlike the case in consumer goods, sold directly to the individual, ballyhoo is worthless. Except perhaps in the field of electronics, no other industry depends so largely on consumer technical requirements. Therefore, i t behooves the manufacturer to maintain a competent technical service organization to ensure efficient use of his products by his customers, The application of chemical products is not always apparent on superficial examination, and this represents one of the major difficulties in the commercial development of chemicals. None of the senses-sight, taste, or touch-can tell very much about what a chemical is good for. But the chemist can tell a lot from a structural formula, or even from the name of a product when given in correct chemical nomenclature. Many chemicals are used in minute quantities only. A company manufacturing a new basic chemical often develops a whole line of derivatives for which there may be no apparent use. Should uses develop, demands arc often for small quantities only. But a lot of these little uses add up to an extensive use of the basic chemicals. Because market research for each of these derivatives may not be worth the cost, companies often seek uses simply
941
PROPITS, TAXES, AND DIVIDENDS Corporote financiol data for Chemkalr and Allied Products Group millions of dollars
2,m
coroorote . profits: .
1,506
1,000 506
divid 0
1939
1947
1948
1949
SOURCf: U.S. Department of Commerce and Securities and Exchange Commission
DIVIDENDS,
% OF
NET INCOME All industry i Chemicals nnd
: Allied Products 1939 55.7 i 64.2 ........................................ 50.0
1949
i
61.5
Chart 2
by listing formulas and properties in trade-journal advertisements, a method of development known, for lack of a better handle, as thc we-have-these-chemicals-hut-wedon’t-know-what-they’re-good-for method. It is based on the hope that some smart technical man will read the advertisement, see a potential use for the product in his own work. Finally, chemical products take an exceptionally long time for development. Even when a company is adding an item to a very similar line of chemicals, development always takes time. When a niorc or less new chemical is being developed, 7 to 12 years are not unusual for product development to full scale production. History of Financial Trends
Of the important companies in the clicinical industry today, many began their existence in the nineteenth century as small partnerships to import chemicals, principally from Germany, and perhaps to produce some simple basic materials. Capital requirements were small and need for additional capital was limited. With the turn of the century some assumed the corporate form of enterpyise, more perhaps as a trcnd of thc times than as a vehicle for financial growth. Chemical companies were, in general, sinall in comparison to the socalled giants of industry, nnd Recurities were closely held by nimngemclnts. I n the eaAy ycars of the prcscnt century the chemical industry continued to show ~ l o wand steady growth. Inorganic chemirals were basically most important. Organics were little more than laboratory curiosities, and expansion in the iisc of heavy clicmicals did not rcquirc large funds according to today’s standards. As a rcsult, retained earnings werc inore than suffirient to finance growth. Imports of organic chemicals and dyestuffs werc cut off sharply a t the tinio of World War I. This gavc the indristry great impetus t,n overcoiiic dcficiencics in thcsc Iwodurts. Sturthg fiwn wiitcli,
942
I N D U S T R I A L A N D ENGINEERING CHEMISTRY
the industry had to undertake research, develop know-how, and build facilities for production of these items. Encouragement was given by government help in building facilities for war-needed products. Through the 20’s and 30’sthe chemical industry developed into an important part of the national economy, and chemical companies became well known on the security markets. Large sums were needed to finance research and develop new products and to add to facilities to make these products. A very substantial part of this money was obtained by retention of a large percentage of current earnings. Growth in the leading companies was accomplished by absorption of smaller units or the combination of several units by exchange of equity securities. This form of financing greatly aided the industry during the difficult 30’s because it relieved management of troublesome senior securities and saved time and effort for the exploitation of new and more profitable fields. I n World War I1 the chemical industry was called upon for a large increase in facilities. Some of this rapid expansion was financed by the companies, but a large part was accomplished with government money. With the end of hostilities, the industry continued to expand to supply pent-up demands. Faced, however, with the necessity of raising very large sums of money quickly, chemical companies entered the capital markets. Conditions then existing in the equity markets forced the industry to raise most of these needed funds by borrowing or by the sale of preferred stocks, a departure from the conventional methods used by the industry in the past.
Voi. 42, No. 6
ASSETS, CAPITAL, AND PLANT (1939 = 100)
1939
1941
1943
1945
index
1947
1949
Bored on reports lrom a selected group of 19 chemical companies.
Analysis of Finances A financial analysis of representative corporations for the past eleven years (1939-49) reveals striking trends. Some changes in the total assets are detailed in Table I. A more comprehensive picture, containing the combined assets of a number of companies, is given in Chart 3. The index clearly shows that the total asset,s rose steadily over 120 points from the prewar period. To the uninitiated, the “assets” mentioned above can be ambiguous. What does this item mean? Where does it appear? Assets are listed in a financial report called the balance sheet, covering the company’s customary fiscal period. The balance sheet together with the income statement constitutes the basic financial statement prepared for the stockholders by a corporation. The balance sheet lists all the resources of the company, the above assets, all its debts and obligations called liabilities, and the interest which the owners, or stockholders, have in the firm, called variously net worth, equity, or proprietorship. Basically: Assets = Liabilities plus Equity or Assets minus Liabilities = Equity
These equations mean that the stockholders own all of the resources of the firm after all obligations and expenses have been paid. The accounts listed under each of these groups can be numerous, but for all practical purposes a simple balance sheet will contain the followingitems: Assets Liabilities Equity Current assets Current liabilities Capital stock Fixed assets Funded debt and Surplus and reother long-term liserves Other tangible assets abilities Intangible assets Current assets, usually meaning resources easily convertible into money, can include cash on hand and in the bank; marketable securities such as government bonds; accounts
Chart 3
receivable from customers; and inventories of goods on hand, work in process, and supplies in stock. Fixed assets include buildings, machinery, equipment, and land of the corporation, while other tangible assets contain such items as securit i 9 in other companies. Intangible assets cover good will, patents, trade-marks, and so on. Under current liabilities come short-term debts such as notes due within a year, accounts outstanding with the firm’s suppliers, taxes accrued during the fiscal period and owed to the Government, and the like. Funded debt and other longterm liabilities include all bonds, mortgages, and long-term Table 111
June 1950
INDUSTRIAL AND ENGINEERING CHEMISTRY
943
notes issued by the company. Capital stocks together with surplus and contingency reserves represent the amount of equity capital in the business. This capital is formed by the issuance of preferred and common stocks and is carried on the books of the corporation usually at a stated or par value. Capital surplus covers the difference between stated value and the price a t which the stocks were offered to the publio, while earned surplus is usually built up by undistributed profits. I n reality, equity capital is the contribution of the owners to the business, but it is in some cases supported by many intangible assets such as good will, trade-marks, etc., and assets which, upon liquidation, will not realize their valuation as stated on the balance sheet. The total assets of the chemical process industries, excluding intangibles and deferred items, increased rapidly to a wartime high of 150 points as shown in Chart 3 and to a 1949 level of 224. For the 10 years after 1939, 57.6% of the increase in funds was applied to expand the net plant value of the industry. This fact is shown on the same chart, where the net plant index rises only to 122 during the war, rushes to 172 in 1947, increases another 36 points in 1948, and rises 12 points more in 1949. The construction boom thus did not begin during the war but started later, in 1946-47. It accelerated thereafter, over a billion dollars being spent in 1949. Adequate net working capital-that is, the difference between current assets and current liabilities-is the first requirement for preserving good trade and bank credit, for meeting all expenses and liabilities, and for taking care of emergency and special needs. The chemical industry has increased its net, working capital from a low of 90 points in 1941 to a high of 202 points in 1947 (Chart 3). During 1948 the index decreased 15 points, but in 1949 it returned to the 1947 high. The decrease in the year 1948 can be attrib-
uted to a sharp reduction of the cash accounts reflecting expenditure for plant expansion. Chart 4, which applies the current ratio-that is, current assets divided by current liabilities-to a number of industries, shows that the chemical industry is in a relatively good position, A simple banker's rule-of-thumb calls for a minimum ratio of 2. The chemical industry's ratio is 3.1, while the composite for all manufacturers is 2.8. Table I11 clearly indicates that additions to the surplus, 50.5% of all funds, was the major source of capital for the 10-year period after 1939. This means that reinvested profits were a major factor in building up the assets. The funded debt is the next largest source of capital (21.2%), a novel development for the chemical industry. Traditionally capital requirements have always been raised from reinvested earnings and the sale of common stocks without resorting to flotation of bonds, Chart 5 vividly demonstrates the new trend. Before 1943 the indexes representing different forma of capitalization exhibited a parallel trend. Thereafter, especially in the years 1946-47, the indexes diverge. More bonds and preferred stocks were issued than ever before. They became for the f i s t time important capital sources for the chemical industry. Ordinarily the funded debt should be used only for expanded capacity. It is a financially bad policy to borrow for replacement capital. The large scale use of bonds furthermore forces the industry to provide for interest, a fixed expense, in periods of good and bad business. This fixed obligation together with the repayment requirements and the expanded capacity of the chemical industry, may make the industry more sensitive to the fluctuations of the business cycle than it has ever been before. The industry has always boasted of its sturdiness during depressions. However, even with its increase in the long-term obligations, the industry,
Chart 4
Chart 5
SOURCES OF CAPITAL
-
index
(1939 100)
1939
1941
1943
1943
1947
Bawd on reports from a selected group of I9 chemical tompanles.
1949'
INDUSTRIAL AND ENGINEERING CHEMISTRY
944
DEBT AND CAPITAL Ratio of funded debt to total capitalization nertent
rubber products
20.9
petroleum and coal products food all monufocturing corporations chemicals and allied products stone, cla.y, ond glass products
= 9.3
9.0
paper and allied products motor vehicles and parts SOURCI: Federal Trade (ommission and Securities and fxthange tommission. Average for 8 quarters for 1947, 1948, and lirsl 3 quarters of 1949
Chart 6
as shown in Chart 6still has a lower ratio of its capitalization in funded debt than all the manufacturing industries combined. The book value of preferred stocks more than doubled from 1939 to 1949. This was a much larger rise than for common stocks during that period. However, much of the preferred stock issued was convertible into common; therefore, as the industry continues to grow, there should be a substantial increase in common and a corresponding drop in the preferred. The dividends paid to each type of stock show a corresponding total percentage increase. I n 1949 the index for preferred stock dividends was 170, while for the common stock it was 199 (Chart 7). Except for the year 1949, the percentage of net earnings (aftertaxes) paid out in the form of dividends has decreased steadily since 193*to 92 in 1943, to 80 in 1947, and to 77 in 1948. Yet the dividend record is good. As shown in Chart 8 the chemical industry has been good to its stockholders. The price-earnings ratio, the average market price of a stock divided by its earnings during the fiscal period, is a useful index. Chemical stocks historically sell a t high priceearnings ratios because investors are inclined to emphasize the inherent growth potentialities of the industry. In other words, an investor is willing to pay a relatively higher price for a stock in an industry which is likely to expand steadily. He anticipates a corresponding expansion in the value of his investment. This ratio is influenced by the fluctuations of its two components. During 1947 and 1948, when the net income of chemical firms increased rapidly while the market price for stocks remained relatively low, the ratio was very low, averaging about 10 for companies active in development and introduction of new products and 8 for the primarily basic chemical producers. In 1949, with a steady rise in the price of chemical stocks on the Exchange, and with only a
EARNINGS DISTRIBUTED
-
(1939 100)
index
chemicals and allied products rubber products food stone, clay, and glass products a11 manufacturing corporations
motor vehicles and parts paper and allied products petroleum and coal products 1939
1941
1943
Char) 8
Chart 7
DIVIDENDS
Vol. 42, No. 6
1945
1947
Based an reports from a selected group of 19 chemical companies.
1949
pertent
49.5
47.1
38.1
SOURCE: Federal Trade Commission and Seruritier and Exchange tommission. Average for S quarters for 1947, 1948, and first 3 quarters of 1949
INDUSTRIAL A N D ENGINEERING CHEMISTRY
June 1950
slight increase or, in some cases, a decline in net incomes, the ratio rose again. While the balance sheet details the financial structure of a company and gives an indication of ability to weather difficulties, the income statement, the second report, shows how the firm is actually doing. Here the net sales are reported and by deducting the production, depreciation, and sales and administrative costs, the net operating income is revealed. Another significant item in the income statement is net income after taxes. This figure is obtained by adding to the net operating income any other revenue obtained by the company-for example, income on the company's investments, royalties, and so forth. Interest paid on borrowed capital and income taxes are deducted to arrive at the net income after taxes. Part of this net profit is then distributed to stockholders as dividends, while the remainder is added to the surplus account of the balance sheet. This surplus usually is earmarked for plant expansion, renovation, and other corporate purposes. 1949 was the year of leveling off. After a decade of steady increases in sales and production, the industry reached an all-time high in 1948. The past year saw net sales decline for many concerns. Chart 9,a plot of indexes for 19 representative companies with 1939 = 100, shows sales climbing steadily after 1939 right through the high-production war years to a p e d of 323 points in 1948. Only in 1945-46 was this progress temporarily halted. This impressive gain overshadows the point decline for 1949. Although this slight decline was expected and predicted in many quarters, the dip in sales during the early months of the year still came with a jolt to some producers. Yet the year's total was better than most people dared to expect during that summer lull. Starting in August, production and sales rose considerably. This upward trend is still continuing in the first half of 1950.
SALES, PROFITS, AND PRICES
-
(1939 100)
1939
1941
1943
1947
1949
Chart 9
C hort 11
NET SALES
RATE OF RETURN
divided by inventory
ratio
divided by net plant
ratio
1941
1945
index
Boscd on reports from a selected group of 19 chemical componier.
Chart 10
1939
945
1743
1945
1947
hsed on reports from a selected group of 19 rhmical tompanlcs.
1949
1939
1941
1943
1945
1947
Dosed on repom from a selected group of 19 chsmical companies.
194"9
946
INDUSTRIAL AND ENGINEEHING CHEMISTRY
NET INCOME PER SALES DOLLAR in cents 11.3
Vol. 42, No. 6
Profits during 1949, unlike sales, maintained their record of 1948. After a wartime low of 87 points in 1942, net income after taxes rose to a high mark of 210 in 1948 and continued to 235 for 1949. And this upsurge was accomplished despite only moderate increases in the average price of chemicals (Chart 9). It is highly significant that the difference between operating income and net income after taxes has been sharply decreased by leading corporations. After a spread of 150 points in 1943, the gap was narrowed to only 53 points in 1946. Thereafter it widened slightly. The narrowing trend can be attributed largely to the repeal of excess profits taxes by Congress in 1946. The widening is probably due to the increased interest most companies must pay out on their enlarged funded debts. 1949 was still a prosperous year. Despite the slight decline in net sales, the over-all performance of the industry was impressive. Income did not change appreciably, thanks in most instances to judicious cutting of expenses. The chemical industry, in fact, remained one of the few industrial groups showing no decline in net income. The National City Bank reported that chemicals (45 leading corporations) increased net income 10% over 1948, despite an over-all decrease of earnings of about 9% and a decline of profits for all manufacturing groups (1006 corporations) of 10%. Only the following six industrial groups, out of 34, reported a better record for last year than for 1948:
% Increase in SOURCE: Federal Trade Commission and Securities and Exchange Cammission. Average far 8 quarters far 1947, 1948, and first 3 sunrters of 1949
Chart 12
Chart 13
r # I T INCOME PER DOLLAR OF NET WORT# I
in cents
motor vehicles and ports
17.0
paper and allied products petroleum and coal products chemicals and allied products
all manufacturing corporations food stone, clay, and gloss products rubber products SOURCE: Federal Trade Commission and Securities and Exchange Cammission. Average for 8 quarters for 1941, 1948, and first 3 quarters of 1949
Net Income Autos and trucks (13 corporations) Glass products (7 corporations) Agricultural implements (10 corporations) Cement (18 corporations) Tobacco (15 Corporations) Chemicals (45 corporations)
31 28 22 18 12 10
Analysis of turnover of inventory shows a poor trend (Chart 10). After reaching a high turnover of 7.7 in 1944, the ratio decreased after the war. During 1948 the trend reversed and rose 0.2 point from 1947 to 1948 and 0.7 point last year, while the value of the inventory rose. The ratio of net sales to net plant has declined since 1945 and continues to do so. Right now, every dollar of plant produces about two dollars in sales. While chemicals inventory turnover during the postwar years was slightly better than for all manufactures combined, the ratio of sales to plant was poorer than the over-all figure. Chart 11 shows that the rate of return per dollar of sales has fluctuated considerably. After making a profit of about 21 cents on every sales dollar in 1939, the net income ratio declined to a low of 8 cents per dollar in 1943-44, mainly because of the excess profits tax which hit the chemical industry rather hard. Thereafter it recovered to about 13 cents in 1948 and 15 cents in 1949, higher than for the industry as a whole (8.5 cents). The income per dollar of equity, on the other hand, has improved steadily since 1945 (Chart l l ) , rising from 10 cents on the dollar to 15 cents in 1947 and to 17 cents in 194849. Compared with the all-industry average (Chart 13), it is slightly higher. Although the net income per plant and equipment increased steadily from 1942, it leveled off in 1947 and 1948 because of tremendous expansion of plant facilities. Of course, reported earnings are all inflated by low depreciation rates. Operating equipment continues to be written off at absurdly low cost figures, and the rate of depreciation does not reflect proper replacement costs. This, in truth, means that the capital of a concern is being eroded.
June 1950
INDUSTRIAL A N D ENGINEERING CHEMISTRY
Manufacturers have been forced to dig into other sources of capital in order to maintain a modern competitive organization. The practice of using surplus for replacement purchases is expensive, because the undistributed profits, which make up the surplus, have been taxed. Management can do little to remedy this situation, except to convince Congress that the tax laws must be amended, Chart 3 shows the decline of the per cent depreciation on net plant from the high wartime rate of 1943. Furthermore, the rate of return on net plant is exaggerated because of the low valuation placed upon fixed assets. Public Cognizance of the Chemical Process Industries
The financial growth of the chemical process industries group has been closely related to increased public cognizance and acceptance. It is one of the few industrial groups that are difficult to understand for the public and investor alike. There has been, nevertheless, a surprisingly inadequate public relations program industrywise. Not only has it failed to pass on a message to the public; the industry has also been extremely sluggish in its reaction to attacks upon it. The exchange of information within the chemical process industries has for many years been handled by the publications in the field. They have done a fine job of publishing technical information and news of interest. A prominent role in increasing the public appreciation of the chemical industry has been played by the AMERICANCHEMICAL SOCIETY News Service, founded in 1917, Intimately tied to the growth of the industry, it has proved so successful in its pioneering efforts to explain chemical progress to the nonscientist that it has won a permanent place as a vital aid to the press, radio, and other media for the dissemination of chemical news. Until a few decades ago the chemical stocks were somewhat suspect, as far as bankers and investors were concerned, partly because they were frightened by the reputation for revolutionary change overnight. Today many chemical stocks are rated as first-class investments. Bankers, insurance companies, and individual purchasers of stocks and bonds now frequently show their understanding of the source of strength in a company by insisting that a company possess an efficient research organization. Whither the Industry? The chemical industry from the first has been based on the practical application of scientific observations and deductions. I n this respect, it may be contrasted legitimately with what have been called the “traditional industries.” The milling of wheat, the building of houses, the weaving of textiles-all these arose as crafts rather than industries, and in all of them the element of craftsmanship still survives. They have, it is true, been affected to a great degree, some more than others, by the discoveries of science and particularly of chemical science, but their roots are in the past and their methods, changed though they may have been by science and technology, are still in essence the methods of our ancestors. In marked contrast have been most of the chemical processes. Their foundations are the reactions discovered by chemists in the laboratory, and their finished products differ essentially from the raw materials. For changes in chemical constitution, sometimes profound changes, have been an essential part of the industrial processes linking raw material with finished product. It is therefore not surprising that the chemical industry, more than any other, is aware that its future rests on the investigations of chemists and chemical engineers in the laboratory and pilot plant. As these investigations have steadily continued-and,
941
moreover, on an ever-increasing scale, in both academic and industrial research establishments of many kinds-the chemical process industries have changed and developed to keep pace with the advances of science and with the new requirements of other industries. It is the cumulative effect of new knowledge, in many fields and in many industries, that shapes the chemical process group, Growth of the automobile industry was made possible by mass-production methods, but these methods were aided by the parallel development of nitrocellulose lacquers, which in turn led to expansion of the solvents section of the chemical industry. It is unlikely that the expenditure for research is exceeded in any other industry. The figures speak for themselves. They reflect the initiative that characterizes the industry. Courage is an essential element in the expenditure of large sums for research, especially when it is considered that the outcome may be new processes and products replacing those upon which large expenditures are even now being made. The possibility of revolutionary changes in processes, with consequent obsolescence of existing plant, is always present. Financial strength to meet such circumstances is a necessity if the industry is to maintain its position. Taxation at the present levels imposes a severe handicap upon the accumulation of adequate reserve@for obsolescence. Chemists and chemical engineers, and the industries in which they work, must, of course, rely upon the raw materials that nature provides-coal, minerals, trees and other plants, air, and water. But from that point on the chemist is in constant competition with nature to produce better and less costly products from the basic materials. In this race, the technologist is winning on many fronts. The trends are recent in origin, but they presage a growing chemical revolution, Still newer textile fibers are already in the production stage, and within a year some of them will be available to the consumer. An appreciable portion of our new tires have much better wear resistance owing to cold rubber. Our insect enemies are no longer so formidable because a number of superior insecticides are taking their places alongside DDT. Plastics grow in volume. New drugs make their appearance each year, thus giving the physician better weapons against some diseases and entirely new ones against others for which no effective treatment has hitherto been available. Antibiotics, parlayed into a multimillion dollar business in a few years, are still only in their infancy. The common inorganic element, silicon, is being combined with carbon-containing groups to provide us with the silicones for use as new and better greases, resins, and insulating materials. The taming of the violent element, fluorine, to produce remarkably corrosion-resistant plastics has been accomplished. Chemistry has broken through many frontiers. It has already supplied an amazing number of man’s needs, and it is now developing useful products for which wants have not yet even been recognired. I n considerably less than half a century, the chemical process industries have grown faster and farther than any other manufacturing group, and there is ample assurance that development will be equally dynamic in the next half-century, For the remarkable changes already brought about, and those even now taking place under the momentum of the times, represent a profound change in the traditional character of industrial thinking. Bold and adventurous always, never averse to the new and unusual, itself the paragon of progressive invention, the chemical procesa industries group bids fair to ignore any negative thinking about recession or depression. Instead, it goes forward, young, ambitious, confident-an example to all industry in pushing the welfare of mankind physically and economically upward. Thanks are due to Rudolf. Cziner for hia help in the collection and organization of the data in this artlole.
