MARKETS Escalation:
Do We Need It?
Could be an inflationary factor, chemical buyers told—Industry's financial requirements to grow .ESCALATION P R I N C I P L E used in
pur-
chase contracts contributes t o rising prices because i t allows rising costs to be passed on too easily. T h e same unfavorable trend c a n result from escalation in wage contracts. In the opinion of Ira T. Ellis, economist for the D u Pont Co., there is actually n o need for escalation at present as a marked rise in costs and prices over t h e next five years is unlikely. These views were given before the dual Chicago-New York meeting of the Chemical and Allied Buyers' Group, National Association of Purchasing Agents. Escalation principle works both ways. An example: T h e price of a product may b e 70 cents per pound, raised or lowered by a factor equal to one quarter of any percentage increase or decrease in average hourly earnings of the chemicals and allied products industry, plus o n e half of the percentage increase in t h e published market prices of a specified list of r a w ma= terials. At times a general price index may be specified, such as t h e Wholesale Price Index of t h e U . S. Bureau of Labor Statistics, excluding farm products and foods. T h e purpose here is to keep a particular produces price in line with the general price level without special reference to cost of production of the item in question. The BLS index for chemicals and related products has shown little change since September 1953, while prices for rubber and rubber products have risen 2 2 % over this period, and metals have risen 1 1 % . F a r m prices have slumped 1 5 % . It is Ellis' idea that business planning can best b e done under conditions of price stability, a n d stimulation of the current u p w a r d trend in commodity prices would b e a dangerous development. Rising prices give a false sense of prosperity or economic progress. The escalation principle contributes to rising prices because rising costs are passed on to t h e buyer easily, b y mutual arrangement. T h e seller becomes less concerned over in728
C&EN
FEB. 13,
1956
flation, offers n o resistance to r a w material price advances. There are exceptions w h e n a supplier builds a plant or part of a plant, for example, with costs to b e regained over a long period. Here, it may be necessary to include some price protection in t h e contract, since t h e length of the contract increases t h e potential risk. Only wide price swings should be covered, n o t minor fluctuations. Price escalation should b e used to protect against drastic price increases rather than t o guarantee a desired profit. Petrochemical growth w a s cited to show w h a t t h e chemical manufacturing industry will require in t h e future to finance expansion a n d operations. Kenneth H . H a n n a n , Union Carbide and Carbon, said financial people consider t h e chemical industry overexpanded. However, since 1920 petrochemicals have about doubled every five years, and further growth may bewitnessed in the years ahead. Attention w a s called t o forecasts which indicate that petrochemical production which amounted to about 7.5 million tons in 1950, a n d 16 million tons in 1955, m a y rise to around 60 million tons in 1960. Petrochemicals today represent approximately one half of the annual dollar chemical sales. Chemical industry h a s been one of the largest consumers of capital and its construction h a s proceeded at an exceedingly rapid rate, in t h e view of Ernest H . Volwiler, president, Abbott Laboratories, w h o spoke before the buyers' group in Chicago. Capital expenditures increased from $376 million in 1945 t o an estimated $1,032,000,000 i n 1955, a n d 1956 outlays for this purpose may b e even greater. There are h u g e tasks ahead for the? industry which will b e related to the chemical buyer. F o r t h e d e c a d e ending in 1953 t h e world food supply increased 9% while t h e population gained 1 2 % . W e must rely on the chemical industry to provide enormously increased amounts of fertilizers, as well as agents for food processing: and preservation.
Other jobs for chemicals are indic a t e d in fuels, minerals, water, iron, and steel- When t h e world supply of iron ore ireally runs short, a n d Volwiler warned tJhat St won't take long, industry and metallurgy must be ready with the mucEi more abundant aluminum, magnesiiLin, amd their alloys. Plastics will carry an appreciable share of t h e load. • Futui-e C Hi em ical Costs. I n discussing Long-Tterm cost trends i n t h e chemical industry, Roger Williams, Jr., technical and economic consultant, called attention t o t h e change w h i c h has taken, place in the organic r a w material bas« fro»m by-product benzene t o petrocheooicaLs, since t h e latter's inception during World W a r I.
Actually ttie development d i d n o t alter the raw material cost picture for the organic chemical industry t o o greatly, according t o Williams. Ethylene, purchased from a petroleum r e finery by pipeline a t 5 cents per p o u n d , is t h e equivalent of 35 cents per gallon benzene on a. weight basis. Benzene now sells for 3 6 cents per gallon. • Organic Trends. T h e story in i n organic cheroricals is somewhat different. Th.« ra*w material starts with a mineral i n the= ground just like the c r u d e oil, excerpt th_at most of t h e m have t o be d u g o.p amd t h e labor requirement comes high. Sulfur a n d salt are exceptions. Ax^dajn upward 10-year trend is likely to be the future p a t t e r n for chemical minerals, because technological improvements will have a hard time matching: advancing labor costs a n d lower mixieral content ores. T h e orpposite might b e t h e case for benzene. Prices have advanced rapidly due to r>etroIeum-based benzene, a n d the rise may continue for a few years, then flatten ofiE to a more normal g r o w t h rate.
