CHEMICAL PRICES SEEK HIGHER GROUND

Chemical & Engineering

NEWS SEPTEMBER 23, 1968

This month's rash of chemical price increases won't do much to boost gen­erally lackluster profits in the basic chemical industry in 1968. The in­creases have come too late and there are still too few of them for that. However, the extent of the increases and the apparent enthusiasm with which many companies in the indus­try are going along with them does pinpoint the industry's growing con­cern over its dwindling profit margin.

This margin, expressed as net in­come as a percentage of sales, has been steadily declining since the squeeze of rapidly increasing costs, slowing sales growth, and stagnant or declining selling prices first hit the in­dustry in mid-1966. The margin is now at its lowest level in a decade. It is running some 25% below what it was two years ago. And, largely be­cause of the new tax surcharge on corporate income, it was still eroding at midyear this year.

But even if the new price increases, most of which have been set for the fourth quarter, won't do much for 1968 returns, they could point to bet­ter things for the basic chemical indus­try next year. Chemical prices will continue to be set on a product-by­product basis in 1969. But the recent slower growth in chemical capacity combined with resurging chemical de­mand that is already under way should help stiffen the price situation in com­ing months.

Many of the recent list price in­creases have been instigated by Dow. But Monsanto, Allied, and Union Car­bide have triggered some higher tags. Big-volume items involved in the in­creases include alum, benzene, borate products, chloride, chlorinated sol­vents and other chlorinated com­pounds, hydrogen fluoride and other fluorine compounds, methanol, oxalic acid, phenol, polyethylene film, some low-density polyethylene film resins,

soda ash, and toluene diisocyanate. The typical increase runs about 7%. At press time it looked as though many of them would stick—at least for a while.

In an earlier interview (C&EN, June 17, page 19) Dow's president Herbert D. Doan told C&EN that it is essential for chemical makers to get prices up if they are to survive as a viable industry. In commenting on the recent increases, he adds that im­proved productivity, better technol­ogy, and even larger markets have not been able to compensate for the recent steeply rising costs and price weak­nesses in the industry. He also ex­plains that Dow is now paying par­ticular attention to the pricing of prod­ucts that have been most directly af­fected by the current inflationary pres­sures.

John L, Gillis, senior vice president-commercial of Monsanto, says his com­pany is constantly reviewing prices. He adds that this is of the utmost im­portance because of "continuing shrinking profit margins." Last year lower selling prices cut Monsanto's earnings per share from $3.77 to $3.17.

Allied Chemical board chairman Chester M. Brown says the industry is "battling with the problem of in­creasing costs and labor rates." This is creating intense pressure for price increases. He adds that Allied's re­cent increases are not a reaction to any bandwagon effect within the industry. With many contractual agreements in effect, price changes have to be made just prior to the start of a new quarter, he explains.

An examination of the industry's first-half financial returns illustrates the cost-price squeeze that chemical makers are in. Although sales were up some 8% for the first six months of this year over the first half of last, after-tax earnings were up only 2%. This dropped the industry profit mar-

Dow's president Doan Fighting to stay viable

Allied's chairman Brown Battling rising costs and labor rates

Monsanto's John L. Gillis Continually shrinking profits

SEPT. 23, 1968 C&EN 11

William C. Freund More dependence on the consumer

gin to 6.69c from the 7.07o of the ear­lier period. For the first halves of 1964, 1965, and 1966 the industry's profit margin ranged between 8.7 and 8.9%.

Some individual companies show even sharper dips in profit margin. For instance, Allied's was down to 4.8% for the first half of this year from 5.9% for the first half of 1967. Union Carbide shows a similar drop, from 7.2% for the first six months of last year to 6.2% for the first half of this year. Even Du Pont, which shows about a 25% increase in earnings on a 14% increase in sales so far this year over last, still has profit margin run­ning some 107c lower than it was in 1966.

The softness in chemical prices that has been largely responsible for these dwindling margins is borne out by government figures. The U.S. De­partment of Labor wholesale price in­dex for chemicals and allied products was 98.3 in July 1967. This July it was 98.2. Over the same period the wholesale price index for all industrial commodities rose almost 3%—from 106.0 to 108.9

THE ECONOMY: No Recession Foreseen The U.S. economy should experience a marked slowdown in the rate of ex­pansion this winter but no general re­cession in 1969. Capital expenditures should rise 4% next year over the 1968 level and corporate after-tax profits should be running at an annual rate of $55 billion by the end of next year, compared with a rate of close to $50 billion at the close of this year.

Thus did William C. Freund, vice

NICB's M. R. Gainsbrugh A signal of mild disinflation

president and chief economist of the New York Stock Exchange summarize the outlook for next year in a paper prepared for presentation at the 52nd annual meeting of the National Indus­trial Conference Board in New York late last week.

In another paper prepared for the meeting, Martin R. Gainsbrugh, senior vice president and chief economist of NIC Β says the current slowdown is more "a signal of mild disinflation than spiralling recession." He predicts the nation's economic speedometer will show lower readings for the balance of the year, but the odometer will still reveal further modest gains.

Also using an auto analogy, econo­mist Freund says the U.S. economic en­gine has been running too fast, gener­ating distortions and inflation. The economy is now undergoing a retim­ing. As a result it will run much more smoothly for some time and in the process inflation will be pared.

According to Dr. Freund, the econ­omy is about to undergo a profound change. The boom in recent years, he explains, has been fueled by two major elements—high business capital expen­ditures, and a prodigious spurt in de­fense spending. Neither of these two factors will provide major momentum for expansion next year, although re­cent events in Czechoslovakia will probably keep military outlays higher than presently scheduled.

Two other economic sectors—hous­ing and consumer spending—will carry the burden of growth in 1969. Dr. Freund predicts that a true housing boom will get under way in the sec­ond half of next year. This will carry the annual level of housing starts to within striking distance of 2 million units. He bases this prediction on a

more abundant flow of credit, a mild decline in mortgage rates, and the in­creasing signs of housing shortages in certain areas of the country. He adds that the U.S. is on the threshold of a vast increase in the number of young people ready to set up new homes.

This boom in housing will naturally bring with it stepped-up consumer spending for durable goods. And consumer spending could get another boost in the middle of 1969 when a substantial part of the recent tax in­creases may be allowed to expire.

In summarizing the outlook for 1969, Dr. Freund says the opening months of the year will likely see a continuation of the sluggishness that will characterize the winter months of this year. But by the second quar­ter, greater optimism will take hold and begin to quicken the economic pulse.

Mr. Gainsbrugh also sees an eco­nomic pickup next year. He expects the present softness in capital invest­ment and inventory accumulation to be replaced by renewed vigorous de­mand early in the year. He points out that a recent NICB survey shows that new capital appropriations, a good leading indicator, grew 4c/c in the second quarter of this year over the first quarter. Further increases are expected during the third quarter.

PEOPLE: Gold Medal for Seaborg Last week, Dr. Glenn T. Seaborg was tapped for still another honor— this one the Arches of Science Award. The award, created only three years ago and administered by the Pacific Science Center, honors a scientist each year for his contribution to the pub­lic's understanding of science's mean­ing to contemporary man.

Formal presentation ceremonies will take place on Oct. 16 in Seattle, Wash. There the Atomic Energy Commission chairman will accept a gold medal and $25,000.

Meanwhile, in a brief press confer­ence held last week in the American Association for the Advancement of Science's building in Washington, D.C., Dr. Seaborg spoke of the urgent need for better communication so that the general public would understand and be kept well informed about sci­ence.

Most important, the AEC chairman argues, is that scientists take time out to communicate. He has long urged his colleagues to take an active part in disseminating science information to the public and at the same time has exhorted the public to learn as much as it can about science and scientific developments.

12 C&EN SEPT. 23, 1968