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Is over-expansion threatening fhe chemical industry? Some executives seem to think so. Mr. Stevenson appraises the future of the industry in terms of the 5 M's

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The Chemical Industry And the Future EARL P. STEVENSON, President, Anhur D. Utile, inc., Cambridge, Mass.

JL H E GROWTH of the chemical process in­dustry since World War I testifies to an important role in our expanding economy. The chemical industry ha s grown in fiscal output at t h e average rate of 1 0 % annually during t h e past quarter century as com­pared w i t h Z°/o for all industry dur ing the same per iod. I n a rev iew of t h e chemical industry, t h e Gerard Trus t Corn Exchange Bank at t r ibutes the comparatively rapid growth of chemicals to

( 1 ) a b l e management of most leading companies,

( 2 ) comparat ively small size of the chemical industry in relation to its cus­tomers,

( 3 ) increase in n u m b e r of new chemi­cal p roduc t s through research having new and ever b roadening application as well as increasing use of old chemical products,

( 4 ) growth in number and size of in­dustries us ing chemicals, and

( 5 ) conservative price structure leading to a progressively bet ter competi t ive posi­tion for chemicals versus other materials.

This report , however, in discerning several small formative clouds, including

growing scarcity of able scientists, goes on to say, "taking into account these elements of cause and effect, it is believed tha t the long-term, 10% annual expansion ra te will decline, perhaps to Wo.'* Later appears the statement, "the cliemicai industry has a long record of unusual growth and sound financial management." Much of this record is built on productive research from which has stemmed a flow of new high-profit chemicals of wide application.

T h e continuing support of research by industries whose operations are based upon chemistry is generally accepted as the principal motivating factor; this support is expected to continue. I n this connection, I would like to recall the statement made b y Dr. Conaut of Harvard on the occasion of the Diamond Jubilee of the AMERICAN C H E M I C A L SOCIETY: "The growth of the chemical profession has been one of the amazing social phenomena of my t ime." In looking ahead, h e made the significant prediction, "The worlc of the chemist in the United States has only just begun." Statements of this kind are certainly an

inspiration for the prophets and should give pause to those who discount t h e future in the face of uncertainties. A statement concluding a paper recendy given by R. H. Ewell and B. Schenerman before the Chemical Market Research Association reminds us that " the history of forecasting in the chemical industries has been tha t nearly all of the forecasts made in the past 15 years have proved to be too low."

To switch from forecasts, for purpose of a background illustration, to equally remarkable history, we might here glance at what is happening in one of t he newer areas—that of petrochemicals. T h e long-term curve of growth reveals tha t the in­dustry has practically doubled every five years. Outpu t of petrochemicals in 1940 was about 4 billion pounds; in 1950, 16 billion pounds . This growth is consistent with the industries served and the pros­pects for new developments—plastics, syn­thetic rubber, fibers, fertilizers, antifreeze, solvents, paints, and detergents. Another clue to the relative growth potential is

2954 C H E M I C A L A N D E N G I N E E R I N G N E W S

provided by the new plant expenditures authorized under Certificates of Necessity for rapid amortization amounting to a total of $2.4 million ( through Sept. 3 , 1952) for chemical plants; it is est imated that petrochemicals account for around 36% or $700 million.

The chemical companies account for the largest share of the petrochemical busi­ness and will likely continue to do so. I t is interesting to note a hybridizing move­ment: a cross between Texas Company and American Cyanamid produced Jeffer­son Chemical; Panhandle Eastern joined with National Distillery; and Tennessee Gas linked with Mathieson.

There are five petroleum companies ac­tively participating to a significant degree in petrochemicals to the extent of 1 to 2 4 % of total sales—Shell Oil, Phillips, Standard Oil of California, Standard Oil of N e w York, and Lion Oil. Among the chemical companies there are ten groups which dominate the petrochemical industry wi th Union Carbide heading the list. T h e esti­mated investment of this chemical group will shortly be around $1.25 billions in petrochemical operations.

Present expansion planning differs from normal expansion in that it has been un ­dertaken to meet Government agencies ' estimates of minimum requirements in a military defense program, plus civilian needs. This is evident from a glance a t figures for scheduled expansion in plastics, fertilizers, chlorine, and caustic. T h e plas­tics goal set by DP A is 4.6 billion pounds of annual capacity by 1955, 2.2 billion pounds over the 1951 output. T h e 2 5 certificates granted for ammonia facilities will about double the capacity at the war ­time peak. For caustic and chlorine, t h e target is a 56% increase b y 1955 over 1950.

Rather than indulge in any more s ta­tistics, I now propose to examine the ques ­tion of why forecasting for the future of the chemical process industries has gen­erally been too low. Let m e preface m y analysis b y saying that the balancing of forces seems to be done too often in t h e static terms of a tug of war.

In a paper before the American Life Convention last fall, I had the temeri ty to challenge the projection method for forecasting the growth potentials of t h e chemical market as these seem almost in ­evitably to result in negative forces ou t ­weighing the positive ones. No one is willing to keep on a straight line projec­tion.

Growth can be thought of in terms of dynamic stability. This concept involves more factors and comprehends t h e forces responsible for developing and expanding the market for an ever wider range of chemical products. The guided missile might b e taken as a mechanical mode l demonstrating dynamic stability. I t is r e ­sponsive to changes in environment a n d can be held on course by its own buil t- in controls. To a large degree it is self correcting and can compensate for t h e development of conditions tha t would disturb its essential stability in flight.

This theme could b e further developed

V O L U M E 3 1 , N O . 2 9 * * »

by examining briefly t h e factors tha t must be reckoned with, in appraising t h e future of any industry, in t e rms of the 5 M i s ­management , markets, materials, men, a n d money.

Management Recruits Technical Men Commentators on t h e achievements of

the chemical industry invariably speak in the most laudatory terms of management . They note the strong t rend toward the selection of technically trained men who have gained first-hand knowledge of a company's activities including research, development, and production; they note the close integration of t h e research func­tion as an equal wi th those of finance, sales, production and marketing. The re­search director is usually a member of top management . Opportunit ies of this order are certainly a great incentive.

T h e techniques of science are not re­stricted to the laboratory. T h e chemical process industries are evidencing real in­terest in d i e use of t h e new management tool—operations research. Here scientists and mathematicians invade the sacred precincts of policy making. There are other current instances of this willingness to experiment.

T h e device conceived by Hooker for conserving their technical manpower is a case, in point. With engineers and chemists in short supply for a t least several years, the Hooker management gave t he problem of making personnel data more quickly and comprehensively available to one of its chemical engineers. There evolved a system for putting engineering logic into personnel deployment.

Mention should also certainly b e m a d e of Union Carbide's longer range approach to the solution of another aspect of the personnel problem—that of assuring man­agerial succession. T h e directors of this company have approved a plan for 400 undergraduate fellowships, supported by an annual appropriation of $500,000. The program begins next fall; 24 liberal arts colleges have been chosen. T h e recipients of this aid will be given, in addition, the opportuni ty for summer employment in one or another company location. By fol­lowing the career of these boys through college years, it is anticipated that re­cruitment of those deemed most promising for ul t imate managerial duties will follow.

Earlier in this century, it was the pre­vailing opinion that the right thing t o do was not always the prudent th ing. Under the system of enlightened self-interest, it is be ing demonstrated tha t a policy of wise liberality, firmly tied to economic realities, can make for profits—and profits are de­manded for the survival of our free enter­prise system.

New Products Create Markets Markets for chemicals and chemical-

based products continue to hold promise for important growth of the industry. The high earnings level of our population creates a ready market for n e w products in increasing amount, while consumer education creates markets which never be­fore existed.

» J U L Y 2 0, 1 9 5 3

We have seen recently a s ing le group of drug agents, the antibiotics, come in to existence and, b y 1951, contr ibute sales to manufacturers of over 2Va-fold t h e total sales of t h e ethical drug m\anufac-turers in 1939. In t h e thirty y e a r s ended in 1951, a $1.3 billion market for synthetic fibers—rayons and all others—has f>een «de­veloped which is expected to increase nearly 5 0 % more b y 1957. T h e s e fibers are not only made b y companies usually considered par t of t he chemical industry, but also require large quantities of im­portant bulk chemicals, caustic sc+cla, car ­bon disulfide, acetone, acetic ac id and/or anhydride, furfural, and acrylonitjdle, In­terestingly, in this same period, natural fibers, principally cotton and wool, also increased, although wool consumption lias declined in recent years from i t s 1946 peak of 700 million pounds.

Other large-volume markets of impor­tance to the chemical industry have also shown important growth. Plastics in 1951 were a 2.1 billion pound market, with esti­mates of 4 billion pounds by 1955. Fe r ­tilizer usage is steadily being expanded through education of farmers to the in­creased earnings possible from t h e use of fertilizer. By 1955 usage is expected to increase 359o over 1952 levels; this will require large additional quanti t ies of a m ­monia, sulfuric acid, phosphates, and potash.

Chemical products have a role in satis­fying the six basic needs of mankind— ( 1 ) food, ( 2 ) clothing, (3 ) shelter, ( ^ ) trans­portation and communication, (E>) medi­cation, ( 6 ) tools, machinery, a n d eqxiip-ment with which to work. They serve the 72 basic industrial groups as enumerated by the U. S. Chamber of Commerce. Their markets therefore embrace our en­tire economic structure.

It follows tha t an industry so situated will b e the beneficiary of many new de­velopments. T h e rapid growth Ln televi­sion has contributed materially to the prosperity of two glass companies; through a market for tubes; the T V tube has doubled the demand for potash chemicals without research and development effort on the part of the producer.

These same exterior forces are "broaden­ing the base by creating uses for the rarer chemical elements; germanium f o r transis­tors, zirconium and beryllium f o r atomic pile construction and operation, and tita­nium for new types of alloys. I would note in this connection the opportunity for new companies to come into existence as the initially very small demand may deter in­terest on the par t of a very large enter­prise, or the opportunity for companies now on the fringe to become chemical producers in t h e stricter sense.

Cheap Raw Materials Nearing End Under this heading, dynamic; stability

takes on meaning in terms of :fîexit>ility, adaptability, and versatility. As ihe Paley report states: "The chemical indxistry differs from other industries chiexfly i n the fact that it has tremendous flexibility, both in the raw materials it utilizes and in its processing techniques. It has a unique

2955

facility for processing abundant raw mate­rials not only into products suitable as sub­stitutes for other materials, but also into new materials having new properties and superior to anything previously known."

In dealing with another aspect of the raw material position, the report goes on to say: "The dhemical industry in the United States faces no long-term prob­lems of raw material supply. . . . chemical technology works with what it can get: sand, salt, soda, brines, air, water, sulfur, phosphate rock, limestone, cellulose, coal, petroleum, lignite, natural gas, molasses, starch, and even corncobs and oat hulls. In general, these materials are cheap and plentiful." The chemical industry also, above all other industries, has a great capacity for adapting itself to variations in raw materials because to a large extent it can work out methods for using raw materials interchangeably.

While quite optimistic about the chemi­cal industry's raw material position, the Materials Policy Commission Report warns us that we are nearing the end of cheap, readily available sources of many of our key raw materials. Therefore, we as a nation must give new and deep considera­tion to the fundamental upon which our national economy, our national defense, and even life itself eventually rest—the contents of the earth and its physical en­vironment.

Chemists Permeate the Whole Industry

On the subject of men, it should be noted that labor, as we ordinarily speak of it, is not the factor in operations involv­ing chemical conversions that it is in physical or mechanical conversion. Auto­matic controls and the mechanization of all handling and transfer operations reduce labor requirements to a minimum. I do not refer here to labor saving devices in the ordinary sense. The operations often demand a degree of programing and control that can only be achieved through the synchronization of instruments. These challenge the ingenuity of the designer and place a high order of responsibility upon those charged with engineering and maintenance.

I know of no sector of American indus­try which presents a young man with a greater diversity and variety of oppor­tunities. Frequently as many graduate chemists will be found in a company's sales department as in its research and de­

velopment laboratories. This is significant in reflecting the training required for pro­moting sales and in the assurance that ex­panding uses for established chemicals and applications for new ones will be de­veloped. These are the kind of challenges to attract ambitious young men.

With the dependence of these industries on creative research, a measure of growth potential is the continuing attraction of chemistry for those who elect a career in science. Historically, the majority of graduate degrees in science during the past 25 years have been in the field of chemistry and the majority of those re­ceiving such degrees have entered indus­try. Men trained in the science and tech­nology of chemistry permeate the whole fabric of the industries they serve. Execu­tives of the major chemical companies are largely recruited from the technical staff. Many began in the research laboratory.

Quality is generally more signiiicant than quantity. It is interesting to note that more men have applied for graduate fellowships in chemistry through the fel­lowship program of the National Science Foundation in its two years of operation than for any other branch of science. The comparatively high rating of this group in competitive examinations is probably more significant than the number. This record reflects strength at the grass roots.

Investment Dollar Is Chemically Minded

Finally there is the question of money. Here we have an issue which differs essen­tially from the others. Certainly it is more hazardous to generalize in terms of the chemical process industries, so my obser­vations will be confined strictly to the chemical companies.

In the case of the six largest chemical companies—Du Pont, Union Carbide, Allied, Dow, American Cyanamid, and Monsanto—sales more than doubled from 1945 through 1952. Du Pont experienced a sales increase of almost a billion dollars in this period. To achieve this growth, new plants were built at an unprecedented rate, far in excess of anything in the past. Construction expenditures in this period totalled $2.667 billion; this greatly ex­ceeded the internally generated funds from retained earnings and depreciation, and thus necessitated a substantial amount of outside financing.

Most of the additional capital has been in the form of debt. Speaking before the

Commercial Chemical Development Asso­ciation meeting on March 23 of this year, C. A. Gerstaker of Dow Chemical said: "We believe that long-term debt is the most attractive for an industry such as ours which seems slated for expansion for a long period of time/*

There are those who would view with alarm this change in basic capital struc­ture. Others accept it as a normal de­velopment and one marking a degree of maturity. The recent experience of Allied Chemical in selling $200 millions of long-term debentures, the largest single public debt offering ever made by a United States industrial concern, reflects the con­fidence of the investing public. This issue was largely subscribed to by institutional investors. The effect of such support on the part of insurance companies, invest­ment trusts, and pension trusts is to in­directly involve the participation of added millions of stockholders. The plowing back of such collective funds into enter­prises that generate them is surely a healthy situation for this sector of our free enterprise system.

The investment dollar has become chemically minded. The investor is in­trigued by a feeling of participation in the achievements of industrial research, of an affiliation with an important branch of science, of having a stake in the future of great enterprises. The annual reports of chemical companies are effective in selling these ideas and thus insuring their continuing financial support by the pub­lic.

Increasing concern regarding over-ex­pansion is evident among many chemical executives in recent months. However, while some weakness may be felt in the near-term demand-supply picture, all ele­ments of the industry continue confident about the long-term outlook. New de­velopments continue to create demand for the basic building blocks of the chemical industry; we cannot discount the 25% growth in population by 1975, meaning more goods and more services required. Even the most conservative groups con­cede that adverse economic factors would serve only to slow up the present rate of growth.

I have attempted to support this posi­tion by the favorable evaluation of the factors which must be reckoned with in appraising the future of any industry. Through them all runs the life blood of a healthy and flourishing science. There is a sense of dedication to the general wel­fare. This spirit arises, in large measure, from a professional sense of obligation that talents be used for the development of practical methods for employing the world's raw materials to the greater bene­fit of mankind. Chemical manufacturing may, therefore, be said to have a certain touch of industrial priesthood which firmly believes in the importance of its mission. "Better living through chemis­try" is more than the slogan of one com­pany.

P R E S E N T E D at the Conference on the Chemical Industry of the Industrial Council held at Rens­selaer Polytechnic Institute, May 16, 1953.

Earl P. Stevenson, president of Arthur D. Little, Inc., has spent most of his career with that firm, which he joined as director of research in 1919 after taking a degree at MIT. His knowledge in the field of indus­trial chemistry and research management has brought him many responsible positions for the Government, among them, consultant to the Atomic Energy Com­mission, membership on a panel of specialists advisory to the National Science Foundation, and consultant to the Army Chemical Corps. He has been chairman of the Committee on Patent and Related Legislation of the ACS for several years.

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