THE CHEMICAL ECONOMY WALTER FEDOR, Senior Editor

Among the various hues and cries coming from chemical executives in 1967 will be the perennial complaint about rising costs and expenses. This year, unlike other years, however, their complaints will have more substance than usual.

Costs and expenses will indeed rise, what with expected increases in wages and raw material costs, plus the substantial startup costs stemming from massive capital expenditure programs. However, companies that have had significant cost control programs over the years will not be hurt by a surge in costs and expenses. But companies that now rush in and misinterpret cost cutting for cost control are bound to feel the effect this year and later.

The fundamental difference between cost control and cost cutting lies in standards. As volume rises and sales increase, the cost of busi­ness increases. In the chemical industry the standard is 85 cents on the dollar: If costs rise 85 cents, sales should rise $1.00 if a company is at least to match the average.

The chemical industry compiles costs chiefly through process costs systems, as most of the industry's major products are made in continu­ous processes. It is not desirable, and in some cases not possible, to identify costs relating to particular sales. All costs chargeable to a process during a given period are collected, and the total cost or standard for the process is established. The manager of a particular process can then be held responsible when costs are unreasonable. He can be credited when costs fall below established standards.

Similarly, a marketing manager, responsible for sales and for expenses related to sales of particular products, can also be held accountable for matching or bettering standards for his expenses.

But standards, for all their value, can be rendered worthless by a misguided manager—someone who wants to prove himself by beating the standards. Indeed, he can save money, no matter what it costs his company.

He can wade into discretionary costs, such as research and adver­tising, and cut them to the bone. He can cut out a job here and there. He can limit expenses of salesmen. Yes, these moves will bring about short-term curbing of costs and expenses. But, the long-term growth will suffer, and he can upset morale, so much so that ultimately some key employees leave.

In times of austerity—and such is not the case in the chemical indus­try today—cost cutting may be necessary. However, in times of rising costs and expenses, managers must approach realistically the costs necessary to do a job correctly. Unfortunately, in time of prosperity, too many tend to maintain the status quo. They relax their holding to standards. If an operation shows a profit—any profit—they leave it alone. This approach is as dangerous as those by the man who wants to prove himself, for would-be profits are ultimately sopped in an aura of complacency.

The final answer, then, lies in a year-in year-out program to analyze costs and then to control them. Operations should be dissected and proper allocations made to such items as manufacturing, wages, pro­motional sales, supplies, outside services, and incidentals. From these allocations, standards are established which become guidelines for the future.

They become a basis for profit forecasting and for laying plans for cash and capital expenditures, pricing policies, and tax reserves. Merely echoing that costs and expenses are rising is meaningless in the face of rising sales. The real job is to keep sales rising faster than costs.

Among major companies, Du Pont probably provides the outstand­ing example of diligent cost control. Its costs and expenses are about two thirds of sales—quite a low level for a very large company. Furthermore, sales are growing 8% a year, while costs and expenses are only rising 7% a year. Seldom does anyone hear of panic at Du Pont. And that, perhaps, is the secret of effective cost control: Don't panic.

IMC reaches potash at second Canadian mine Saskatchewan has taken another big step toward the day when it will be the world's major potash producing area. Miners have reached the potash level in the shaft being sunk for Inter­national Minerals & Chemical Corp.'s second mine in the Canadian province.

The new mine, near the town of Esterhazy, is known as K-2. It cost $60 million and will be producing at the rate of 1.5 million tons of potash per year in time for this spring's ferti­lizer season. IMC expects U.S. ferti­lizer sales this year to run some 15% ahead of last year's. According to company president Nelson C. White, all the potash that K-2 will produce in this fertilizer year (ending June 30) has already been contracted for.

IMC's Nelson C. White Mine output sold

The new mine will bring the total capacity of the three potash producers now operating in Saskatchewan to 4.8 million tons annually. By 1970, when five more mines now being built should all be completed, the province's annual capacity will be some 11 mil­lion tons. By then, the world's total capacity will be about 35 million tons.

IMC's first Esterhazy mine, K-l, has been on stream since 1962. It produces 2 million tons of potash an­nually. The other two producers in the province are Potash Co. of Amer­ica and Kalium Chemicals, Ltd. PCA now produces 600,000 tons per year and is about to start sinking its second shaft. This will be finished in three or four years. Kalium, a joint venture of Armour and Co. and Pittsburgh Plate Glass, produces more than 700,000 tons of potash annually from the prov­ince's only solution-mining operation.

According to Saskatchewan's De­partment of Industry and Commerce, potash output in the province in 1966 was 3.3 million tons, worth $83.5 mil­lion. In 1965 it was about 2.5 mil­lion tons, worth $61 million. This year it should reach 4.5 million tons.

Of those who have projects under construction, Alwinsal Potash of Can-

24 C&EN JAN. 23, 1967

ada, Ltd., and Allan Potash mines are furthest advanced. Alwinsal, a joint Franco-German effort, will be in pro­duction with a 1 million ton-per-year mine by 1968. Allan Potash is jointly owned by U.S. Borax & Chemical Co., Swift Canadian Co., Ltd., and Home-stake Mining Co. Allan is sinking two shafts and will be able to produce about 1.5 million tons per year by mid-1968.

By 1969, mines will be ready for the potash division of Cominco, Ltd. ( con­trolled by Canadian Pacific), Duval Corp. of Houston, and Noranda Mines, Ltd., of Toronto. Each is well along with sinking two shafts. The Co­minco and Noranda plants will both have a 1.2 million ton-per-year capac­ity; Duval's will produce about 1 mil­lion tons.

When all these plants are com­pleted, total capital investment in Sas­katchewan potash will exceed $500 million. And that may not be the end. Thirty-five other companies have properties in the area and some of these companies are thinking of devel­oping them. Southwest Potash Corp., for instance, says it is in the initial stages of developing a high-grade potash ore body in the province.

Ohio's ABS pipe approval for DWV use challenged An Ohio court has issued a "stay order" preventing approval of plastic pipe and fittings for drain, waste, and vent use from going into effect. The stay order was in response to a suit by Jamison Plumbing & Heating Co., of Springfield, Ohio, in Franklin County Common Pleas Court in Columbus against the Ohio Board of Building Standards. The board had approved amendments to the state's building code, which were to go into effect early this year, allowing acrylonitrile-butadi-ene-styrene (ABS) and polyvinyl chlo­ride pipe and fittings for DWV use (C&EN, Jan. 2, page 28) .

Jamison claims that the Ohio board failed to comply with notice provisions of the state code. Some of the other reasons cited in the Jamison petition are that "the plastic materials would classify as 'combustible* . . . at pres­sures and temperatures that might oc­cur during a fire in a building"; that "from two to four times the instantane­ous fatal dose of carbon monoxide was released when ABS plastic of three dif­ferent types were burned"; and that "hydrogen cyanide was also released in two cases below instantaneous fatal dose, and in the other case, at a level about equal to the carbon monoxide/'

The Plastics Pipe Institute says it may intervene in the lawsuits.

BUSINESS PERSPECTIVES DAVID M. KIEFER, Senior Editor

One of the less expected reactions to President Johnson's call for increased income taxes took place on Wall Street. Concern that taxes might be raised, thus undermining consumer demand and corporate profits, had been troubling investors for months. Their fears were reflected in erratic stock prices late last year.

Then the President, in his State of the Union message, dropped the other shoe. Predictably, stock prices slumped severely when the market opened the following day. Unpredictably, however, within an hour they had turned around and rocketed sharply higher.

This paradoxical behavior, of course, may merely reflect doubts on the part of many stock purchasers that Congress will go along with the Presidential request. There's a more reasonable explanation, though: that many sophisticated investors recognize higher taxes, while cer­tainly a bitter pill, as perhaps the very medicine best suited to alleviate the stresses now so apparent in the U.S. economy. In its own no-non­sense, cash-on-the-barrelhead way, Wall Street seems to have stamped its approval on the tax proposal.

Similar approval is less evident from either the business community or the public at large. Despite anguished outcries from these groups, however, the President's request has many of the earmarks of economic statesmanship and fiscal responsibility. As an increasing share of the nation's overstrained resources are reallocated from civilian markets to the armed forces, inflationary pressures threaten to build up explo­sively. The logic behind increased taxes, therefore, is not so much to provide the Government with more money but to siphon off funds that otherwise would compete with rising military outlays for the output from the nation's already strained productive capacity.

The Government has tried other, less stringent measures to dam the inflationary tide. The "voluntary" wage-price guidelines in which it put such stock a year ago, while theoretically sound, proved inequi­table once demand outran capacity. The guidelines were powerless to halt an inflation that fed itself on a host of small but widespread price increases. And the guidelines proved totally ineffective in stemming a surge in wages once the labor unions scented blood.

With the guidelines in disarray, emphasis shifted to monetary policy in the fight against inflation. Unfortunately, the impact of credit restrictions and high interest rates is not spread evenly throughout the economy. Big business, which generates most of its new capital inter­nally, can shrug off interest rates that may scuttle small, less-well-heeled companies. And tight money is less of a burden for the affluent, watching the return on their savings mount, than for the small consumer of limited means. Credit shortages, moreover, can severely depress certain areas of business while leaving others relatively unscathed. Witness the tailspin in housing construction last year.

Neither does the oft-heard call for a cutback in domestic spending seem to provide the fairest approach to economic restraint. Some fat can be pared from nonmilitary outlays, no doubt. But when budget cuts are discussed, the talk tends to focus on federal welfare programs. Advocates of welfare curtailment seem to be saying, in effect, that the burden of supporting the war should be shouldered by the poor, the aged, and the handicapped.

Raising taxes is a nasty business, pleasant for no one. The hazards are clear in an economy where many business analysts already are view­ing with alarm the dislocations caused by the shifting of resources from civilian to military uses. But the merits of the President's plan for a temporary 6% surtax are clear, as well. It places the burden of restor­ing a healthy balance to the economy on nearly everyone—only a bit more heavily on those who can bear it most lightly: on corporations (who have been doing quite nicely for themselves in a war-stimulated economy) and on the well-to-do. If the distasteful prescription proves successful and prices (which many economists had feared would increase by 3 to 4% this year) are held in line, the cost of the tax increase, in terms of "real money," will be considerably less than 6%.

JAN. 23, 1967 C&EN 25