Category Archives: Economics

Chemical Fear Factor

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The chemical business environment is changing in some ways that, I fear, add even more disadvantage to small chemical manufacturers. The regulatory sphere is closing in on our chemical manufacturing industry like shrink wrap around a gutted salmon.  Whereas it was once straightforward to bring a new chemical product to the B2B market, now we have TSCA and Department of Homeland Security (DHS) placing complex obstacles in the road. 

TSCA compliance for non-listed compounds requires that process details be disclosed for screening and hazard modeling by EPA workers.  Unless the EPA finds some compelling environmental or worker exposure issue that requires further consideration, a new compound is allowed.  

Operating unsafely is a poor business model. Civil litigation and insurance pressures are usually enough to motivate a plant operator to conduct safe practices. Regardless, if you’re in the business of breaking trail in developing new chemical entities, waiting for allowance by EPA necessitates starting the development timeline up to a full quarter in advance.  TSCA filing also starts an audit trail that, for the unwary, can lead to a filing cabinet full of discoverable documents that can return to haunt you.  TSCA is powerful code and it is one of the larger hammers that the government wields.

Before the chemical regulatory epoch began in earnest, chemical processing merely delt with the forces of the market and of nature.  Corrosives, flammable liquids, runaway reactions, foreign competition, etc. That was dangerous enough and required the full attention of many experts. 

Today, in addition to chemical hazards we have administrative hazards that require specially trained staff and, naturally, lawyers. Law office charges to document compliance may cost as much per hour as a whole shift of operators for a medium scale process line. 

The federal government is beginning to impose itself more strongly in the operations of chemical plants. Part of this is in response to international terrorism.  Like children sitting in a darkened room telling ghost stories, federal regulators have stirred themselves into a twitter. Apparently, they have developed fault trees that line out the universe of consequences from attack scenario’s on our chemical industrial infrastructure.  Code has been written and passed by the congress, signed by the president, and embraced by the suffocating bosom of the Department of Homeland Security. Woe is he who runs afoul of these people. Their para-military authority and zeal is what makes me uncomfortable.

If only we could be so analytical and systematic about invading and destabilizing prickly iron-age cultures on the other side of the world.

Of course, one cannot entirely fault the government for trying to apply the Precautionary Principle.  It seems so sensible.  But the eternal question is, what are the thresholds for action?  Where safe meets sorry is also where the rubber meets the road.  How much more industry are we going to chase to Asia?

On the non-security side, Europe has adopted REACH. I’m trying not to be a Chicken Little, but before the US adopts this approach to environmental regulation, we should study the suite of unintended consequences that will surely arise from this regulatory framework.  The EU is breaking trail for us and we should pay attention.

Booyah

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It is worth reading the latest essay in New York Magazine by Jim “Mad Money” Cramer on the sub-prime lending crisis. No booyah’s or sound effects in this article.  I hear some commentators going on about this circumstance as a normal equilibration of the economy. But after reading Cramer’s editorial it is hard to believe this is just a “correction”.   Sounds like a train wreck.

It is hard to fathom how the massive upset in the mortgage market will play out for those of us engaged in chemical manufacturing. Anything that depresses home construction and mortgage lending is sure to slow down orders for raw materials in some fashion.  The rat is moving through the snake. This disturbance could eventually effect those remote from the mortgage business. 

Cramer is clearly an expert of some sort in the finance field. But it is good to remember that it was finance experts who fabricated the house of cards that got them (us) into this problem in the first place. This supprts my theory that we have too many MBA’s in the world.

Corporate Freeloaders?

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Our local area is graced with the presence of a biomedical drug production facility.  The company manufactures important, lifesaving products from which mankind benefits and in doing so, the company makes a handsome profit.  They also have a production facility in a Caribbean Island Territory which also manufactures important products.  I understand that they are a very progressive organization. Friends, family, and colleagues from grad school work at the local plant and at the R&D office in Many Trees, in some coastal state. [Note: the name and location have been cleverly disguised or omitted- Th’ Gaussling]

Meanwhile, there is a constant buzz concerning the possibility of moving the entire mfg operation to this Caribbean paradise where the tax and labor costs are significantly lower.  I have no special inside information  here, I just know that this has been considered.

The situation outline is in no way unique to the particular company I’m thinking of. It is a very common situation.  Company decides to move operations off-shore to continue profit growth of a successful product. Shareholders continue to enjoy good returns on their investment, product pricing is competitive and the company continues to hold on to market share. Everybody’s happy, right?

Back at the corporate HQ, assets are safely nestled in the Unites States of America, under the 24/7 protection of the Army, Navy, Air Force, Marines, and Coast Guard.  Corporate human and capital assets (shareholder assets, really) enjoy the benefits of the vast infrastructure of the USA.  Materials and people move safely and efficiently over land and through the skys of the USA.  The FAA assures air safety and orderly movement in the skies.  The DOT assures motor vehicle safety. State and federal monies provide for highways, bridges, and all of the motorway infrastructure to keep the trucks of raw materials and product moving. 

Federal, state, and local governmental agencies provide reservoirs for water and electricity. Plant process water comes from a pipe put in place by the local water district infrastructure.  Sanitary water treatment is provided by the municipality.  The streets are patrolled by city and county police who are charged with crime prevention.

Corporate scientists who invent the technology that the company profits from so handsomely and the executives who guide product to market were educated within the vast academic/research complex that has made the USA the envy of the world.  Graduate student and post-doctoral stipends in science and engineering are largely funded by some government agency or other.

Corporate researchers have access to enormous volumes of public domain technology and knowledge paid for by NSF and NIH grants. Researchers who were educated at public institutions with public subsidies take their talent and generate treasure for the corporations and the shareholders.

Yet, a great many corporate entities are escaping tax liability by moving manufacturing off-shore.  Corporations whose very existance is owed to their fertile, wealthy, and knowledge rich nation have somehow seen fit to evade paying back into the system so as to perpetuate that very system from which they benefit so handsomely.  Instead, others contribute to sustain it.

The advantage of substantial US infrastructure amounts to a kind of subsidy.  The purpose of this subsidy is to stimulate the formation of wealth generating organizations who can then provide jobs and stability for the economy.  Instead, we find that corporations are tapping US knowledge wealth and eventually using it to subsidize foreign economies. 

There are mathematical justifications for this transfer of manufacturing from the local to the foreign.  More profits flow to the shareholders- the big players and those who hold 401(k) plans.  Growth is sustained and a competitive edge is held.  But is it really? Could it be just the result of poor imagination?

Good Customers and Bad Customers

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Even the biggest pollyanna in the sales group will discover one day that it is possible to have a bad customer.  Yes Johnny, it is a fact that not all customers are desirable.  Oh I know, in sales one is always rabid to close the deal. Get the sale and move on to the next prospect with a pulse. But what is the difference between a good customer and a bad customer if their money spends the same?

Ideally, a “Great” customer comes back for repeat business, is flexible on terms and conditions, pays 30 days net, gives long lead times for delivery, accepts FOB terms, accepts delays and price increases without protest, and picks up the dinner tab when out for a visit.  [~~Sound of needle scraping across phonograph album~~]

If only such compliant customers existed (Sigh).  In reality, most chemical customers are in what I would call the “Good” category.  That is, they have reasonable expectations of price and delivery as well as an understanding of what constitutes fair business practice.

But on occasion one runs into what you might call a “bad” customer.  Such customers are found across the entire spectrum of size and business model. 

A bad customer is one that consumes excessive resources during the course of service.

A small bad customer might want you to do free product development for them, or may try to negotiate bulk pricing only to turn around and try to get bulk pricing on small quantities. Bad customers may finagle front-run samples from you and then disappear for months or years without a peep.

Large bad customers like to throw their weight around.  They know they are above you on the food chain and behave accordingly.  They dangle promises of big and long term sales and wangle free services from you. Services like gratis process development, holding inventory for free, tolling or other business agreements that tie your hands and force you to open your books for their auditors.

Bad customers large and small have other maddening habits that consume resources.  Specifications that change over time, always to the side of higher stringency, are a favorite of bad customers.  Bad customers will discover that they can shave costs by elaborate just-in-time delivery schemes with favored shippers, a circumstance that will require full time attention by logistics people and production managers.

Bad customers want the transaction to follow their particular terms and conditions. Bad customers will want 60 days net- a particularly transparent scheme to float their resources in interest bearing accounts while the vendor has to finance manufacture up front.  The fetid odor of MBA finance people lingers here.

Bad customers will want their vendors to provide indemnity to shield them against any conceivable liability related to the product.  Bad customers will want to own any and all inventions pertaining to process improvements relating to the product. They’ll want to be free to take this improvement and hand it to your competitors in order to generate a tidy little bidding war over their business. 

Practices that I have been calling “bad” are generally accepted in the business world.  On the buy-side they are considered good practices.  On the sell-side they are arguably bad practices because they increase risk and expense related to the transaction. A good buyer tries to implement these bad attributes.  A good seller tries to eliminate or minimize these bad attributes. 

In the real world, one rarely has the option of walking away from bad customers.  But it is possible to stand firm and prevent profit erosion.  Very often a customers apparent demand is just a straw man.  If not entirely a bluff, it might be negotiable to some reasonable concession.  The best practice is to be up front with your concerns and communicate with the customer. They are nearly always reasonable.

The 80/20 rule often applies to customer service:  20 % of your customers will take 80 % of your time. This is life in the fabulous world of sales.  Every sales person must eventually come to terms with it.  Sales consultants talk about “qualifying” sales prospects, but that only applies to real estate and vacuum cleaners.  The world of custom business-to-business chemical sales is such that if someone can identify your product and seek your services, they are almost always a legitimate player.

Contrarian Views on Corn-Based Ethanol

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If you travel through the American midwest, you cannot help but notice that corn-based ethanol is in the news. Over at the Oil Drum blog there is a good post on the merits of corn-derived ethanol (EtOH).  One of the important points that was made is that EtOH will be replacing MTBE as an oxygenating additive. This is an important point. For the near term, as MTBE is phased out EtOH is taking its place.  Therefore, the net effect on imported oil volumes may be nil. 

Then there is the matter of the energy balance for EtOH production.  There is no clear consensus on whether or not corn EtOH production is a net gain in BTU’s.  And then there is the matter of unintended consequences in shunting large mass flows of corn into energy production.

Modern agriculture has been characterized as the process of converting diesel fuel into food. High yield crop production also requires large machinery for efficient cultivation, soil amendments, advanced corn breeding, crop rotation, and specialized pesticides.  And this is just the farming part. Modern grain production requires substantial distribution infrastructure as well as financing for the upfront seed and fuel costs.

By unintended consequences the writer of the Oil Drum post means the possibility of ecological insult resulting from intensification of corn production.  Intensified corn production may result in reduced soybean production in the US, resulting in increased production in Brazil. US farmers may simply choose to grow fewer soybean acres. Increased soybean production in Brazil could result in accelerated deforestation to meet the demand uptick. 

What the writer did not mention is that reduced US soybean production could mean reduced crop rotation, placing increased demand on synthetic ammonia (NH3) production to make up the demand for fixed nitrogen.  Ammonia production uses natural gas (CH4) as the source of hydrogen, and the carbon is lost as CO2.  Increased nitrogen fertilizer use may result in greater run-off into the watershed, placing the aquatic ecosystem under increased stress and polluting drinking water supplies. 

Increased ammonia demand will stress the natural gas market to some extent and result in increased greenhouse gas emissions. 

In addition to ecological insult, there will be a shift of wealth associated with increased diversion of corn to fuels.  If corn yields and acreage cannot be increased to make up for increased fuels demand on corn supplies, the food product chain could be subject to greater scarcity with an increase cost to consumers for everything associated with corn- corn oil, high fructose corn syrup, starch, beer production (!!) with corn starch, cereal products, animal feeds and the associated price uptick that would cause for meat products. 

It is worth remembering that corn is one of the major inputs to our food manufacturing complex. It enters directly as whole corn or as separated corn germ and corn starch, and indirectly as food for hogs, cattle, and poultry.

Many of the choices we have in the supermarket are largely based on what you can do cheaply and on a continuous process basis with grain products.  Stress on this supply will be passed along to the consumer.

One fresh approach is from a start-up company called Zeachem who aims to produce cellulosic ethanol from biomass other than just the corn kernel.  In this process, all fermentable sugars as well as cellulosic hydrolyzates can be converted to acetic acid by fermentation and the lignin sidestream can be processed to yield hydrogen.  Esterification with process ethanol to afford ethyl acetate followed by hydrogenation yields EtOH.  This process is currently in scaleup and may prove to be a major improvement in the otherwise anemic economics of EtOH. 

Purchasing Chemicals from China

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I’m having to search far-off China for raw materials much more frequently these days. The availability of many US manufactured chemicals is slowly falling off.  Especially for really basic materials.  I’m not referring to those mundane elements like iron or soda ash or copper. No no. materials from the folds and deep recesses of the periodic table. Elements with relativistic electrons.  There are short term economic pluses and minuses to this migration of manufacturing.

On the plus side, Chinese prices are often, well,  quite low. Even with multimodal freight charges from across the Pacific. When you pay peasants fresh off the farm $40/month (or whatever insane wage it is), you can undercut nearly everyone in pricing. 

But there is a down side to spot buying from China.  This is to be distinguished from contract purchasing.  In contract purchasing, you work out an agreement with a manufacturer and you lock in quality, price, and delivery in exchange for long term business.  Spot buying, however, is much more risky. What do I mean by that?

Spot buying is where you find a merchant supplier who can furnish material without the fuss and obligations of a contract.  Either they have it in inventory, they can source it quickly, or they themselves will make it pronto.  A supply contract has to be managed or enforced.  For raw materials that are less than critical, finding a spot supplier makes sense. 

Locating a spot supplier in China that you can trust is problematic. I’m not suggesting that Chinese suppliers are dishonest.  I am saying, however, that culling out a supplier from a list of unfamiliar names from the other side of the world without the benefit of a site visit or a Dunn and Bradstreet report can be risky. Spot buying anywhere is risky, but when it is complicated by international transactions, the risk multiplies a bit.

It is relatively easy to find contacts on the web that will reply to an RFQ (request for quotation) by email (often “hotmail” accounts) and make an offer.  But what you find is that you may be in contact with an agent of some description in an office suite in Shanghai, far from the factory.  Indeed, it is hard to tell just what the relationship is between the factory and your contact.  To salve over some of the uncertainty westerners may have, it is common now for these web contacts take on western names. 

Brokering goods is common in some parts of the world and scarce in others.  In the USA, brokering chemicals is fairly uncommon.  Most US companies prefer to do bulk business with the manufacturer or a catalog house.   Sigma Aldrich, for instance, is both a catalog company and a manfacturer of bulk and semi-bulk materials.  Purchasing from a broker (as opposed to a distributor) rather than the manufacturer will add costs to the transaction.  A broker is someone who connects the purchaser with the supplier.  Usually they perform drop shipments to the purchaser directly from the manufacturer.  A broker is a sort of “free agent” sales group.

I have found that there is a greater reliance on brokering in Asia and to a lesser extent, the EU.  The internet has made life a bit trickier for brokers in that a search for manufacturers is a lot less painful than it used to be.

A company will work through a broker for several reasons. Brokers are usually specialists, so a company can tap into considerable expertise in supply chain management.  And, the broker only gets paid if they find a qualifying supplier, so a manufacturer could conceivably keep the head count down. Brokers might be better at the intricacies of negotiation as well.  There are a lot of tough guys running companies out there who are actually poor negotiators.

These agents seem to work in organizations that carry on the sales and marketing activity for a factory or a series of factories.  In addition to unfamiliar business practices, there is the matter of payment.  Many Chinese companies want prepayment- they do not automatically offer 30 days net.  This makes company controllers and project managers nervous.  Since this is an international transaction, customary business laws covering remedies are not applicable. In other words, you can get royally screwed. But from their perspective, it is the same issue.  So settling into a supply relationship can take time.

Deutsche Bank’s Sankey: Simple Scarcity Driving up Fuel Prices

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As everyone knows, the price of gasoline in the USA has been steadily marching up into the low US$3.00 per gallon range to achieve all-time high pricing.  Reliable sources state that the price run-up is due to simple shortage of supply. According to testimony from energy analyst Paul Sankey of Deutsche Bank, the US refines 17 million barrels of petroleum per day against a demand of 22 million barrels per day.  An interesting analysis can be found at the Oil Drum. 

We are in a very precarious position here. An oil shock caused by a catastrophic loss of refining capacity will result in a wild price spike (some estimate US$100/bbl) while gasoline is in the mid $3.00 range already and a major perturbation to the economy- or worse.  Unfortunately, we are bogged down in the ill-conceived GW-II, the second of the energy wars. 

Bush Administration’s Soldiers of Fortune

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Lordy.  The very notion that our federal executive branch is managing a contractor army to promulgate its policies, apparently outside of the oversight of the legislative branch, is the kind of revelation that takes your breath away.  

The presence and extent of mercenaries, or commercial warriers, has been popping up in the news lately.  This video is given by Jeremy Scahill, an investigative reporter at The Nation.  The Bush II administration has placed soldiers of fortune in Iraq (and elsewhere?) whose fundamental operating sensibilities may be rooted in their company Articles of Incorporation rather than the ideals of a nation state.  On a recent edition of Fresh Air, Terry Gross interviewed Scahill and he recounted some chilling observations related to the emergence of the private army business.

No doubt, the DoD has a thousand page contract and hard drives full of MIL-Spec terms and conditions that a contractor must abide by.  But the contractors are well paid for their trouble. 

What the people of the United States lose, apparently, is accountability.  One of the reasons a nation state has a military is to promulgate foreign policy.  The checks and balances and the separation of powers provided for in the US Constitution assure that power is shared and that there is accountability by each of the branches. However, what we have here is a circumstance whereby one branch of government has war-zone contractors obligated to the DoD, which is under control of the Executive Branch.  Exactly what is their status in regard to congressional oversight?

Let me clarify my point. It isn’t clear that there is anything inherently wrong with the US government hiring militarized contractors.  However, everything is wrong when we hire military contractors who are hidden from, or are not subject to our system of checks and balances.  It is doubly true when we ask these people to expend ammunition on our behalf.

What US law covers the conduct of US military contractors in a foreign conflict? What is their status if they are captured?  Would they be non-military combatants and be disqualified from international law covering the humane treatment of prisoners of war? Would other nations treat them like we treat the detainees at Gitmo- i.e., criminals with no rights or due process? 

What rights here at home do these folks have in comparison to US military veterans?  Do not the people of the US owe some debt of gratitude for their sacrifice? I think so.  Will Haliburton or Blackwater see to their medical needs in 20 years? Good questions.  The federal government, for all of its flaws, does have resources that function over multi-decade timeframes. 

Chemical Logistics

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Any chemical company manager will have to admit that order fulfillment isn’t over until the product is in the hands of the customer.  Chemical manufacturing isn’t just about running reactions in big pots.  It’s about attracting a skilled, reliable, and safe work force. It is about building a supply chain for the timely delivery of raw materials. It is about executing the manufacture of products in spec the first time through. It is about warehousing raw mats and products and keeping the stream of wastes moving through the system.

Chemical manufacturing requires the careful management of cash flow by minimizing costs and maximizing profits. The business office must attend to receivables and collect payments in the most expeditious way that customers will tolerate. This is no different that any other manufacturing arena- sprockets, fur caps, or rocket motors.

One of the key jobs required of any chemical company is the matter of managing logistics.  That is, managing the timely transport of raw materials onto the site and the transport of products off the site. So how does this affect the chemist??

The tender shoot studying chemistry in their junior year of college may not know it yet, but if their path is in the fabulous world of business, then some aspect of logistics may be in their future.  What kind of chemist would need some knowledge of shipping? Well, project managers, sales managers, business development managers, plant managers, procurement managers, etc.  All these positions are often filled with chemists and all have to have some knowledge of this topic.  And how does one get this knowledge? Why, on-the-job training, of course.

If you have read many of my posts, you know that I tend to prattle on about this. There is a reason. It is not uncommon for a sales person or a business development manager to spend no small amount of time with a customer trying to work out how the product will be delivered.  The transport of materials is complicated in proportion to the hazard and the chemical sensitivity to decomposition. 

Let’s say that you are in the chemical business and you are just starting the custom mfg of a trialkylphosphine.  The customer will state that they want say, 100 kg, of their R3P with a list of specifications (e.g., 99% in R3P, oxides < 0.1 %, etc, Karl Fisher water 200 ppm) for their new product. The customer has accepted the quoted price and the delivery date. Hmmm. Price, delivery, and specs. Sounds like everything is in place.

So, the question then arises: How are you going to ship it? Glass bottles? Drums? Polyethylene totes? Whoops, the material is excruciatingly air sensitive, so charging and discharging the product will have to be done airlessly. Sounds like a cylinder is just the thing. But what are the materials of construction? I seem to recall that phosphines are ligands, so can we really use a steel cylinder? Soft steel? Stainless steel?

But there is yet another question.  Do we offer the phosphine neat or as a solution? If the neat R3P is a liquid, we can move it around airlessly and charge a cylinder with it. If it is a solid, then it could be a serious problem to transfer it from a filter to a shipping container. How will you or the customer actually handle it? This is the kind of detail that chemists might find themselves groping with. If it is a solid, the customer might have to consider receiving it as a solution in a non-interfering solvent.

Then the matter of transporting it arises. In the present epoch of security theatre, air transport of any quantity might be banned. So, surface shipment will be needed. The matter of heated shipment may arise if freezing or precipitation is an issue. The last thing anybody needs is a cylinder full of precipitated solids in it.  Remember, if you are shipping product in a heated trailer in the winter, you may have stiff competition from other customers who need to ship their lettuce or strawberrys. In some locations, reefer trucks as they are sometimes called may be in short supply.

OK. So you’ve specified a reefer trailer for heated transport of the goods. Let’s say that the product solution will crash out precipitate at 15 C. In the trailer everything is just fine. Fine that is until the shipper reaches a transfer point and moves the product out onto the loading dock where it sits in the freezing weather for a few hours waiting to be put into another trailer. Or it sits in unheated warehouse space for a while.

Eventually, the cylinder of R3P solution arrives and, sadly, has precipitated and won’t come out of the cylinder. So there you are. The customer is unhappy and you now face having to haul it back and recover the product. These are the kinds of problems that chemists on the business side (the plow horses) can find themselves dealing with. Of course, the R&D chemists (the show horses) are rarely bothered with such things.