Category Archives: Economics

Fools and Randomness

There is an interesting book out by Nassim Nicholas Taleb called Fooled by Randomness, 2005, Random House (!!?), 2005, ISBN 0-8129-7521-9.  To get right to the point, Taleb has combined cognitive science and statistics with finance. 

There is nothing new about cognitive scientists using statistics.  But there is  something distinctly recent, at least, about finance people thinking about how cognitive science and statistics might be applied to how we approach investment thinking. I don’t mean the cookbook use of cognitive science in investments, rather, I mean how we think about investment risk.  The theme of Taleb’s book is concerned with how we think about randomness.

The reader can form her/his own opinion about Taleb’s ideas.  Speaking for myself, I am intrigued with his thesis that many “experts” in economics and investments are largely deluded when it comes to perceiving risk. Taleb suggests that validation of forecasting methods and the use of error estimation is generally lacking in investment trading. The cognitive connection applies to how investment traders think. Taleb suggests that there is a general lack of probabilisitic thinking.

Coming to grips with infrequent and unexpected outcomes (black swans) is one of the most befuddling and confusing challenges we all face. Our primate brains form elementary strategies for dealing with certain risks.  We catch a glimse of a big carnivore in the brush and we run. 

But what to do if we have a bundle of money in the market and some social or economic perturbation comes along?  What will the market do if the Molybdenum prices skyrocket or if China invades Taiwan? Individuals and industries are concerned with the value of their investments over the course of positive and negative events. Stock traders need to act on clues so as to protect the value of their accounts.

Taleb laments the lack of probabilistic thinking in the investment community. He suggests that individuals and firms who are deemed as highly successful in investments are in reality just very lucky more frequently than we realize.

Even for hacks such as myself who gasped and sputtered through a few semesters of exposure to probabilistic concepts, i.e., quantum mechanics, radiation science, etc., sweeping the mind free of deterministic biases requires constant attention.  How is some MBA derivatives specialist going to temper her/his enthusiasm to buy or sell when phantom patterns appear in the market?  Good question.

Evonik Absorbs Degussa

Another venerable corporate identity has been rendered obsolete.  Evonik Industries AG has acquired Degussa to form what they call the Chemicals Business Area. Evonik has interest in energy and real estate as well.

It always surprises me to see a buyout that includes the retirement of an entire corporate identity. It’s the same with Union Carbide or Hoechst AG (now Aventis). There is so much name recognition with company’s like this that I really wonder what the rationale is for the change.

I recall one evening at a bar in Houston we were drinking with some Degussa business develpment guys after a tedious day at a conference. After listening to these German guys griping about American drivers, I took a sip of my gin and tonic and asked the question-

“So, was there a founder named Herr Degussa somewhere, sometime in the past?” They looked at me for a moment and then began to laugh. Turns out that the word Degussa  comes from “Deutsch Gold and Silver” in some fashion.  Or, so they said.

Best wishes to the good folks at (former) Degussa in their new adventure.

Possible Signs of a Slowdown

Hmmm. Some early indications of a slowdown are out there in certain commodity markets.  Purchasing people getting conservative and skittish with forecasts. When buyers revise their projections downward or say that they’ll ride on their inventory for a while longer, you can bet that rougher sledding is ahead. Just a question of magnitude.

The signs come a day after Bernanke suggested that a slowdown was possible. Cause? Effect? Hard to say.

The picture will begin to resolve over the next few months. The first quarter of the year often sets the pace for the year in markets that I’m familiar with. The chemical manufacturing market is so global and the dollar is so low that it is hard to determine if some of the latest conservative buying behavior is an actual indicator or not of business slowdown.  Hmmm. 

Toward the Green Manufacturing Ideal

In the waters that I swim within, the term “Green Chemistry” is often derided as an environmental extremist codeword used by chemical technology Luddites. I’m sure there are anti-chemical purists who view Green Chemistry as a kind of natural alternative to the use of man-made, unnatural substances. Biodiesel is is commonly held as one example of a green alternative.

The merits of Green vs non-Green, or the inherent Greenness of Green technology is a contraversy too large for this blog. Instead, I would rather turn my attention to the merits of Green thinking in chemical process development.

Specialty chemical manufacture begins with relatively simple raw materials and produces more complex and more valuable compounds.  Limiting the topic to synthesis as opposed to formulation, specialty chemical manufacture relies on the application of functional group manipulation to achieve an end product with the desired features and connectivity. 

In chemical manufacture, there are several general ways to improve process economics. The most general term is process intensification, which describes the overall effect of maximizing the conversion of raw materials into product per volume or per dollar of capital equipment.  This can be done by a) running reactions at more concentrated levels, b) the application of heat and pressure, c) the elimination of solvents altogether, d) the use of more reactive species, or e) telescoping. 

a) Of the many kinds of reaction optimization schemes that we learn in grad school, perhaps the least explored is space yield improvement. Space yield is just the kg of product obtained per liter of reaction mixture used.  In manufacturing, the goal is to maximize the number of kg of product obtained per plant man-hour for a given piece of equipment.  Raw material costs are only slightly adjustable, whereas labor hours can often be lowered with the application of better technology. Labor costs are among the highest costs in a plant, so the goal is to produce the most kg of product per man-hour.  

Intensification by increasing space yield simply means that a solution reaction is run at the highest reasonable concentration. The benefit is that a reactor is run at the highest mass yield per batch.  Since the corresponding increase in labor to run the higher space yield is near zero, the resulting labor costs are spread over a greater quantity of mass- the labor $/kg go down.

b) Most people come out of college with precious little experience or appreciation for the benefits of high temperature and pressure in chemical synthesis. Continuous high temperature short time (HTST) reactions are out there, but require specialized equipment and expertise. Engineers love this kind of processing. For an optimized process, HTST systems have comparitively small reaction zones that are relatively inexpensive and take advantage of the economics of continuous flow chemistry. Good examples are ammonia production or Petroleum refining.

c) The elimination of solvents is a tricky thing. Gas phase chemistry is well known and quite mature technology. It is also amenable to continuous flow processing.  Elimination of solvents in condensed phase chemistry is a bit different problem.  Solvent molecules are like tiny sand bags in their ability to absorb energy.  Neat reactions may be prone to exotherms, so the calorimetry of any given proposed neat reaction needs to be examined carefully.

On the plus side of solventless processing, the space yields are at maximum and reaction rates are not diminished by dilution effects.

d)  The use of more reactive materials in a process can have benefits in time savings if a particular step is slow or does not go to completion. If the reactive reagent affects the rate limiting step, then time and yield savings may be had. On the down side, increased reactivity may offer decreased selectivity. Increased hazards will have to be calculated into the value proposition as well.

e) Telescoping refers to the combination of multiple steps in one reactor.  In it’s best incarnation, telescoping may afford the direct reaction of a product in the reaction mixture of the previous reaction. The benefit is in the savings of man-hours in vessel cleanout and preparation time, minimized hazwaste, and minimum handling.  Another form of telescoping would be that pot residues are left in the vessel and reagents from the next step are charged in without extra transfers and new vessels.  This tends to minimize the number of vessels needed for a process and minimizes the opportunity costs of having empty vessels standing by for use.

The goal of green chemistry as I see it is to minimize environmental insult by the reduction of consumables and the discharge of hazardous waste streams from a plant to the outside world of waste treatment.  The reduction of consumables like solvents, reagents, or electrical power reduces hazards and pollution up and down the value chain. The reduction of hazardous wastes minimizes the mass that has to be consolidated for eventual incineration or burial.

The reduction of consumables is entirely compatible with the economic goals of business.  Process intensification points to the same general direction as the goals of Green Chemistry and should be considered a type of Green activity.  If one draws a picture of the ideal state of any chemical manufacturing process, it surely would include intensification with sustainable raw materials and with maximized throughput and minimized risk.

Japanese Trading Companies

Selling goods to Asia can be challenging for westerners. End users of chemicals in Asia often use trading companies to do their buying.  Selling to an Asian consumer of chemicals via the usual tools of marketing- cold calls, advertising, etc.- is complicated by the fact that the buyer may not be the end user. A call to an end user, if you can find their identity, may be politely declined. Instead, you might be referred to the allied trading company or just shown the door.

Th’ Gaussling is not an expert in this area of business. But I have more than a passing interest. Under the egg on my face are plenty of black and blue marks from my latest lesson. I should be receiving a certificate for 2 credit hours from the correspondence school of hard knocks.

Outwardly, chemical trading companies often look like end-users of chemical products. If you visit their websites, they’ll promote the manufacturing capacity of their customers and the impressive list of fine chemical products. In reality, they are located in a cramped office suite with fax machines and a server that projects the image onto the internet.  Their activity is limited to buying, selling and arranging logistics. Trading companies are part of the social custom of strategic alliances in Japanese business. They may buy and resell with a markup. They may provide contract buying services. There are numerous ways to do the deed.

For a factory, this arrangement allows managers to focus on manufacturing. Since trading companies only get paid if they hand over their deliverables, there is always a productive stress on the procurement people to look after their cadre of customers. 

One big problem from the vendors perspective is negotiation.  Negotiating with an end-user through an intermediary trading company is complex and time consuming. It’s best to do this face to face. Negotiation over the internet is not the best method. Trust is an issue and one gains trust by direct meetings.

The discussion of technical issues may also proceed through the trading company. This is can be a nightmare. I have wasted far too many precious heartbeats trying to noodle information from the end user through the mouthpiece of the trader. But from their side, this amounts to providing needed service to the customer.

It is difficult for western suppliers to penetrate the mind of customers in the east and discover how to market their wares in that part of the world. The trick for western business development people is to invest time and effort in understanding Asian trading practices.  Pick up some books on the topic. Go to trade shows and talk to Asian exhibitors. Read the trade publications.  Develop personal relationships.  Price wins the day, but trust is part of the calculation.

LunaBank. Off-shore banking on the moon.

If you knew Th’ Gaussling very well, you would be quite surprised at his increasing skepticism with our approach to manned spaceflight.  I am an aerospace enthusiast. The most thrilling and terrifying moments of my life have occured at 7000 ft MSL with a Cessna strapped to my ass.  It is distressing to go public (well, under my pseudonym) with criticism of our manned space flight effort.

My first question is, what are we getting out of the ISS?  We’re racking up a lot of flight hours and the aerospace contractors are doing good business. The purpose of the ISS seems to be “Learning How to Build an ISS” if you watch NASA TV.  Where are the dividends to society? I’m sure they are there. Where is the tech transfer?

I know that research is being done on the ISS. But, how productive is it?  How close are we technically to going to Mars? The assessment of criteria for a Mars mission is supposed to be one of the work products of the ISS. Has anyone articulated how the big picture is looking? 

Apparently, a trip to Mars will involve a lot of gardening.

Hmmm. I can just hear it-

“Hey Bob! Where d’ya s’pose them sonsabitches at Kennedy put that g*ddamned shovel? ”

“Simmer down, Annie. For the third time, it’s behind the weed-eater next to the inertial navigation unit. Shee-yit!”

Given the commercial interests in building manned-flight rated hardware, are we really being honest with ourselves on the question of man-vs-robot? In other words, could we spend less and learn more from robotic space hardware?

Friends connected to NASA tell me that monies that were once available for activities not directly related to manned spaceflight are drying up. NASA is preparing for a return trip to the moon. We’re going to the moon again, but without any fanfare or sense of purpose. The public is largely disengaged and uncompelled. The public is disengaged because no one has heard the purpose articulated.

A country that has interest in an ongoing moon station will have to come up with more than just stunt or prestige value.  Huge inputs of national treasure will be committed to the enterprise.  Commercial interests should be folded in to produce goods and services in order to recover costs in some fashion.  The return of material products from the moon will have a very large transportation cost per kilogram.

The production of intellectual property, information, broadcasting services, or remote sensing will likely be the most attractive commercial products. Actually, the moon would be a good place for a Bank. Imagine a Swiss-style bank with safe deposit boxes located on the moon.  How much more secure a location for small treasures and damning evidence could there be? 

Similar ideas have been put into practice, starting with pirate radio of all things.  The Principality of Sealand was started as a micro-nation on a retired gun platform off the east coast of England. The plan initially was to have a remote location for pirate radio broadcasts.  Today, Sealand is the location of a secure data sanctuary called Havenco. The idea of a remote, encrypted data sanctuary was the theme of the book Cryptonomicon.

Naturally, other nations have voiced disapproval of the data sanctuary concept, citing potential for money laundering and other criminal activity. Havenco may find itself cutoff from the telecommunication network that keeps it alive.

The moon would be a great site for off-shore banking activity. Nobody owns the moon. It is outside the boundaries of all the jurisdictions on earth.  Funds could be electronically transferred to a remotely operated bank on the moon.  Hell, you could leave the doors unlocked and forget the vault.  At minimum, all you need to do is land a computer, a dish for data transfer, and some solar panels for power.  Once a year a service visit can be made by LunaBank people to service the equipment and swap deposit boxes. 

Aphorism #114. If you want to make money, you have to serve the people or institutions who have the money.

Eventually, though, there may well be jurisdictions on the moon. One day, the moon will be partitioned, so the last thing a LunaBanker wants is to suddenly be a part of the Soviet Union Russia or China on the moon. Or nearly any nationality, for that matter. The Swiss may be preferable, owing to their favorable history with this kind of business.

This scheme is very simplistic.  It will require more thought than that presented here and the criminal potential will have to be prevented. The question of what minimally constitutes a “Bank” and its relation to nationality naturally arises in this discussion. No doubt, there is more to it than my simple scribblings. But the point of this essay is that we as a spacefaring society need to start discussing this kind of activity and not just leave it to a cloister of specialists.

Hummers Hummin’ Along

According to the Detroit News, GM has announced that they are going to spend $73 million on the Hummer H3T pickup manufacturing line.  The first units are scheduled to arrive at dealerships sometime 3Q08.  The new model is supposed to be somewhere between the Silverado and the Colorado in size.

It’s a curious thing as we approach US$100/bbl oil that GM is plowing forward with upgrades to its Shreveport pickup truck operations. Could it be that they see enough remaining price elasticity with fuels that their pickup production upgrades will pay off? It is notable that GM is introducing a Hummer pickup and not a mini-Hummer.  Economy isn’t in the equation.

To produce an economy Hummer would be to invite questions (and ridicule) about the merit of such vehicles to begin with. It is like diet fudge. What’s the point?

I think GM is taking a purely market-pull approach with this brand. The brand has value and they will offer the Hummer product line until the demand falls away.  GM hasn’t given up on large vehicles because the public hasn’t given up on them.

The Nanny State. Gaussling’s 5th Epistle to the Bohemians.

“We live in an age of miracle and wonder” is the refrain from Paul Simon’s album Graceland. All around us and through us are engineered materials devised for their specific physical and chemical properties. Time-released magic bullet drugs that inhibit specific enzymes. Flavorants, colorants, rheology modifiers, and manufactured food substances are engineered and marketed to satisfy our lizard brain’s willingness to shell out cash-for-calories and stimulate our limbic system’s emotive triggers. 

It is nearly impossible to avoid contact with manufactured goods that aren’t modified by chemistry. A century and a half of tinkering with substances at the nanometer scale has given us the ability to optimise the composition and performance of products that make our lives easier and safer.  Microprocessors and Lycra, Hastelloy and Lipitor. The chemical industry has evolved to produce the raw materials and finished goods needed for the performance we have come to expect.

However, history provides a record of the problems associated with the exuberant but uncritical acceptance of this flood of manufactured goods.  From radium poisoning of watch dial painters to chromium VI to asbestos, there is a long list of negligence and environmental insult. The trail blazing of chemical industry leaves behind it a chronicle of tragedy as well as benefits.

The result of the checkered past of industry is a growing (some would say “metastisizing”) intertwined web of state, federal, and international regulatory oversight and requirements. And with it- perhaps as a result of it- has come institutional risk aversion

In general way, risk aversion is a type of survival trait and is probably hardwired into our brains. It is hard to blame people for being wary or fearful of risks, especially those they do not understand. But on the other hand, risk aversion is also a type of inertia. It is a fulcrum from which metaphysical rather than physical justifications are leveraged.  

At what point does concern for safety become excessive and how does one go about commenting on it? In a sense, it is similar to being critical of a religion. Similar to interpreting religion, we interpret that safety is important, but we do not often have a clear path mapped out for us through the maze of details and choices.

It is possible for organizations to be dominated by confident voices that are risk averse. Meeting facilitators will piously intone that “safety first” is our policy.  Detailed SOP’s will issue, dragging out the most elementary actions into numerous steps.  There is great merit to SOP’s, but enlightened and proactive management of hazardous operations personel is more important.

Organizations can find themselves spiraling into micromanagement of even the smallest details for fear that a regulatory or liability hammer will fall at any moment. Indeed, if one studies the regulations in detail, it is easy to fall into this habit. Risk aversion isn’t just a personality issue, it is statutory.

Statutory risk aversion is the domain of the Nanny State. The name “Nanny State” refers to the sum total of regulated actions and conditions in our lives as well as the set of penalties.  Though perhaps well intended, the Nanny State seeks to zero out risk, even for the less risk averse.

The Nanny State makes the startup of new chemical technology companies prohibitively expensive.  Nobody advocates the idea that we should be free to pollute and risk the lives of workers and communities.  But even for the most skillful and well intended, there are too many regulatory landmines to dodge: air, water, and waste permits; local zoning; OSHA; EPA (TSCA); fire codes; insurance inspections; MSDS’s in multiple languages; ITAR; and DEA. All have reporting requirements, statutes, and paper trails to maintain.

The plant is the domain of the chemical disaster. The inner offices are the domain of the administrative disaster.  Executives fear being out of regulatory compliance almost as much as an exploding 1000 gallon Pfaudler reactor (alright, I exaggerated … slightly).

In my view, the USA is becoming ossified in Nanny State paralysis in much the same way the EU has.  The combination of technological risk aversion along with the popular sport of outsourcing by our nations corps of MBA wizards only serves to accelerate the de-industrialization of the USA and the EU.

Excess Quality. High Purity vs Nominal Purity

So, the bane of my life right now is water.  You see, the planetary atmosphere that presses down upon us is dilute, wet, oxygen. Given that the planet is generally damp, providing a customer with an anhydrous product requires some care.  For solids, it resolves to the removal of lattice water and/or coordinated water originating from the process and then keeping the dried material from humidity.

Lattice water is the easiest to remove. Azeotropic methods or good old-fashioned vacuum goes a long way to remove this troublesome aqua. Coordinated water is a different issue, however.

Inorganic materials form aqua complexes that are often quite stable. Removal of this ligand opens a coordination site which begs to be refilled with a donor.  Removal of coordinated water may change the stuctural nature of the material and affect its application. Rare earth materials, for instance, often have coordination numbers of 7 to 9, so there are lots of extra coordination sites for water to park. OK, so what?

As a chemical merchant, one has to decide on the specifications of a product either in response to a query or as part of a collection. In the matter of dehydration, the issue that is front and center is how far to go with that dehydration.  How much water can you keep and still have a saleable product? It is quite possible to work way too hard to provide product purity that no one asked for.  Excess quality, call it.

Excess quality is excess expense. This seems contrary to the prevailing work ethic taught by our parents. But, for a given application, there will be a threshold material purity above which further purification affords little or no increase in benefit. Resources spent to obtain or use this excess quality is a type of loss.

Generally speaking, a chemical company will offer what it can make with reasonable effort to meet the needs of the market. If a customer comes along who wants a higher grade, then the manufacturer has to communicate with the customer to determine if the higher grade is really necessary and if so, make a decision as to the merits of kicking up the grade a bit. 

Many times a customer will develop a process based upon material obtained from Aldrich, Strem, Alfa Aesar, etc. These catalog houses provide R&D materials and are often quite pure.  Part of the reason for the purity is that many of the compounds are prepared in 5 or 12 liter flasks and are subject to benchtop processing that is difficult to duplicate in large metal reactors. In particular, tight fractional distillations or the handling of intractable solids, emulsions, or oils, is easier on the benchtop than in a plant. So, sub-kilogram quantities can be easier to prepare in a purer state, generally. Obviously, well engineered bulk manufacturing produces high quality goods as well. But remember, a large fraction of what you see in a catalog has not been scaled up.

It is often a shock for a customer to find that a material will have a different or exaggerated contaminant profile at scale because of their work with commercial R&D materials.  If you need to obtain a material at scale, it is best to work with a manufacturer as early as possible in the commercialization timeline to qualify samples of the needed compound. The assumption that process development with Aldrich samples is good enough could be a trap.  In reality, a user will have to consider to what extent they can live with residual process solvents, suspended solids, water, color, and side products.  Higher purity generally means lower manufactured yields and as a result, fewer kgs of product to dilute the costs. Somewhere the needs curve crosses the wants curve and you’re in business.

Hometown Industry

Ah, the sweet drone of American English. It’s nice to travel, but it’s nicer to be home.

The conference in Bangkok was useful in many ways. For the most part, it gave Th’ Gaussling some needed perspective in an important segment of the Asian chemical market. North America is far from doomed, market-wise, though it is critical that we curb the rate of chemical de-industrialization going on here.

Manufacturing is the bedrock of our economy and one of the major pillars of our culture. I think that the notion of clean telecommuting promoted by the computer industry leads to the expectation that the country can become one large bedroom community, with dirty heavy industry left to banana republics and Asian tigers.

This notion is absurd and self destructive. If paper mills, refineries, and coal mines are too polluting, then industry needs to collaborate better with the chemical engineering departments around the country. If semiconductor and pharmaceutical manufacturing is too costly in the states, then industry needs to collaborate better with our research institutions.

We have too many non-technical MBA’s driving the country and it has to change. Ruthless finance manipulations must be replaced by ruthless technological advance. Delicate, abstract investment contrivances should be superceded by robust scientific and engineering achievement.