ACS Industry

The Paradox of Making Something Everyone Needs

Blog Post created by ACS Industry on Jun 5, 2015

ChemicalEggs3.png“If you are walking behind a manure spreader, never lick your lips”.  My grandfather was a man of few words and, rare as the memorable quotes are, I don’t get to use this one. It always evokes a bit of a smile, but it doesn't fit many situations. Not once have I gotten the privilege of galvanizing an argument or injecting wisdom into a conversation with this quote.

I would spend extended period of time on my grandparents’ farm when I was a kid, but I actually never saw the manure spreader out of the barn.  The glory days of the farm were far before my time and, while it was still an active farm, the cattle were long gone.  Row crops were replaced by strawberries and tomatoes, and chickens were the major activity. There were three pretty good sized hen houses and the days always began with an early morning egg collection. Chickens were let out of the houses to forage and we raided the nest boxes.  That was followed by candling the eggs using a tin can with a hole in it and a light bulb inside.  Eggs that passed the test were put in cartons.  The cartons were loaded into the trunk of a white Ford Fairlane for distribution to customers. 

One day, I asked “Pop, why do you sell eggs?”  It took years for the slyness and wit of the answer to actually sink in. He responded “I knew there was money to be made with eggs because no one ever has”. 

Unlike the manure quote, this is a quote that I have used over the years.  It actually has amazing relevance in the chemical industry.  Eggs represent a pretty good analogy for the commodity chemical industry. 

Eggs are certainly one of the most ubiquitous foods. Everyone needs eggs. Clearly there is a market demand.  It would seem that supplying something that everyone needs would be a great business. Buy some chickens and you’re set. The USDA supplies detailed information about how to raise chickens.  Many stores supply the equipment, food, and chickens.  There is a ready and economical supply of the raw materials, the production technology is readily available, and there is a ready market for the product.  Yet, my grandfather was correct in his appraisal.  No one really makes money with eggs. Sergei and Larry would not cash-in their positions at Google to be chicken farmers.   It is not a lucrative business opportunity.

There are several problems.  The first is with the eggs themselves.  They are an undifferentiated commodity.  My grandfather had his customers due to history and proximity.  He kept them only because he delivered the eggs cheaper than the equivalent eggs offered by local competitors.

The chicken is the fundamental unit of egg production. You get more chickens, you “number up”, in order to increase production of eggs.  You don’t replace a flock with one humongous chicken.  There are certainly some economies of scale, but not the huge economies of scale that can be realized in the chemical industry when production machinery can be increased in size.  It is typically stated that raw materials account for 60-70% of the cost of chemical production.  For large scale egg production, it is about the same.  Economies of scale are realized because large producers can command advantaged feedstock pricing and logistics on getting product to market. There are also economic advantages to growing more chickens in a smaller area, a sort of process intensification. Automation has reduced manpower requirements, again like the chemical industry.  Today’s largest and most efficient producers don’t have their grandsons collecting eggs and chickens ranging freely like my grandfather’s farm did. As we are learning now that avian influenza threatens America’s chickens, today’s chickens are confined in large barns controlled by fewer and fewer companies.  The egg industry has consolidated just like the chemical industry.

The current chemical industry is facing some of the same issues that my grandfather faced as a chicken farmer, with some of the same limitations.  Materials produced by the chemical industry, like chlorine, sodium hydroxide, ethylene, propylene, polystyrene, vinyl chloride and such, are largely undifferentiated commodities.  The technology to manufacture them is readily available, not quite as easy as the local farm supply for chickens, but vendors stand ready to supply the technology globally. Anyone with raw material supply and cash can be in the chemical industry, just like raising eggs. Chemical products, like eggs, are incredibly useful, almost a necessity. However, like eggs, this doesn’t translate into a particularly attractive business.  Once a market is largely satisfied, suppliers compete on cost and profitability drops.

There are of the order 50,000 farms commercially raising chickens in the US.  That is more than 1000 times the number of commodity chemical companies.  USDA scientists continue to investigate better production methods and freely share advances.  The lifetime of the “production equipment”, a hen, is short. Advances in chicken farming move through the industry relatively quickly.  Chemical plant assets, in contrast, last for 30 to 50 years.  Minor retrofits are not commonly possible.  The pace of advancement is slow.  We are currently seeing a wave of divestitures of commodity chemicals.  Since the products are still needed, the plants still run, but they are now, more and more, being operated not by multiproduct, integrated producers, but by single product firms.  Single product firms that operate plants just like the competition and compete on cost. Unlike my grandfather who went to his grave waiting for someone to make money in eggs, these assets had their day minting money.  At some point, many were exceedingly profitable businesses.  Technology was differentiated and demand far outstripped supply.  Paradoxically, as the products became more necessary for life as we know it, the quality of the business degrades.  “Commoditized” is a derogatory business term. The most exciting businesses, those with large margins, are most often for things that aren’t really necessary for life.


Mark Jones is Executive External Strategy and Communications Fellow at Dow Chemical since September 2011. He spent most of his career developing catalytic processes after joining Dow in 1990. He received his Ph.D. in Physical Chemistry at the University of Colorado-Boulder doing research unlikely to lead to an industrial career and totally unrelated to his current responsibilities.