Thursday, January 18, 2018

Does Institutional Economics Affect Fossil Energy Company Outcomes?

The institutional economic theory emphasizes the role that institutions play on economic outcomes.  Institutions can be: social norms; pollical interactions; government agencies; non-government organizations; rules, regulations, and the law; and more.  

Another economic theory is neoclassical economic theory.  In this theory, economic outcomes are determined (in contrast to institutional economic theory) by supply and demand of products, the desires of consumers to want products, and the perspective that the consumer uses rational thinking in deciding whether to purchase products.   Rational thinking implies that the consumer makes a choice on whether to buy a product, based strictly on whether it is in the consumer’s best interest to do so.   In this theory, there seems to be little, if any, role for institutions to play in determining economic outcomes.

Knowing whether institutional economic theory influence the economic performance outcomes of companies is of interest to me as an analyst evaluating companies’ economic performances.  I am especially interested in materials and energy-related companies.

Do differences exist in institutional impacts on fossil fuel companies that operate primarily in the European Union (EU) compared to the institutional impacts on fossil fuel companies that operate primarily in the United States (US)?   If so, based on the intuitional economic theory, one would expect that these institutional impacts would cause different economic outcomes for the companies in each area.

To test this expectation, I have compared the profit rate (net profit divided by total asset value) of 10 primarily EU fossil fuel companies to 10 primarily US fossil fuel companies.  The following table shows the average profit rate for each of the EU and US companies over the last 3 years (net profit and total asset value data taken from the companies’ annual reports) and the average of the 10 companies in each area:


european union fossil fuel companies
profit rate (net profit/ total assets)
united states fossil fuel companies
profit rate (net profit/ total assets)
omv
0.031
anadarko
-0.081
ina
-0.050
apache
-0.212
total
0.023
cabot
-0.028
hellenic
0.001
chesapeake
-0.402
mol
-0.011
chevron
0.029
shell
0.020
conocophillips
-0.009
statoil
-0.062
hess
-0.083
pkn orlen
0.015
marathon
0.059
lundin
-0.120
occidental
-0.061
respol
0.012
valero
0.034
average
-0.014
average
-0.075
as a %
-1.4%
as a %
-7.5%


The table shows that the average profit rate for the 10 EU companies (-1.4%) to be much better (even though still negative) than for the US companies (-7.5%).  The EU companies have about a 6% better profit rate than the US companies.  This data does not show that institutional impacts account for the differences in these economic performances, but such a difference allows for the possibility.

Another test is determining the fossil fuel use per person for the EU and the US.  EU and US fossil fuel use and population data were obtained from EU and US government websites (click here and here to go to the EU websites) (click here and here to go to the US websites).  Using a fossil fuel use of 1.22 million tons oil equivalent (mtoe) and 508 million EU population gives a fossil fuel use per person of 2.4 toe.   Using a 2.03 mtoe fossil fuel use and a 318.6 million population for the US gives 6.4 toe per person.  If only the neoclassical economic theory governed energy fuel-type choices by individuals in the EU and US, I believe you would expect the toe/person values to be much closer.  That they are not suggest other economic considerations, such as the institutional economic theory, are at work.

In conclusion, both economic outcomes for EU and US fossil fuel companies and the EU and US fossil fuel per person data, given above, suggest that institutions impact the outcomes and that the institutional economic theory has validity and should be considered when evaluating companies.  


Friday, December 29, 2017

Chemical and Metal Shortage Alert – December 2017

The purpose of this blog is to identify chemical and metal shortages reported on the Internet.  The sources of the information reported here are primarily news releases issued on the Internet.  The issue period of the news releases is December 2017.

Section I below lists those chemicals and metals that were on the previous month’s Chemical and Metal Shortage Alert list and continue to have news releases indicating they are in short supply. Click here to read the November 2017 Chemical and Metal Shortage Alert list.

Section II lists the new chemicals and metals (not on the November alert).  Also provided is some explanation for the shortage and geographical information.  This blog attempts to list only actual shortage situations – those shortages that are being experienced during the period covered by the news releases.  Chemicals and metals identified in news releases as only being in danger of being in short supply status are not listed.

Section I. 

None
      
Section II.   Shortages Reported in December not found on the Previous Month’s List

Benzene: United States; production not keeping up with demand
Natural gas: China; supply not keeping up with demand
Saline solution: United States; production not keeping up with demand
Sand: India; supply not keeping up with demand
Silicon: United States; production not keeping up with demand
Vitamin A and E: Canada; production not keeping up with demand

Reasons for Section II shortages can be broadly categorized as: 

1.  Mining not keeping up with demand: none
2.  Production not keeping up with demand:  benzene; saline solution; silicon; vitamin A
                                                                        and E
3.  Government regulations: none
4.  Sources no longer available: none
5.  Insufficient imports: none
6.  Supply not keeping up with demand: natural gas; sand



Wednesday, December 6, 2017

Chemical Industry Support of the Fish Farming Industry

The fish farming industry (also represented by the term aquaculture industry) now provides more than 50% of global fish consumption (compared to caught/captured fish).  This percentage has greatly increased in the last 30 years and is expected to continue to increase.  In recent years, fish have accounted for around 20 percentage of total global human consumption of animal protein.  As the aquaculture industry continues to innovate and expand its production, it is likely this 20 percentage will increase.  In fact, with an increasing global population expected to reach 9 billion by 2050, the increase is paramount.  Click here for a good overview of such data from the United Nations (PDF file).

The chemical industry has been a major supplier to the aquaculture industry.  Materials supplied have included:  amino acids; antioxidants; carotenoid pigments; enzymes; proteins; stabilizing agents: trace elements; and vitamins.    Public, chemically-related companies marketing materials to the aquaculture industry include:  Ajinomoto; Archer Daniels Midland; BASF; Darling Ingredients; DSM; and Navozymes.

Two large, public companies that farm fish with large fish retail businesses are the Thai company Charoen Pokphand (click here to go to its website; click the Thai language link to get to the English site) and the Norwegian company Marine Harvest (click here to go to its website).  In 2016, Charoen Pokphand sold for approximately $1.9 billion its farmed fish.  This sale amount represented a 6% increase over 2015.  For Marine Harvest, farmed fish revenues in 2016 was approximately $3.7 billion and in 2015, $3.3 billion, a 12 % increase.   According to data found on the Internet, farmed-fish consumption growth globally is expected to increase about 8% per year.


The growth of the aquaculture industry over the last 30 years seems to me to be a good example of how a “new industrial sector” can benefit the chemical industry.

Friday, December 1, 2017

Chemical and Metal Shortage Alert – November 2017

The purpose of this blog is to identify chemical and metal shortages reported on the Internet.  The sources of the information reported here are primarily news releases issued on the Internet.  The issue period of the news releases is November 2017.

Section I below lists those chemicals and metals that were on the previous month’s Chemical and Metal Shortage Alert list and continue to have news releases indicating they are in short supply.  Click here to read the October 2017 Chemical and Metal Shortage Alert list.

Section II lists the new chemicals and metals (not on the October alert).  Also provided is some explanation for the shortage and geographical information.  This blog attempts to list only actual shortage situations – those shortages that are being experienced during the period covered by the news releases.  Chemicals and metals identified in news releases as only being in danger of being in short supply status are not listed.

Section I. 

None
      
Section II.   Shortages Reported in November not found on the Previous Month’s List

Ethane:   Mexico; production not keeping up with demand
Hydrogen peroxide:  Texas; production not keeping up with demand
Polysilicon:  China; production not keeping up with demand

Reasons for Section II shortages can be broadly categorized as: 

1.  Mining not keeping up with demand: none
2.  Production not keeping up with demand:  ethane; hydrogen peroxide; polysilicon
3.  Government regulations: none
4.  Sources no longer available: none
5.  Insufficient imports: none

6.  Supply not keeping up with demand:  none

Thursday, November 23, 2017

Supply Chain and Sustainability Management at a Few Chemical Companies

Fourteen large, mostly European chemical companies (with annual revenues ranging from $61 billion to $4.9 billion) belong to a non-profit organization, called Together for Sustainability (TfS), that assists each company in its supplier evaluations and audits.  Chemical companies of the size of the ones belonging to TfS often have thousands of suppliers paying billions of dollars, e.g., BASF, a TfS member, reports in its 2016 annual report it has 70,000 suppliers paying $36 billion to those suppliers and Clariant, another member, in its 2016 annual report, states it has 5,250 suppliers paying $2.1 billion to them.

These large amounts paid to so many suppliers represent a significant business concern for the companies and an important response to this concern is effective evaluations and audits of the suppliers.   Belonging to the TfS allows these companies to share supplier evaluations and audits, done by TfS directly or by TfS subcontractors, reducing the need for each company to do its own evaluations and audits for many, but not all, suppliers.

The emphasis on the evaluations and audits done by (or on behalf of) TfS is to support member sustainability management.  This management is intended to ensure the long-term sustainability of the company, a sustainability which depends to a large extent on suppliers.  Click here to go to the TfS website and read more about what TfS does.

The amount of data and analysis found in the annual and sustainability reports of the TfS chemical companies indicate the extent that these companies are embracing sustainability as an important strategic management goal.  The data and analysis demonstrate how value and supply chain considerations interact with sustainability considerations.  Reviewing several TfS-membered companies’ annual and sustainability reports found the following:

  • ·         Solvay seeks to detect sustainability risks and opportunities along the entire value chain (cradle to grave for products)
  • ·         AkzoNobel has a company-wide approach to continuous improvement of its integrated supply chain function, looking for breakthroughs in process, packaging, and digitalization
  • ·         Arkema is implementing improved information technology for supply chain optimization
  • ·         BASF sustainability is an integral part of its supply chain strategy
  • ·         Bayer has had more than 700 sustainability assessments of suppliers made by TfS and in 2016 conducted more than 70 external audits and more than 160 internal audits related to its suppliers
  • ·         Clariant has initiated an integrated planning landscape to improve supply chain management
  • ·         Covestro regards adherence to sustainability within the supply chain as crucial to value creating; social, ethical, environmental, and governance factors, in addition to economic ones, are used in supplier selections
  • ·         DSM has had 96% of their approximately 1,000 critical suppliers go through the evaluation and audit process
  • ·         Evonik, with approximately $8 billion spent on raw materials, supplies, services, and energy, emphasizes automation and optimization in its procurement process.



 A 2013 survey of more than 500 supply chain executives, conducted by PWC, focused on what these executives are doing to enhance their supply chain management.  Click here to read the report on this survey (PDF file).

Tuesday, November 7, 2017

Surfactants Business Prospects

The following public companies report (in their annual reports) that they produce surfactants: AKZO Nobel; BASF; DowDupont; Clariant; CRODA; Evonik; Henkel; Huntsman; KAO; and Stepan.  Of these companies, only one, Stepan, reports any financial data on their surfactants business.  For Stepan, surfactants is a separate, reportable segment.

Surfactants sales account for about 70% of Stepan’s sales.  These sales decreased $24.3 million from 2015 to 2016, a 2% change.  Gross profit margin percentages (GPM%) increased by 1% from 2015 to 2016, but was only 17% in 2016, not a particularly good GPM% for a chemical company.  Surfactant operating income in 2016 was 8% of sales and 9% in 2015.  These surfactant business results do not seem to me to reflect a strong, robust business.  And the Stepan results could reflect the surfactant business results for other companies that produced surfactants.

Countering what appears to be a recent lackadaisical surfactant business performance is the introduction of biobased surfactant products.   Of the ten public companies mentioned above, at least four of them write about biobased surfactants in their annual reports (Clariant; CRODA; Evonik; and Henkel).   CRODA has recently commissioned a manufacturing facility in the United States producing 100% biobased surfactants.


Targeting biobased surfactants could be an excellent example of good supply/value chain management.  The purchasers of these company surfactants, (retailers of detergents, soaps, and other products containing surfactants) are likely assessing their customers and are concluding that detergents, soaps, and other consumer products containing biobased surfactants are growing in demand.   A 2011 Genencor consumer survey found that more than 50% of consumers in the United States and Canada are likely to buy biobased products and more than 60% are confident that biobased products are better for the environment (click here to find more details on this survey).  A more recent, 2017 European-centered report examines trends in biobased products in several industrial sectors and found that in the personal and home care sector (i.e., soaps and detergnets) the market is especially receptive to biobased, environmentally friendly products (click here to read this report-PDF file).  Increasing demand for differentiated products usually leads to higher profitability.

Wednesday, November 1, 2017

Chemical and Metal Shortage Alert – October 2017

The purpose of this blog is to identify chemical and metal shortages reported on the Internet.  The sources of the information reported here are primarily news releases issued on the Internet.  The issue period of the news releases is October 2017.

Section I below lists those chemicals and metals that were on the previous month’s Chemical and Metal Shortage Alert list and continue to have news releases indicating they are in short supply.  Click here to read the September 2017 Chemical and Metal Shortage Alert list.

Section II lists the new chemicals and metals (not on the September alert).  Also provided is some explanation for the shortage and geographical information.  This blog attempts to list only actual shortage situations – those shortages that are being experienced during the period covered by the news releases.  Chemicals and metals identified in news releases as only being in danger of being in short supply status are not listed.

Section I. 

Graphite electrodes:  global; supply not keeping up with demand
Polyethylene:  United States; supply not keeping up with demand
      
Section II.   Shortages Reported in October not found on the Previous Month’s List

Magnesia:  Europe; production not keeping up with demand

Reasons for Section II shortages can be broadly categorized as: 

1.  Mining not keeping up with demand: none
2.  Production not keeping up with demand:  magnesia
3.  Government regulations: none
4.  Sources no longer available: none
5.  Insufficient imports: none
6.  Supply not keeping up with demand:  none