It should be noted that, in this instance, the differences between past and future conditions are more marked than often is the case. Under Government ownership the plants have been operated as an integrated unit. Butadiene and most of the styrene have been charged into the copolymer plants at cost of manufacture. The selling price of GR-S and butyl has been arbitrarily fixed by the Government. Under private ownership most of the butadiene and copolymer plants will be operated as single units; in some cases, the butadiene plant will be operated in conjunction with the adjacent copolymer plant; all plants will be operated on a profit-making basis. Selling prices of butadiene and synthetic rubber will be fixed by free market conditions. Each copolymer plant will probably produce a greater diversity of products. In the calculations, ranges of prices and costs were assumed, and several valuations of each plant were made based on varying sets of assumptions. The following table shows analyses on a unit basis of typical butadiene and copolymer plants and indicates the relative importance of each element of cost. The following comments summarize the important assumptions made and the reasons therefor: GR-S and butyl selling prices : The assumed selling price of standard GR-S and butyl was 23 cents per pound f. o. b. producing plant, the current Government selling price. Raw materials: Butadiene and butyl plants: All prices f. o. b. producing plant. Yields were based on performance of recent past at each plant. Normal butlyenes and isobutylene in BB stream were priced at from 13 to 15 cents per gallon, based on the alternate use value of 115/145 aviation gasoline, the most valuable and largest other use for butylenes. This price range is less than most of the Government's current purchase contracts and reflects the recent decline in the price for 115/145 avgas paid by the Government, the principal purchaser. Butane at Borger was priced at from 5% to 6 cents per gallon based on its use in liquefied petroleum gas. Copolymer plants: Butadiene was priced at from 14 to 15 cents per pound at which prices adequate profit would be attained by the butadiene plants. Styrene was priced at from 17 to 18 cents compared to the present quoted market of 18 cents. Styrene plant: Benzene was priced at 43 cents per gallon and propane at 4.3 cents, which prices are about the present cost to the Government. Conversion costs were based on the performance of the recent past. Depreciation rates used were 7% and 10 percent of the purchase price which assumes a remaining life of assets purchased of from 13% to 10 years. Administrative, selling, and research and development: Butadiene plants, 31⁄2 percent of sales. Copolymer plants, 41⁄2 and 6 percent of sales. Insurance: Government is self-insured. To allow for insurance other than minor insurance now carried by the Government, a cost of $0.75 per $100 of value was allowed, based on the advice of a leading insurance agency. 55066-55-No. 10-2 Interest: To allow for the 4 percent interest on the declining balance of the mortgage, 2 percent on the total purchase price was allowed. Federal income tax: Calculations were made on the basis of 52 and 47 percent. Other factors affecting valuation : Rated capacity: The basis for establishing the rated capacity was the past record of production adjusted for any recent additions to the facilities. Rate of operations: Copolymer plants: It was assumed that average annual production of a period of years would be 80 percent of the rated capacity. At Los Angeles operation at 67.4 percent of rated capacity was assumed because of the limitation in supply of butadiene from the adjacent plant when operated independently of the El Segundo plant. A lower rate of production is justified in view of the possibility that a large part of the present consumption in the area (that going to the Big Four fabricating plants) may be supplied from the plants in the gulf area owned by the Big Four. Butadiene plants, it was assumed, would operate at 80 percent of capacity except at Lake Charles, Baton Rouge, and Torrance where 100 percent operation would be required to supply the adjacent copolymer plants when producing at the assumed rate. In Styrene plant, it was assumed, would operate at 70 percent of capacity. using this figure consideration was given to the low rate of operation at the Los Angeles GR-S plant and the present overcapacity of all styrene plants. Butyl plants, it was first assumed, would operate at 85 percent of capacity in view of the large assured outlet for inner tubes. After the changeover to tubeless tires, which require less butyl, the figure was reduced to 80 percent. WORKING CAPITAL Butadiene plants: Working capital requirements were assumed at 12 percent of sales. GR-S plants: 12 and 18 percent of sales. In the case of the Borger plant, a calculation was made on the basis of 24 percent of sales because of the fact that the operator of this plant will have no captive market, and warehousing of many types of GR-S near fabricating areas will be required. Butyl plants: 12 and 18 percent of sales. Styrene plant: 12, 18, and 24 percent of sales. RATE OF RETURN Studies by SEC, FTC, and private banks show a wide variation in average net profit over a period of recent years as a percent of total invested capital. Variation is found between different types of industries and between companies of one industry. Based on these studies, calculations were made on the basis of capitalizing estimated average future earnings at 12% and 10 percent. In addition to estimated earning power, the Commission considered such other factors as the proposals received, replacement costs, depreciated values, justifiable deductions for excess wartime building costs, possible obsolescence, other miscellaneous pertinent items, and, finally, the important element of how much the buyer was willing to pay. The early acceptance of the Commission's views as to values by several of the buyers was useful in negotiating other initial bids upward. Finally, the differences between the buyer and seller were reconciled in the course of long negotiations by the element of give and take. The sale of the alcohol butadiene plant to Koppers Co., Inc., presented a singular problem, as fully disclosed in the Commission's report, and the foregoing discussion is accordingly not applicable to that particular case. Question No. 8 What agreements or public announcements have been made by probable purchasers with respect to the sale of inventories on hand at the transfer date, including availability to small business and price? Answer. The Commission has been furnished statements as follows by the prospective purchasers regarding their plans for sales of inventory on hand at the transfer date. Direct quotations are from letters or telegrams to the Commission unless otherwise indicated. 1. American Synthetic Rubber Corp.: "Specifically with regard to the inventories which will be on hand at takeover date, it is our intention to sell these inventories at the same prices at which they are billed to us by the Government, with the freight cost of shipping such inventories from their existing locations to the customers' plants to be borne by the customer. "It is estimated that our share of these inventories will amount to approximately 2,700 tons, and it is estimated that we should have approximately 2,000 tons available for sale to users outside of our own group of stockholders." 2. Copolymer Corp.: The Commission was advised by telephone that the amount of inventory to be purchased by this company is so small in comparison with the constituents' needs that the constituents will consume it. The following is quoted from a subsequent letter: "While the Copolymer Corp., consisting of seven constituents, all of whom are comparatively large users of synthetic rubber, did not and does not know now just what the inventory will be, nevertheless the constituents have agreed to take whatever portion was allocated to Copolymer and at the prevailing Government price in order to have a smooth transition to private industry. By Government price is meant the present Government consumer selling price." 3. Goodrich-Gulf Chemicals, Inc.: "As Goodrich-Gulf has stated before, we will have a substantial volume of rubber to offer for sale on the open market. It is our intention to make this rubber available to both large and small consumers." The following is from a letter sent to approximately 300 rubber consumers: "This is to advise you the inventory will be purchased at the official FFC quoted price for each type of GR-S acquired, and will be offered for resale by GoodrichGulf Chemicals, Inc., at the acquired price." 4. Phillips Chemical Co.: "Phillips Chemical Co. has long been offering synthetic rubber to the small rubber companies on the basis of contract form attached." (Basically the same contract as that attached to Phillips proposal except that the third and fourth sentences of section 3 have been deleted, thus denying to Phillips any right of escalation of rubber price on the basis of the increase in its negotiated purchase price for the plant above its original proposed amount.) "The average transportation cost to us will be about 1.5 cents per pound, bringing our f. o. b. plant realization to 23.5 cents per pound plus the labor escalation which, if unchanged from the January 1955 preliminary index, would result in a delivered cost to the customer of 25.1 cents per pound and an average f. o. b. Borger price of 23.6 cents per pound. "It is our intention to sell the inventory acquired from Federal Facilities Corporation at the same price as newly produced rubber.” (As described above.) "It should be noted that upon learning of the Bureau of Labor Statistics average hourly earnings index in SIC group 29 for February 1955, the Phillips delivered price to its contract customers will be fixed for the 12 months following the date of start of private operation. We have felt that the naming of a firm price for synthetic rubber which would prevail for the first 12 months of private operation would be a stabilizing influence, would permit our customers to compute their raw material costs on a known basis, and would be advantageous to all of the rubber processors buying from Phillips as well as to the end users of their products. Thus, Phillips' fixed price under a 12 months contract should not be initially compared with a spot price or a price subject to a quarterly change quoted by others. The weighted average prices paid by the rubber users for the first year will, of course, be more revealing when they are known. "It will be noted that should Phillips make any general reduction in synthetic rubber prices, all of the contract buyers will receive the benefits. If the prices were increased after the end of the first year, the customers may terminate. The customers may also terminate upon receiving lower bona fide prices after the first year, if Phillips does not meet them." 5. Goodyear Synthetic Rubber Corp.: "Goodyear expects to make available to small users and others at least the same proportion of inventories purchased as of the transfer date as the capacity of the plants purchased by Goodyear represents to the total capacity sold, and at competitive prices. It is anticipated that prices will be about the same as heretofore existing under Government operation plus actual freight." 6. Shell Chemical Corp.: The following is quoted from a letter sent by Shell to several hundred potential customers in the Western States: "We thought you would be interested to know that in bidding on the Los Angeles facilities, we have visualized ourselves as future marketers of GR-S products primarily in the plant's natural trade area, i. e., the Western States. We are happy to advise you that your needs for our products will be our primary concern and that it will be only after making every reasonable effort and provision to secure your business in the Western area that we plan to offer our GR-S products for sale elsewhere. "Serving the Western GR-S market means serving a large number of accounts varying widely in size and type of GR-S requirements. We plan to do everything in our power to meet these varying needs on terms and conditions of sale which are fair to all, big and small, and in keeping with the best industry practices. We know that, among other things, you will be interested in prices, and we are pleased to notify you now that on acquisition of the GR-S plant, we plan to offer the available copolymers at the f. o. b. plant prices in effect for Government sales, plus only actual freight to your point of consumption, equalized if advantageous to you with a closer manufacturing plant." 7. Enjay Co., Inc.: "On February 2, 1955, we addressed a letter to over 1,000 different rubber fabricators, representing both small and large businesses, advising them of our plans for marketing butyl rubber. Among other things, we advised that it is our intention at this time to sell present grades of butyl rubber on the basis of 23 cents per pound, f. o. b. the plants in carload lots. "You can see from the above that we are making this offer without discrimination to small and to large rubber consumers. "You will also remember that at the time the proposals for the purchase of the Baton Rouge, La., and Baytown, Tex., butyl plants were filed by Esso Standard Oil Co. and Humble Oil & Refining Co., respectively, each proposal included a letter from Enjay Co., Inc., in which Enjay agreed to offer to small-business concerns, on the same terms and conditions as to large-business enterprises, at. least the same proportion of the butyl so acquired by it as RFC sold to smallbusiness enterprises during the years 1953 and 1954. In addition, and as pointed out in the above, we are offering butyl rubber at exactly the same price as the Government is now selling the material." 8. Humble Oil & Refining Co.: "The present market price of butyl rubber, as established by Federal Facilities Corporation, is 23 cents per pound. Public announcement has already been made that if Humble is the purchaser of the Baytown butyl plant, sales of butyl to the trade would be made initially at a price of 23 cents per pound. "When submitting its bid on the Baytown butyl plant, Humble outlined in detail its position concerning sales of butyl to small business concerns. It would plan to adhere to this same position in disposal of the butyl inventory.” 9. Texas-U. S. Chemical Co.: The Commission was advised by telephone, with confirming letter to follow, that Texas-U. S. plans to offer the inventory it purchases from FTC in the same proportions as its contract commitment, 20 percent to small businesses and other users. The offer will be made at the price for which the GR-S is purchased from the Government plus transportation and any handling costs the seller might incur. Texas-U. S. has no intention of realizing a profit on this GR-S. 10. United States Rubber Co.: The Commission was advised by telephone, with confirming letter to follow, that U. S. will sell its inventory of GR-S according to the same percentage pattern set out in its contract. The contract allots 50 percent to 60 percent for small businesses and other users. This GR-S will be sold at cost plus freight and handling; no profit will be realized. 11. The Firestone Tire & Rubber Co.: The Commission was advised by telephone, with confirming letter to follow, that Firestone will make available to small businesses 20 percent of the inventory it purchases this is the same percentage its contract commits it to make available out of private production. The inventory GR-S will be sold at the price at which Firestone purchases it from FTC. This is a basic price of 23 cents per pound f. o. b. plant site for rubber at the plants. Rubber in public warehouses will be priced basically at 23 cents per pound plus freight, which will not exceed in total 1.1 cents per pound. Question No. 9: What is the nature of the public announcement by the Standard Oil Co. (New Jersey) that it will license any company to manufacture butyl rubber, including amount of fee to be paid per pound produced? Answer. The RFC report of March 1, 1953, regarding disposal to private industry of the Government-owned rubber producing facilities stated that Standard Oil Co. of New Jersey, which controlled the basic butyl patents, had represented publicly that it would fully license butyl production on a reasonable royalty basis and would make available to any licensee its technical knowhow in the field of plant design and butyl production (p. 27). Subsequent testimony to like effect was given by Standard's representative in the congressional hearings on disposal legislation in 1953. A reiteration of Standard's position was contained in a letter to RFC of November 19, 1953, which was made available to the Commission at that time, and the Esso Standard Oil Co. proposal of May 26, 1954, for the purchase of the Baton Rouge butyl rubber plant sets out the basis whereunder butyl licenses are available from Standard, including the royalties payable. (a) Butyl rubber: Standard Oil Development Co. and Jasco, Inc., hold patent coverage on substantially all features of the butyl rubber plants. In addition Standard Oil Development Co. is the owner of confidential technical information presently used in the plants under license, due to the fact that the butyl rubber process was invented and developed in the laboratories of Standard Oil Development Co., and that Standard Oil Development Co. made the process designs from which the two plants were engineered and constructed. "The butyl rubber patents of these two companies covering inventions made up to June 6, 1950, are available to a purchaser of a Government plant on the terms set out in the agreement between Standard Oil Development Co., Jasco, Inc., and Rubber Reserve Co., dated May 15, 1942, which provides for a patent royalty of 3 percent of the sale price of the rubber and an additional limited charge for any technical information which the purchaser wants to obtain and could use in operating under the licensed patents. "Standard Oil Development Co., having continued its research to improve butyl rubber as a product, the design of plants for its production, and the application of butyl rubber to various uses including tire carcasses, has acquired or applied for numerous patents based on inventions made since June 6, 1950, which would not be included in the license heretofore referred to. They are, nevertheless, available under license from Standard Oil Development Co. "Standard Oil Development Co.'s royalty rate for all its butyl rubber patents (about 150 patents) and commercially useful technical information is, on a running royalty basis, 1 cent per pound of butyl rubber with escalator, and on a paid-up basis, $120 per long ton of annual capacity. Part of the running royalties paid can be used as a credit in acquiring a paid-up license. Standard Oil Development Co. has issued such licenses to Petroleum Chemicals, Inc., and Goodrich-Gulf Chemicals, Inc., and has offered them to the numerous other companies that have inquired about butyl rubber licenses. "The royalty rate of Jasco, Inc., for licenses under all its butyl rubber patents (about 60 patents) is 11⁄2 percent of the sale price of the butyl rubber. Jasco has issued such a license to The B. F. Goodrich Co. and has offered them to the numerous other companies that have inquired about butyl rubber licenses." Question No. 10 On the basis of the sales price for the butadiene plants and the market price for styrene, what is the Commission's opinion as to the contemplated f. o. b. price per pound for GR-S (a) For the first year after the sale? (b) For the next 5 years? Answer. The Commission believes that the selling price for standard GR-S f. o. b. producing plant for the first year after the sale will remain at approximately 23 cents per pound. The price for the succeeding 5 years will depend upon a number of factors including general economic conditions and competition from natural rubber. The Commission is therefore in no position to offer an opinion as to probable future prices for such 5-year term. The Louisville, Akron, and Naugatuck plants probably will sell their products at somewhat higher levels because of freight facts and because of the latex and special rubbers which these plants may be expected to produce. The average selling price at the Los Angeles plant may vary depending on the proportions of its production which are absorbed on the Pacific coast and Mountain States and in other parts of the United States. Questions Nos. 11 and 12 11. How much depreciation cost has actually been covered into the Treasury since the inception of the rubber program? 12. How much interest is charged to the program by the Treasury on money loaned or advanced to the program, and how much of this amount has been covered into the Treasury? |