Having emphasized that viable production strategies today no longer depend exclusively on standardization and economies of scale, one can look more systematically for other sources of competitive advantage. In particular, we wish to consider 'returns to integration', or 'returns to internalization' (that is to say, 'closure') of the materials cycle.
The classical illustration of this strategy was the Chicago meat packers who prided themselves on recovering and finding markets for 'everything but the squeal' of the slaughtered animals. (See, for example, Siegfried Giedion's Mechanization Takes Command, Part IV, 1948, pp.213-40). The link between scale and integration is obvious: only a large-scale operator could invest in the various specialized facilities needed to produce various meat products from steak to sausage, lard (some of which was saponified to produce soap), pet-food, bone-meal, blood-meal, gelatin (from hooves) and even hormones from animal parts. Pig bristles became shaving brushes and hairbrushes, while the hides were tanned to make leather.
Coke, used in blast furnaces, offers another historical example. The earliest 'beehive' coke ovens were terrible polluters. However, the 'by-product' coking process, first introduced by Koppers, in Germany, changed this situation significantly by capturing both the combustible gas and other by-products of the coking operation. (Even the most modern coke ovens are not regarded as desirable neighbors, since there are still non-negligible emissions from leaks, dust and especially from the quench-water used to cool the red-hot coke.) High-quality coke oven gas became available near the Ruhr steelworks in the late 19th century. Its availability encouraged a local inventor, Nicolaus Otto, to commercialize a new type of compact 'internal combustion' engine - to replace the bulky steam engine (and its associated furnace, boiler and condenser) - to supply power for small factories. The Otto-cycle gas engines were quickly adapted to liquid fuels, higher speeds and smaller sizes by one of Otto's associates, Gottlieb Daimler. The Daimler engine, in turn, made possible the motor vehicle and the airplane.
By-product coke ovens also produced coal tar. Coal tar was the primary source of a number of important chemicals, including benzene, toluene and xylene, as well as aniline. Aniline was the raw material for most synthetic organic dyestuffs, the first important product of the German chemical industry. Coke ovens were also the source of most industrial ammonia, which was the raw material for both fertilizers (usually ammonium sulfate) and nitric acid for manufacturing explosives such as nitroglycerine.
The modern petrochemical industry is the best current example of systems integration: it begins with a relatively heterogeneous raw material (petroleum), which consists of a mixture of literally thousands of different hydrocarbons. The first petroleum refiners of the 19th century produced only kerosine ('illuminating oil') for lighting and tar for road surfaces and roofing materials. The lightest fractions were lost or flared; even natural gasoline had few uses (except as a solvent for paint) until the liquid-fueled internal combustion engine appeared on the scene in the 1890s. By the second decade of the 20th century the market for petroleum products had become mainly a market for automotive fuels; after 1920 this market expanded so rapidly as to create a need for 'cracking' heavier fractions and, later, recombining lighter fractions (by alkylation) to produce more and more gasoline. Heavier oils found uses in diesel engines, as lubricants, as fuel for heating homes and buildings, and as fuel for industrial boilers and electric power plants. Meanwhile, a great deal of natural gas was found in association with petroleum deposits, and a beginning was made on the long process of capturing, processing and utilizing this new resource.
By the 1930s, by-products of petroleum and natural gas process engineering began to find other chemical uses. In particular, ammonia and methanol were derived from methane, from natural gas. Then ethylene (produced, at first, by pyrolysis of ethane separated from natural gas) became cheap, as did hydrogen. This encouraged the development of a family of synthetic polymers, starting with polyethylene and followed by polyvinyl chloride. Natural gas liquids and light fractions of petroleum refining also became the basis of most synthetic rubber production (via butadiene). Propylene, from propane, is now second only to ethylene as a chemical feedstock. Another whole family of chemicals was created from benzene, also a by-product of petroleum refining. Phenol, the basis of polystyrene and phenolic resins, is a benzene derivative. Finally, the refining process has become a major source of sulfur.
Most of the organic chemicals and synthetic materials produced today are derived from one of these few basic feedstocks. A very sophisticated technology for converting a few simple hydrocarbon molecular structures into others of greater utility has arisen. Light fractions become chemical feedstocks. The heavier fractions, including asphalt, are the least valuable (per unit mass), but some products of the heavy fractions - like lubricants and petroleum coke - are very valuable indeed. It is fair to say that, today, there are scarcely any wastes from a petroleum refinery. There is a continuing trend towards adding value to every fraction of the raw material. While most petroleum products are still used for fuel, the fuel share is actually declining and the share of fuel for stationary power plants and space heating is declining quite fast. It is virtually certain that these 'low value' uses of petroleum will be displaced in a few decades by higher value uses without any intervention by governments.
To be sure there are other chemical families where by-products have been much harder to utilize. One example is biomass. Cellulose and cellulosic chemicals (such as rayon) are derived from wood, but about half of the total mass of the harvested roundwood - lignins - is still wasted or burned to make process steam. There are a few chemical uses of lignins, but no more than a few per cent of the available resource is used productively except as low-grade fuel for use within the pulp/paper plants.
The idea of converting wastes into useful products via systems integration has recently become a popular theme among environmentalists. The 3M company introduced a formal program, beginning in 1975, with the catchy title: 'Pollution Prevention Pays' or PPP. The Dow Chemical Co. has its own version, namely 'waste reduction always pays' or WRAP. Others have followed suit. These acronyms are not merely 'awareness raisers' to attract the attention of managers and staff; they also contain an element of generalizable truth. Unquestionably, it is socially and environmentally desirable to convert waste products into salable by-products, even though the economics may be unfavorable at a given moment of time. However, the economic feasibility of converting wastes into useful products often depends on two factors: (1) the scale of the waste-to-by-product conversion process and (2) the scale of demand (that is, the size of the local market).
For example, low-grade sulfuric acid is not worth transporting but it can be valuable if there is a local use for it. Thus sulfuric acid recovered from copper smelting operations is now routinely used to leach acid-soluble oxide or chalcocite copper ores; the leachate is then collected and processed by solvent extraction (SX) technology and electrolytically reduced by the so-called 'electro-winning' (EW) process. The combined SX-EW process was barely commercialized by 1971, but already accounts for 27 per cent of US copper mine output, and about 12 per cent of world output. (See, for instance, the chapter on copper in US Bureau of Mines Minerals Yearbook, 1989). Capacity is expected to double by the year 2000.
Similarly, sulfur dioxide, carbon monoxide and carbon dioxide are needed for certain chemical synthesis processes, but these chemicals cannot be economically transported more than a few kilometers at most. Hydrogen, produced in petroleum refineries, can be compressed and shipped but it is much better to use it locally. A hydrogen pipeline network has been built for this purpose in the Ruhr Valley of Germany. So-called 'blastfurnace gas' can be burned as fuel, but it is not economical to transport very far. There are numerous examples in the chemicals industry, especially. Closing the materials cycle can take the form of creating internal markets (uses) for low-value by-products by upgrading them to standard marketable commodities. (This often depends, incidentally, upon returns to scale, but only in a particular context.)
To summarize, there are significant potential returns to internalization of the materials cycle. For instance, the so-called 'integrated' steel mill (including its own ore sintering and smelting stages) is an example. It would not pay to produce pig iron in one location and ship it to another location for conversion to steel, for two reasons: (1) there would be no way to use the heating value of the blast furnace gas and (2) the molten pig iron would cool off en route and it would have to be melted again. Thus energy conservation considerations, in this case, dictate integration. The same logic holds for petroleum refineries and petrochemical complexes. In each case there are a number of low-value intermediate products that can be utilized beneficially if, and only if, the use is local. However, these examples of integration obviously require a fairly large scale for viability. This is in direct contrast to the strategy of 'end-of-pipe' waste treatment and disposal, which is normally practiced in smaller operations.
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