Committee Reports > List of Committees > Joint > 1979 > Committee on Commercial State-Sponsored Bodies > Report No. 05 - Ceimicí Teoranta

FIFTH REPORT

CHEMICÍ TEORANTA

I INTRODUCTION

1. The Industrial Alcohol Act, 1938 provided for the establishment of a company, called Monarchana Alcoil na hEireann Teoranta, to manufacture industrial alcohol. Provision was made in the Act for the Minister for Finance to acquire or underwrite the issue of shares in the company up to a maximum of £500,000. The Act also provided that the petrol distributing companies, operating within the State, should compulsorily take from the alcohol company allotments of industrial alcohol in proportion to the quantities of petrol which they cleared through the Customs or Excise authorities from time to time, at a price to be fixed by the Minister for Industry and Commerce, with the consent of the Minister for Finance.

2. The Industrial Alcohol (Amendment) Act, 1947, changed the name of the Company to Ceimici Teoranta and extended the objects of the Company to manufacture, under Ministerial licence, any chemical product not being manufactured by private enterprise within the country. Provision was made in the Act that imports of any chemical products such as the company might make could be restricted by licence.

3. The paid up share capital of the company has continued unchanged since 1938 at £495,767. all subscribed by the Minister for Finance who has the power to appoint directors of whom there are at present seven. The Minister for Finance may also guarantee any debentures issued by the Company and may require the Company’s accounts to be drawn up in such manner as he may require.

4. When the Company was originally established, the feedstock for the production of industrial alcohol was potatoes which were in surplus in Counties Donegal, Mayo and Monaghan and unmarketable in the Cooley peninsula of Co. Louth because of scab. Accordingly, five distilleries were set up. two in Co. Donegal at Carndonagh and Labbadish, one at Cooley, one at Corroy in Co. Mayo and one at Carrickmacross. Co. Monaghan. In the course of years, changes in the Company’s activities and in the availability of the original feedstock have reduced the number of distilleries to two, one at Cooley and one at Carndonagh. A plant for the manufacture of glucose has been substituted at Corroy. A plant for the manufacture of potato starch was installed at Labbadish but is now idle: and the distillery at Carrickmacross was disposed of.

5. The Company’s current activities consist of the distillation of alcohol at its two distilleries in Cooley and Carndonagh and the manufacture of glucose at Corroy. About 1970 the Company commenced the production of potable alcohol for sale to companies in the alcoholic drinks business that did not have distillation plants of their own, and at the present time more than half of the Company’s basic alcohol production is of the potable variety.

6. The total employment in the Company now stands at 141, mostly men, consisting of 50 at Corroy, 33 at Carndonagh, 33 at Cooley, 2 at Labbadish and 23 at the Company’s headquarters in Dublin. It ranks as the major employer in the Cooley and Carndonagh areas where the two remaining distilleries are located.

II FINANCES

7. The profitability of the Company has fluctuated widely. In the five years ended on 31 December 1978, an overall loss, after tax, of £121,693 was incurred. In only one of these years, 1975, was a dividend paid to the Exchequer. The five-year loss was due to a deficit of £525,792 which arose in the year to 31 December 1977, and which represented 12.1% of the value of the products of all kinds sold by the Company in that year. This was an alarming situation especially in circumstances in which the Company has an assured market for one of its products (industrial alcohol) the price for which is fixed by the Minister for Industry, Commerce and Energy.

8. The Company attributes this loss mainly to the glucose side of the business which is carried on at Corroy, and in particular to its inability, under the price control arrangement which it had at the time with the National Prices Commission, to recover quickly enough increases arising in the costs of its raw material, maize starch. Although the Profit and Loss Account of the Company showed a recovery to an overall trading profit of £150,756 in the year to 31 December 1978, a trading loss on its glucose operations was again recorded to the amount of £83,801.

9. The Joint Committee will return to the matter of the Company’s glucose operations later in this report, but feels it necessary to say here that it finds it difficult to understand how the pricing system, based on a practice of forward sales contracts, should have been allowed to continue to run up such substantial losses over a long period of time. The Chairman of the Company in his evidence concerning that pricing system stated, “It probably should have been broken off about 1974 because, once inflation started to rear its ugly head, price increases became almost monthly. We could not recover price increases until the following year”.¹ However. Ceimici reported to the Committee that in Mid-1979 revised. price control procedures for glucose were approved and that the Company is now free to charge an economic price for glucose if the market can stand it.² The Joint Committee was pleased to hear of that change, but the fact remains, unfortunately evidenced by financial losses, that for a period lasting a number of years (during which the market price of maize starch could not be anticipated because of inflationary pressures), the Company persisted in a policy of selling glucose on forward contracts at an apparently fixed price.

10. The Joint Committee also noted that the auditor’s certification of the 1978 accounts contains a note that these have been prepared under the historical cost convention. It recognises that this has become somewhat standard practice and that the accounts of many other companies both public and private are prepared in the same manner, but it does raise the question whether, in striking the profit and loss figure, adequate depreciation charges have been made to enable the Company to maintain its assets at their present level. The Joint Committee recommends that the Company should examine the feasibility of increasing the levels of depreciation used in its accounts, over and above the levels calculated by reference to the historic cost of assets.

III ALCOHOL

11. The term “industrial alcohol” is defined in the 1938 Act as being ethyl alcohol, whether denatured or not, which has been distilled or rectified to a strength of not less than forty degrees overproof by a process other than the pot still process. It is believed that this definition was adopted at the time, so as to relieve the existing distillers of whiskey from having to apply for a licence to manufacture under the Act. In practice the term has come to be applied, in the main, to the Power Methylated Spirits which the company produces for mixing with petrol, and for convenience in this report that meaning will be given to the term “industrial alcohol”. The Company also sells alcohol as a base mainly for alcoholic drinks, and this will be referred to in this report as potable alcohol. The Company have submitted to the Department of Industry, Commerce and Energy a proposal for an alteration in the Company’s Memorandum of Association to change the term “industrial alcohol” into “alcohols”.³ This would apparently require an amendment to the 1938 Act. from which the Memorandum of Association derives.

IV INDUSTRIAL ALCOHOL

12. As stated earlier, on its inception the Company used potatoes as the feedstock for its production of industrial alcohol. Although the potato surplus was a significant factor that influenced the establishment of an alcohol industry, the prime motivation was one of industrial development. It was inevitable that the decline in the availability of potatoes and the difficulty of arranging contracts for the growing of potatoes of suitable quality should result in a change of raw material. At present, molasses imported from abroad are used for the production of both industrial and potable alcohol. The two distilleries still in use are in operation for almost forty years and the only significant change to them appears to have been a new unit for potable alcohol production installed in the Cooley distillery in 1977.⁴

13. The sale of industrial alcohol to the petrol distributing companies is still governed by the provisions of the 1938 Act. The petrol companies must inform Ceimici Teo. of the amounts of petrol cleared by them for duty purposes, and accept from Ceimici Teoranta an allotment of industrial alcohol in proportion to the quantities of petrol so cleared. There is thus a captive market for Ceimici’s production of industrial alcohol and this practice has not been questioned by the European Commission under any Common Market regulations, although the Company’s chairman in his evidence to the Joint Committee appeared to doubt that these legislative provisions could be sustained if challenged.⁵

14. The Minister for Industry, Commerce and Energy is empowered by the legislation to fix the price, with the agreement of the Minister for Finance, to be paid by the petrol companies. While the price paid for molasses by the Company may fluctuate, it is to be expected that this side of the Company’s business should show a profit margin.

15. The quantity of industrial alcohol sold to the petrol companies represents only a very small fraction of total petrol sales, approximately 0.3%. Its contribution to resolving the energy problem is, therefore, not at present significant, and the price of this alcohol is notably dearer than that of petrol. The Joint Committee will return to this matter later in the report when considering the future aims of the Company.

V POTABLE ALCOHOL

16. Potable alcohol produced by Ceimici Teoranta is sold to certain spirit manufacturers and for use in the making of vinegar and some pharmaceuticals. There has been a rapid growth in this segment of the Company’s business and this is ascribed to the sales success of a particular liqueur for which the Company’s alcohol is used. In fact, this increased demand requires the Company to import a sizeable quantity of crude alcohol which it refines to supplement its own basic production of industrial alcohol. Of the Company’s entire volume of alcohol sales, potable alcohol now represents some 38%.

17. Unlike the situation of its sales of industrial alcohol which the petrol companies are obliged to purchase, the sale of potable alcohol has to be made in a competitive market. Publicity has already been given to the production of alcohol by a private company in Ireland (Carbery Milk Products Ltd.) on a scale comparable to that of Ceimici Teoranta. It is noteworthy that the private company uses as its base for alcohol a derivative of the whey available to it as a by-product of its other operations. The fact that Ceimici Teoranta works on imported molasses as a feedstock must occasion continuous study as to how the viability of this part of the Company’s business can be sustained.

VI GLUCOSE

18. The glucose plant operated by Ceimici Teoranta at Corroy has at present a production capacity of 14/16,000 tons a year. As noted earlier, in the chapter dealing with the Company’s finances, the glucose operation has of recent years been a loss maker. This is partly blamed on the age and inadequacy of the factory equipment which was bought second-hand a quarter of a century ago, and at the present time an overhaul of this plant is being made at a cost of £1.3 million towards which the Industrial Development Authority will give a grant of £455,000.

19. The Company expects that this investment in refurbishing the glucose plant will greatly improve the handling and conversion costs within the plant and cut the energy cost.⁶ Production capacity would be immediately increased to 17,500 tons, and it is anticipated that with a change in the shift work system that is being negotiated with the trade unions, production could be pushed up to 25,000 tons.⁷

20. The buyers of glucose are the manufacturers of sweets, biscuits, chewing gum, etc. and notwithstanding the difficulties which some of these buyers are experiencing from increased imports of their kinds of products, Ceimici Teoranta remains confident that the glucose market will continue to grow in the future at the 8-11% annual growth rate that it has shown in the past.⁸ With regard to exports, the Managing Director of Ceimici told us: “We currently supply 30% of the glucose market in the North of Ireland”.⁹ The Committee understands that the Company’s exports of glucose to Northern Ireland amount to only about 300 tonnes per annum.

21. The raw material used by the Company for its production of glucose is maize starch, which is imported. Originally, potato starch was used but, as noted earlier, the potato starch plant at Labbadish (Donegal) was closed down in 1971 for lack of raw material and remains idle. The cost of the maize starch used by the Company is calculated to represent 75% of the sale value of the glucose produced. This leaves a very tight margin to cover operating costs and to make a profit and it highlights the purchasing skills that have to be exercised by the Company in buying its starch. This is accentuated by the fact that the Company’s competitors operating from other EEC countries produce both the starch from the maize and the glucose from the starch, with obvious opportunities to weight their costings on the different operations to their own advantage. As the basic commodity, maize, is an agricultural one, the operation of M.C.As. comes into play. This should have the effect of evening out between, say, Britain and Ireland the cost of glucose based on maize starch that is traded between the two countries. The Company is not satisfied that this is in fact the case and feels that British glucose imported here is to some extent a subsidised commodity, but it may well be that any benefit to the British producer is due to the purely commercial advantage of manufacturing the glucose from the ground up, compared with Ceimici’s reliance on a semi-manufactured and high cost materíal.¹⁰

VII IMMEDIATE DEVELOPMENT PLANS

22. At the moment the Company is engaged on the scheme, already mentioned, for the refurbishing of the glucose plant at Corroy at an estimated cost of £1.3 million. Allowing for the sanctioned Industrial Development Authority grant of £455,000, the Company would need to raise the balance of £845,000 by way of loans or credits. This will make a very considerable interest charge on the Company’s resources. At the end of 1977, the Company’s bank overdraft and short term loans amounted to £645,001, and although these had been reduced to £356,339 by the end of 1978, they still represented a high loan gearing. The new investment figure relates solely to the glucose factory. The two distilleries, according to the Company, also require modernisation and reequipment as an immediate issue.¹¹ It seems clear that if this is to take place in addition to the new expenditure at Corroy, an overhaul of the Company’s financial structure would be called for and this would require legislation.

23. Ceimici Teoranta has, in the past, investigated the possibilities of a joint venture with an outside partner to manufacture maize starch here. It was not found practicable to establish such a venture because of the relatively small requirements of the Irish market, and because exports would have been confronted with an over-capacity in Europe. It has also been considering the possibility of an alternative to maize starch as a raw material for its production of glucose. A return to potato starch is ruled out on the grounds of cost. The Company has, however, been keeping in touch with the use, elsewhere, of wheat starch for the making of glucose, and has in fact processed a consignment of wheat starch through its Corroy plant.¹² The utilisation of a starch based on a cereal that can be grown in Ireland is an attractive idea, but it raises the question of the economics of such a plant for the reasons already mentioned about the projected maize starch venture. The Joint Committee thinks that while the immediate refurbishing of the Corroy plant might give the extra productivity to eliminate or at least reduce the recent loss-making in glucose production, the margin of value added to the raw material is so narrow as to leave the operation continually vulnerable, and that without a fundamental change in the processes of manufacture, the Company’s production of glucose gives no assurance of a sustained profitable return on the capital put into it.

24. On the alcohol side, the only immediate plans of the Company relate to improving the equipment of the distilleries at Cooley and Carndonagh. The Company is alive to the necessity of improving and adapting its growing output of potable alcohol to the requirements of existing and potential customers. As in the case of the glucose plant, an adjustment of the shift-work system is contemplated. The question of finding a native raw material for alcohol production, including the alcohol used as a petrol mix, touches on longer term energy development and is commented on later.

VIII LONG TERM DEVELOPMENTS

(a) Manufacture of Chemicals

25. The Industrial Alcohol (Amendment) Act, 1947 extended the objects of Ceimici Teoranta to include the exploration of the possibilities of manufacturing any chemical substance, and to undertake the production of any chemicals, under licence, which were not being manufactured to any considerable extent by private enterprise here. The Act empowered the Government to restrict the importation of chemical products of a kind that the Company might make, but it is doubtful if such restriction could be sustained at the present time having regard to our obligations under the Treaty of Rome.

26. It cannot be said that while these provisions were operable the Company emerged as an initiator of new chemical development in the State. It is fair to point out, however, that the 1947 Act did not in any way increase the share capital of the Company or otherwise provide funds for the research and experimentation that would have been necessary for the Company to carry out its new mandate. In the years since the Act was passed, other national bodies have been established for research and promotion of industrial projects, and many enterprises in the chemical field have been established here.

27. Nevertheless, development in the field of chemical products remains a statutory object of the Company. It has been giving attention to the possibilities of production of fine chemicals for such as the pharmaceutical industry.¹³ It seems to the Joint Committee that care must be taken by the Department of Industry, Commerce and Energy to prevent the overlapping of research and promotion activities by different bodies in this field.

(b) Alcohol

28. Aside from some immediate proposals to modernise the two existing distilleries, Ceimici Teoranta is considering as a longer term measure the possibility of extending production of both industrial and potable alcohol based on native raw materials.¹⁴ As mentioned earlier in this report, a private enterprise in the State is already producing alcohol from a by-product of its native agricultural raw materials. It is accepted that a much greater percentage of alcohol for mixing with petrol could be used than is at present the case, as far as compatibility with present car engines is concerned — Ceimici informed the Committee that technically the percentage could be increased from 0.3%, as at present, to 10%.¹⁵ However, the amelioration of the energy problem is a matter beyond the scope of this report, and although Ceimici Teoranta has long experience in the supply of alcohol to the petrol trade, the Joint Committee feels that this matter is one which needs to be considered on a wider basis than merely as one of natural development by Ceimici Teoranta as it is at present constituted.

IX CONCLUSION

29. The Joint Committee is conscious of the good work done by the Company in its earlier years in utilising a surplus potato crop for conversion into industrial alcohol and must pay tribute to the adjustments which the Company made when the original feedstock disappeared. The Joint Committee has carefully examined the three different operations on which the Company is now engaged viz. industrial alcohol, potable alcohol, and glucose, and the financial results of these operations over the past five years as analysed in Appendix 1. For the reasons set out in the separate chapters of this report dealing with these three commodities, the Joint Committee feels that in each case, the viability of the operation is left open to doubt. It is of the opinion that further State investment in the Company should not be made without a fundamental reappraisal of the Company’s role. The Joint Committee recommends that such a reappraisal be undertaken by the Department of Industry, Commerce and Energy as a matter of urgency. The Joint Committee proposes to have another look at the Company within the next twelve months.

10 October 1979.

¹See Evidence (Question 3).

²See Evidence (Question 4 to 7)

³See Appendix 2 (Chapter VI)

⁴See Evidence (Question 101).

⁵See Evidence (Question 115).

⁶See Evidence (Question 67).

⁷See Evidence (Question 69).

⁸See Evidence (Question 32 and 33).

⁹See Evidence (Question 41).

¹⁰ See Appendix 2 (ChapterIII) Appendix 3 and Evidence (Questions 49-53).

¹¹ See Appendix 2 (Chapter IV).

¹² See Evidence (Questions 60-66).

¹³ See Appendix 2(Chapter V) and Evidence (Questions 80-85).

¹⁴ Appendix 2 (ChapterIV) and Evidence (Questions 105-108).

¹⁵ Evidence(question 93-94).