The economics of a chemical plant: costs, prices and profit

By the end you will be able to

• Explain why capital intensity, continuous operation, joint products and commodity pricing shape process industry economics
• Estimate a market's size and a product's price using end-use analysis, floor-and-margin pricing and import parity
• Scale and adjust a capital cost using the six-tenths rule, Lang factors, cost indices and location factors
• Build a cost of production from raw materials, utilities, labour and capital-related charges, separating fixed from variable costs
• Calculate payback, NPV and IRR from a cash flow table and identify the inputs that matter most

Contents

1. Part 1 What makes the process industries different

   A chemical plant is a machine for turning cheap, impure raw materials into products sold to tight specifications, around the clock, for decades. Before estimating any cost it helps to see the shape of the business: where the money is made, why plants are so large and expensive, why one feedstock often yields several products at once, and why most bulk chemicals are sold on price alone.

   • A process plant earns its living from the value it adds between raw material and product
   • Capital intensity and continuous operation reward size and full plants
   • Joint products and commodity pricing tie each plant to many markets
2. Part 2 Markets: sizing demand and forecasting price

   Sensitivity studies keep finding selling price and sales volume to be the inputs that move project returns most, yet both must be forecast years before the first sale. This part covers the main ways to size a market, how a price is built from a floor cost and a competitive margin, and why forecasts so often fail together.

   • Market size is estimated from end uses, trends, economic links and other countries
   • Price is a floor set by the best cost, plus a margin that competition erodes
   • Elasticity, lead times and the investment cycle make forecasts err together
3. Part 3 Capital cost: what the plant costs to build

   Capital is the cost that cannot be undone. Once a plant is built the money is sunk, so the estimate made before sanction carries great weight. This part covers the kinds of capital, the classes of estimate, scaling from known plants, adjusting for time and place, and factoring from the cost of equipment.

   • Capital comes in four kinds, and estimates come in classes of accuracy
   • The six-tenths rule scales cost with capacity, and the exponent depends on the flowsheet
   • Cost indices and location factors move an estimate through time and across borders
   • Factoring from purchased equipment builds the plant cost from its flowsheet
4. Part 4 Operating cost: what each tonne costs to make

   Operating cost is paid every year the plant runs, and its level per tonne decides whether a plant survives a downturn. Brennan builds it from a simple model with four blocks: raw materials, utilities, people and capital-related charges. This part sets out the model and the fixed and variable split, gives typical figures for each block, and compares cost sheets.

   • A four-term model separates performance from prices, and fixed from variable cost
   • Raw materials and utilities usually dominate, and their prices depend on place
   • People, maintenance and overheads are estimated by counting and by factors
   • A cost build-up shows which term controls the business
5. Part 5 Profitability: does the project earn its capital back?

   Markets give revenue and the estimates give costs; profitability evaluation brings them together over the life of the plant. Brennan's method is the cash flow table: money out during construction, money in during operation, tax in between, then discounting to allow for the time value of money. This part builds the measures, works through his sulphuric acid example, and identifies which inputs matter most.

   • Return on investment is quick, but cash flow is the real test
   • Discounting turns a cash profile into payback, NPV and IRR
   • Worked example: a sulphur-burning sulphuric acid plant
   • Sensitivity analysis points to price and volume first, then capital
6. Wrap-up Key terms, try it in the table, final quiz, sources