# The economics of a chemical plant: costs, prices and profit: Operating cost: what each tonne costs to make

Source page: https://www.materialinsights.org/learn/chemicals/plant-economics-costs-and-profit/p4/

[Understanding Chemicals](https://www.materialinsights.org/learn/chemicals/) / [Module 3: The economics of a chemical plant: costs, prices and profit](https://www.materialinsights.org/learn/chemicals/plant-economics-costs-and-profit/) Part 4 of 5

## 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.

### 4.1 A four-term model separates performance from prices, and fixed from variable cost

Brennan's simplified model gives production cost per tonne of product as:

C = sum of (R x r) + sum of (E x g) + (M x m)/QU + (k x I)/QU

R is tonnes of each raw material per tonne of product and r its price. E is each utility used per tonne and g its price. M is the number of employees and m the annual cost of each, including payroll overheads. I is fixed capital and k a factor for capital-related costs such as maintenance, insurance and property taxes. Q is annual capacity and U capacity utilisation, so QU is the output actually made.

The model separates two kinds of number. R, E and M are performance parameters, set by the technology and by how well the plant is run. The prices r, g and m are mostly set outside the company and depend on location. When a cost changes, the first question is which kind of number moved.

Raw materials and energy rise in step with output, so they are variable costs. Personnel and capital-related costs stay much the same whatever the output, so they are fixed. Per tonne, fixed costs are divided by QU, so a plant running at half capacity carries twice the fixed cost per tonne.

The model is approximate: electricity per tonne, for example, rises at low output because pumps and lighting keep running. Marginal cost, the cost of one more tonne, is usually far below average cost, and in many continuous plants is little more than the variable cost.

Data How the main costs are classified

| Cost | Fixed or variable | Cash or non-cash |
|---|---|---|
| Raw materials, catalyst and process chemicals | Variable | Cash |
| Utilities: fuel, electricity, steam, cooling water | Variable | Cash |
| By-product credits | Variable (negative) | Cash |
| Process labour and supervision | Fixed in modern plants | Cash |
| Maintenance, insurance, property taxes | Fixed | Cash |
| Plant overheads | Fixed | Cash |
| Book depreciation | Fixed | Non-cash |
| Interest or cost of capital | Fixed | Finance cost |

Wittcoff notes that labour was once variable (casual hire by the day) but a plant at 50% load now needs the same operators as at 100%.
 Source: Wittcoff (2004), Appendix 1 A note on cost calculations, pdf pp. 646-648  Worked example

#### Cooling water at full and part load

Brennan prices recirculated cooling water from a system costing $7.2 million that circulates 0.85 m3 a second. Make-up water at 3.5% of the flow and $1.20/m3 costs 4.2 cents per m3 circulated. Electricity at 0.6 kWh/m3 and $100/MWh adds 6.0 cents. Capital-related charges at 16% of fixed capital, $1.15 million a year spread over 26.8 million m3, add 4.3 cents. The total is 14.5 cents/m3. If a seasonal plant runs the system only 70% of the time, the capital share rises to 6.1 cents and the total to 16.3 cents.

- Brennan (2020), Ch 4 Operating cost estimation · pdf pp. 100-104
- Brennan (2020), Ch 6 Some examples in process economics · pdf pp. 161-162
- Wittcoff (2004), Appendix 1 A note on cost calculations · pdf pp. 646-648

### 4.2 Raw materials and utilities usually dominate, and their prices depend on place

Raw material use per tonne comes first from mass balances, then needs an allowance for real losses: off-specification product, evaporation, spills, purge streams and weather in open storage. Brennan's indicative consumptions include 0.57 t of methane per tonne of ammonia, 0.71 t per tonne of methanol and 3.2 t per tonne of hydrogen; 0.32 t of sulphur per tonne of sulphuric acid; and 1.68 t of salt per tonne of chlorine and caustic soda. Ethylene needs 1.24 t of ethane, 2.11 t of propane or 2.7 t of naphtha per tonne.

Utilities are estimated from energy balances too. Brennan adds about 20% to theoretical steam and cooling water figures for losses, and estimates electricity from the rated power of the running drives multiplied by operating hours. Electricity dominates electrochemical processes such as chlor-alkali and aluminium smelting, and is large in high-pressure processes like ammonia, where synthesis gas must be compressed.

Utility prices vary widely by place: in 2018 natural gas cost about US$3/GJ in the United States, thanks to shale gas, against about $9 in Japan, which imports liquefied gas.

The IEA shows why feedstock price so often decides where plants are built. Crude oil costs much the same everywhere, but natural gas prices vary by a factor of 4 between regions. Feedstock makes up 15-85% of the levelised production cost of HVCs, depending on route. Middle East ethane crackers were the cheapest source of HVCs in both 2010 and 2017, while Europe sits high on the cost curve for most primary chemicals.

Data Indicative prices of utilities for process plants (US$ 2018)

| Utility | Price | Comment |
|---|---|---|
| Natural gas | $3-8/GJ | About $3 in the US, $5-6 in Europe, about $9 in Japan |
| Steaming coal | $60-85/t |  |
| High-pressure steam (40 bara) | $10-16/t | Higher pressure costs more |
| Medium-pressure steam (15 bara) | $8-13/t |  |
| Low-pressure steam (5 bara) | $6-9/t |  |
| Electricity | $70-140/MWh |  |
| Town water | $0.7-1.8/t | Varies widely by location |
| Desalinated water | $1.0-4.0/t | Costs fell from 2015 to 2019 |
| Cooling water | $0.1-0.2/t |  |
| Nitrogen | $30-70/t |  |

 Source: Brennan (2020), Ch 4 Operating cost estimation, pdf p. 110 (Table 4.4)  In the data

#### Shale gas and the ethylene cost gap

The US shale gas boom pushed ethane prices so low after 2011 that ethane was often left in the gas rather than extracted. The IEA reports that the production cost gap between Middle East and US ethane crackers shrank more than threefold between 2010 and 2017. Brennan reports that ethane supplied 73% of US ethylene feedstock in 2017, and that US ethylene sold for about US$660 a tonne in 2016 against a global price of about US$1,000. A feedstock price advantage passes straight through the R x r term of the cost model.

- Brennan (2020), Ch 4 Operating cost estimation · pdf pp. 104-110
- Brennan (2020), Ch 2 Market evaluation and forecasting · pdf pp. 55-56
- IEA (2018), The Future of Petrochemicals, Ch 2 · pdf pp. 32-34

### 4.3 People, maintenance and overheads are estimated by counting and by factors

Personnel costs start with process operators. A continuous plant needs a shift roster, so the total number of shift operators is four to five times the number on duty at any time. Payroll overheads (leave, workers' insurance, payroll tax, pensions) add 30-50% to wages. Total personnel costs have typically been about three times process labour cost, so a poor count of operators distorts the whole estimate.

Staff numbers grow slowly with scale. Brennan's rule is that total personnel M is proportional to Q^a, with a of 0.3-0.4 for single-stream plants and 0.6-0.7 for parallel-stream plants such as aluminium smelters.

Capital-related costs are set as percentages of fixed capital. Maintenance runs at 2-11% a year, averaging 5-6%, higher for hot, high-pressure or corrosive service, and is roughly half materials and half labour. Insurance is 0.1-3%, averaging 0.5%. Depreciation spreads the capital over a life of typically 10-15 years for undifferentiated products. A capital recovery factor can replace it in a cost sheet: at 8% interest over 15 years it is 0.117 of capital a year.

Nonmanufacturing costs follow: selling expenses at 1-20% of manufacturing cost, research and development at 1-7% (about 3% on average) and corporate administration at 3-6%.

For quick estimates Brennan's factored method sets manufacturing cost = raw materials + utilities + (1 + kL) x process labour + kI x fixed capital, with typical kL of 2.8 and kI of 0.15. Total operating cost is then manufacturing cost x (1 + kC), with kC about 0.2.

Data Operating cost sheet for a 450,000 t a year naphtha isomerisation unit (Brennan's Example 6.7, A$ 2012)

| Item and basis | $ per tonne | $ million a year |
|---|---|---|
| Naphtha, 1.03 t at $1,000/t | 1,030.0 | 463.5 |
| Hydrogen, 0.015 t at $1,200/t | 18.0 | 8.1 |
| Catalyst make-up and minor chemicals | 3.7 | 1.7 |
| Credit for stabiliser off-gas | -6.0 | -2.7 |
| Raw materials, net | 1,045.7 | 470.6 |
| Utilities: 40 kWh power, 0.28 t steam, 10 m3 cooling water | 8.4 | 3.8 |
| Process labour: 3 per shift x 5 teams at $80,000, plus 40% overheads | 3.7 | 1.7 |
| Plant overheads, 80% of labour cost | 3.0 | 1.3 |
| Maintenance 4%, insurance 1%, property taxes 1% of $57m fixed capital | 7.6 | 3.4 |
| Fixed production cost | 14.3 | 6.4 |
| Nonmanufacturing costs, 2% of fixed capital | 2.5 | 1.1 |
| Total operating cost (excluding depreciation) | 1,070.9 | 481.9 |
| Selling price | 1,150 | 517.5 |

Raw materials are almost 98% of cost. At 80% utilisation fixed cost rises to $21.1/t but total cost only to $1,075.2/t.
 Source: Brennan (2020), Ch 6 Some examples in process economics, pdf pp. 168-171  Common misreading

#### Depreciation is not an outgoing payment

Brennan stresses that book depreciation is an internal provision for the falling value of the plant, not an out-of-pocket expense. It belongs in cost sheets and in return on investment, but cash flow analysis leaves it out, except through tax: the tax depreciation allowance reduces taxable income and so the tax paid. Book and tax depreciation can differ. Straight-line depreciation of $200 million over 10 years is $20 million a year; a 15% reducing balance gives $30 million, $25.5 million and $21.6 million in the first three years.

- Brennan (2020), Ch 4 Operating cost estimation · pdf pp. 111-123
- Brennan (2020), Ch 6 Some examples in process economics · pdf pp. 168-171

### 4.4 A cost build-up shows which term controls the business

Brennan's Example 6.1 builds the full cost for a two-potline aluminium smelter of 600,000 t a year, integrated with an existing alumina refinery. Each tonne of metal uses 1.93 t of alumina and 0.42 t of carbon, both at $300/t, and 13.0 MWh of electricity at $60/MWh. Fixed capital is $2.5 billion, and 600 people work there at $80,000 each plus 40% payroll overheads. Capital-related costs take 13% of capital a year, including capital recovery at 5% over 20 years.

The result is about $2,139 a tonne, close to the 2018 aluminium price of roughly $2,100. Because capital recovery is included, Brennan likens the figure to a floor price. Electricity is the largest item at 36%, alumina 27%, capital charges 25%, carbon 6% and people only 5%. The levers follow: a cheap long-term power contract, and alumina from the refinery next door.

Cost structure decides how much scale and utilisation matter. Variable costs per tonne do not change with plant size, so a plant dominated by them gains little from scale. Brennan's scale curves show aluminium smelting flatter than ethylene or chlor-alkali, because power, a variable cost, is so large. His isomerisation unit, nearly all naphtha, gains little from doubling to 900,000 t a year: capital rises from $57 million to about $86 million, but cost per tonne falls only from $1,070.9 to about $1,067. The sulphuric acid plant in Part 5 is the opposite case.

Wittcoff adds that short-term run-or-shut decisions rest on cash cost, while in the long run a plant must earn its total cost.

Data Cost of production build-up for a 600,000 t a year aluminium smelter (Brennan's Example 6.1)

| Item | Usage and unit cost | $ million a year | $ per tonne | Share |
|---|---|---|---|---|
| Alumina | 1.93 t at $300/t | 347 | 579 | 27% |
| Carbon | 0.42 t at $300/t | 76 | 126 | 6% |
| Electricity | 13.0 MWh at $60/MWh | 468 | 780 | 36% |
| Total variable cost |  | 891 | 1,485 | 69% |
| Personnel | 600 people at $112,000 incl. overheads | 67.2 | 112 | 5% |
| Capital-related costs | 0.13 x $2.5 billion | 325 | 542 | 25% |
| Total fixed cost incl. capital recovery |  | 392 | 654 | 31% |
| Total operating cost |  | 1,283 | 2,139 | 100% |

Annual totals computed from Brennan's per tonne figures (x 0.6 million t). Reported aluminium price about $2,100 a tonne in 2018.
 Source: Brennan (2020), Ch 6 Some examples in process economics, pdf pp. 160-161  Worked example

#### What a power contract is worth

Illustrative arithmetic on Example 6.1. The smelter uses 13.0 MWh per tonne, so every $10/MWh on the power price changes cost by $130 a tonne, about 6% of the $2,139 total. Over 600,000 tonnes a year that is $78 million, more than the whole $67.2 million personnel bill. A 10% change in staff numbers, by contrast, moves cost by only about $11 a tonne. For an electrochemical plant the power contract matters far more than wages.

- Brennan (2020), Ch 6 Some examples in process economics · pdf pp. 160-161, 173
- Brennan (2020), Ch 4 Operating cost estimation · pdf pp. 124-126
- Wittcoff (2004), Appendix 1 A note on cost calculations · pdf p. 649

### See it in the table
[H₂O Water](https://www.materialinsights.org/commodities/water/)[Oil Crude oil](https://www.materialinsights.org/energy/crude_oil/)[Gas Natural gas](https://www.materialinsights.org/energy/natural_gas/)[Al Aluminium](https://www.materialinsights.org/commodities/aluminum/)[NaCl Salt](https://www.materialinsights.org/commodities/salt/)[H2SO4 Sulphuric acid](https://www.materialinsights.org/chemicals/sulphuric_acid/)[NaOH Caustic soda](https://www.materialinsights.org/chemicals/caustic_soda/)[Cl2 Chlorine](https://www.materialinsights.org/chemicals/chlorine/)[H2 Hydrogen](https://www.materialinsights.org/chemicals/hydrogen/)[NH3 Ammonia](https://www.materialinsights.org/chemicals/ammonia/)[C2H4 Ethylene](https://www.materialinsights.org/chemicals/ethylene/)[MeOH Methanol](https://www.materialinsights.org/chemicals/methanol/)

### Check your understanding

In Brennan's model C = sum(R x r) + sum(E x g) + Mm/QU + kI/QU, which quantities are performance parameters set by technology and management?
 R (raw material per tonne), E (utility per tonne) and M (employees) describe how well the plant converts inputs. The unit prices r, g and m are mostly set by markets and location.

A continuous plant needs 3 operators on duty at all times. Roughly how many shift operators must it employ?
 Brennan says total shift operators are four to five times the number per shift, to cover a viable roster. Example 6.7 uses 3 per shift x 5 teams = 15.

Why does Brennan's isomerisation unit gain so little from doubling its capacity?
 Scale economies act on the fixed, capital and personnel terms. When naphtha alone is $1,030 of a $1,071 cost, even a large cut in capital per tonne barely moves the total.

[← Part 3: Capital cost: what the plant costs to build](https://www.materialinsights.org/learn/chemicals/plant-economics-costs-and-profit/p3/)[Mark read · Part 5: Profitability: does the project earn its capital back? →](https://www.materialinsights.org/learn/chemicals/plant-economics-costs-and-profit/p5/)

## Other sections

- [Module overview](https://www.materialinsights.org/learn/chemicals/plant-economics-costs-and-profit/index.md)
- [What makes the process industries different](https://www.materialinsights.org/learn/chemicals/plant-economics-costs-and-profit/p1/index.md)
- [Markets: sizing demand and forecasting price](https://www.materialinsights.org/learn/chemicals/plant-economics-costs-and-profit/p2/index.md)
- [Capital cost: what the plant costs to build](https://www.materialinsights.org/learn/chemicals/plant-economics-costs-and-profit/p3/index.md)
- [Profitability: does the project earn its capital back?](https://www.materialinsights.org/learn/chemicals/plant-economics-costs-and-profit/p5/index.md)
- [Key terms, quiz and sources](https://www.materialinsights.org/learn/chemicals/plant-economics-costs-and-profit/review/index.md)