# The economics of a chemical plant: costs, prices and profit: Key terms, quiz and sources

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

[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/) Wrap-up

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

### Key terms

**Value added**
: Sales revenue minus the cost of raw materials, utilities and other bought-in inputs; the wealth a plant creates.

**Commodity chemical**
: A product made in high volume to the same specification by every producer, so it sells mainly on price.

**By-product credit**
: Revenue from a secondary product, such as exported steam, deducted from the cost of the main product.

**Import parity**
: The lowest landed price of imported product (FOB price plus duty, freight and landing), which caps local prices.

**Floor price**
: The price that just covers production cost with the best technology and scale plus a minimum return on capital.

**Price elasticity of demand**
: The fractional change in volume demanded divided by the fractional change in price.

**Battery limits**
: The boundary around the process plant; costs inside (IBL) are the plant itself, costs outside (OBL) are storage, utilities and buildings.

**Purchased equipment cost**
: The summed purchase price of the main plant items, including their drives.

**Lang factor**
: The multiplier, usually 3-4, that converts purchased equipment cost into the cost of the installed process plant.

**Scale exponent**
: The power b in cost proportional to capacity^b; about 0.6 for single-stream plants, hence the six-tenths rule.

**Location factor**
: The ratio of the cost of a plant in one place to the cost of the same plant in a reference place, in one currency.

**Working capital**
: Money tied up in stocks and customer credit, net of supplier credit; recovered when the plant closes.

**Contingency**
: An allowance added to a cost estimate for costs that are certain to arise but cannot yet be identified.

**Capacity utilisation**
: Actual output divided by the plant's annual capacity.

**Fixed and variable costs**
: Variable costs, such as raw materials and energy, rise with output; fixed costs, such as labour and maintenance, do not.

**Cash cost**
: Operating cost excluding depreciation and other non-cash charges; the basis for short-term run or shut decisions.

**Capital recovery factor**
: The annual fraction of capital that repays an investment with interest over a given life; 0.117 at 8% over 15 years.

**Net present value**
: The sum of all of a project's cash flows, each discounted to today at the cost of capital.

**Internal rate of return (DCFR)**
: The discount rate at which a project's net present value is zero.

**Payback time**
: The time taken for cumulative cash flow to recover the capital invested.

### Try it in the table

- Open the [Sulphuric acid](https://www.materialinsights.org/chemicals/sulphuric_acid/) tile and look at its raw materials and typical plant scale. Brennan's plant needs 0.32 t of sulphur per tonne and makes money only because it also sells steam and power. Ask whether the plants described on the tile export energy, and how a sulphur price change would flow through to cost.
- Open [Ethylene](https://www.materialinsights.org/chemicals/ethylene/), then [Propylene](https://www.materialinsights.org/chemicals/propylene/), [Butadiene](https://www.materialinsights.org/chemicals/butadiene/) and [Benzene](https://www.materialinsights.org/chemicals/benzene/). Using Brennan's figures (1.24 t of ethane or 2.7 t of naphtha per tonne of ethylene), work out which regions on the Ethylene tile depend on co-product markets, and which are mostly selling ethylene alone.
- Open [Caustic soda](https://www.materialinsights.org/chemicals/caustic_soda/) and [Chlorine](https://www.materialinsights.org/chemicals/chlorine/). They are made together in one electrolysis, in a fixed ratio. Look at their main uses and ask what happens to the price of one when demand for the other drives plant output.
- Open [Acetic acid](https://www.materialinsights.org/chemicals/acetic_acid/). Brennan's illustrative cost sheet uses 0.54 t of [methanol](https://www.materialinsights.org/chemicals/methanol/) and 0.52 t of carbon monoxide per tonne at $300 each, or $318 of raw materials per tonne. Compare that with the price range on the tile to see how much margin is left for capital, labour and profit.
- Open [Hydrogen](https://www.materialinsights.org/chemicals/hydrogen/) and [Low-carbon hydrogen and e-fuels](https://www.materialinsights.org/energy/green_hydrogen_carriers/). Brennan's gas and coal hydrogen plants show how capital intensity can sink ROI even with cheap feedstock. Apply the same test to electrolysis: the IEA finds it competes with gas plus carbon capture only at power prices of about US$20-45/MWh.
- Open [Ammonia](https://www.materialinsights.org/chemicals/ammonia/) and [Methanol](https://www.materialinsights.org/chemicals/methanol/). Both are made mainly from [natural gas](https://www.materialinsights.org/energy/natural_gas/) (0.57 t and 0.71 t of methane per tonne in Brennan's table). Compare where the tiles say capacity sits with the IEA point that gas prices vary by a factor of 4 between regions.

### Final quiz

A project team quotes a capital estimate of plus or minus 10%. According to Brennan, at what stage is this level of accuracy normally required, and roughly what does it cost to prepare?
 A sanction estimate needs a chosen site, flowsheets, specified and costed equipment and preliminary layouts, and its preparation may cost 2-5% of the project. A feasibility estimate is closer to 30% and costs about 0.2%.

Using Brennan's Table 3.7 averages, $20 million of purchased equipment implies roughly what total inside battery limits cost?
 Total IBL averages 3.40 times purchased equipment cost, so 3.40 x 20 = $68 million. $54 million (2.70 times) is direct plant cost only, before engineering and project management.

Brennan's aluminium smelter costs about $2,139 a tonne. Which single item is the largest share?
 13.0 MWh at $60/MWh is $780 a tonne, more than alumina ($579) or capital charges ($542). Personnel is only $112.

Why is book depreciation excluded from a project cash flow table?
 No cash leaves the company when depreciation is charged. The tax depreciation allowance matters because it reduces taxable income and therefore the tax actually paid.

A plant's fixed costs are $10 million a year and capacity is 100,000 t. What is the fixed cost per tonne at 50% utilisation?
 Output is 50,000 t, so $10 million / 50,000 t = $200 a tonne, twice the $100 at full output. This is why Brennan stresses running close to capacity.

Wittcoff's old paradigm describes the industry's tendency to:
 High prices in a boom prompt investment, but plants take years to build, so capacity comes on stream in the downturn. Overcapacity then depresses prices until closures restore balance, a cycle of about 4-5 years.

Inflating Magidrop's prices and costs and discounting at the matching rate cuts its NPV from $54.1 million to $9.2 million. Which feature of tax rules contributes most directly?
 The allowance is based on the original capital spent, so its real value shrinks each year and real tax payments rise. Brennan also assumed costs rising faster than the selling price.

In the IEA's comparison, what is the main reason Middle East ethane crackers are the cheapest source of high value chemicals?
 The IEA notes that equipment prices are fairly uniform worldwide; regional advantage comes mainly from feedstock, which can make up 15-85% of HVC cost depending on route.

[Next module: Heavy inorganics: salt, sulphur, nitrogen and phosphorus →](https://www.materialinsights.org/learn/chemicals/heavy-inorganic-chemicals/)

### Sources for this module

- Brennan, D. (2020). Process Industry Economics: Principles, Concepts and Applications, 2nd ed. Elsevier. Chapters 1-6. · pdf pp. 8-178 (Ch 1 pp. 8-22; Ch 2 pp. 23-57; Ch 3 pp. 58-98; Ch 4 pp. 99-129; Ch 5 pp. 130-159; Ch 6 pp. 160-178)
- Wittcoff, H.A., Reuben, B.G. & Plotkin, J.S. (2004). Industrial Organic Chemicals, 2nd ed. Wiley. Chapter 1 The chemical industry; Appendix 1 A note on cost calculations. · pdf pp. 41-62, 646-649
- IEA (2018). The Future of Petrochemicals: Towards more sustainable plastics and fertilisers. OECD/IEA. Chapter 2. · pdf pp. 31-35
- Kent, J.A. (ed.) (2012). Handbook of Industrial Chemistry and Biotechnology, 12th ed. Springer. Ch 25 Sulfur and Sulfuric Acid (d'Aquin and Fell). · pdf pp. 1013, 1016

## 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)
- [Operating cost: what each tonne costs to make](https://www.materialinsights.org/learn/chemicals/plant-economics-costs-and-profit/p4/index.md)
- [Profitability: does the project earn its capital back?](https://www.materialinsights.org/learn/chemicals/plant-economics-costs-and-profit/p5/index.md)