CAPACITY

1
CAPACITY LOCATION

• Any manager can do well in a growing market, but
  in a competitive marketplace, good managers need
  competitive insight to stay ahead.

2
Basis For Capacity Location

• Marketing Factors
• Forecasting Business Environment
• Market Risk by Economic Modeling

3
Product Growth Rate

• Distinguish between a captive market (C2H4) vs a
  consumer market (Polyethylene).
• Determine the maturity of the product.
• Just starting to get consumer acceptance.
• High Growth rate as market takes off.
• Mature market proportional to population growth.
• 20 year forecasting by curve fitting.

4
Growth Rate Example
5
Curve Fit Growth Rate
6
Glycol Growth Per Year
7
Select Plant Size
8
Pricing

• Pricing based on competition.
• Pricing based on product advantage.
• Pricing based on demand.
• Pricing based on market environment.

9
Market Share

• Must know current market share.
• Company goals and plans to increase market share
  marketing strategy
• Growth by design, engineer and construct.
• Growth by acquisition.

10
Technology Advantages

• Must know in-house technology.
• Must know your competitors technology.
• Determine competitive advantages.
• Research based program.
• Licensing based program.

11
Raw Material Availability

• 20 year forecasts.
• Determine optimum delivery system.
• Negotiate long term supply contracts.
• Consider Partnerships (Dows Fractionator at Fort
  Saskatchewan).

12
Market Location

• Build your plant as close as possible to your
  consumer market.
• Sarnia Advantage You can reach 50 of U.S.
  population via rail or highway within 8 hours.

13
Shipping

• Pipeline ownership preferred
• Railcars Fleet ownership vs leasing
• Boat / Barge Global / Southern U.S.
• Trucking fastest growing in NAFTA

14
Market Environment

• Canada / U.S. / Mexico NAFTA plays an important
  role in selecting location.
• NAFTA has essentially destroyed the Alberta
  hydrocarbon advantage.
• European Common Market has changed the market
  place.
• How to forecast the market environment in the
  face of latest U.S. policy.

15
Market Risk

• Capacity is determined using company economic
  models to meet company goals.

16
Dow Economic Goals

• Generate a DCFRRAT on equity of 20.
• Return 3 above our cost of capital.
• Earn our cost of capital at the trough.
• Grow earnings per share by 10 per year.

17
Economic Models - DFC

• Consider producing ethylene in a captive market
  based on ethane cracking.
• In 1987 Dow built a 1.5 billion lb/yr plant in
  Alberta for 287.65mm.
• Assume Dow was considering building a similar
  plant to startup in 2002.

18
Time Factor

• Use the MS or FEI escalation factors (found in
  Chemical Engineering).
• The escalated DFC for the year 2002 was found to
  be
  DFC 02 (1101.87 /
  760.8)(287.65mm) DFC 02 413.73mm

19
Size Factor

• DFC for any size can be estimated by the two
  thirds rule as follows
• DFC 2 (Size 2 / Size 1)0.67(DFC 1)
• For example a 0.5 billion lb/yr plant would cost
  DFC 0.5
  (0.5 / 1.5)0.67(413.73) DFC 0.5 198.83mm

20
Unit Ratios

• For similar technology, the unit ratios for raw
  materials, utilities, maintenance, factory
  expense, operating labor, sales and general
  administration costs can be used for any sized
  plant.
• There must be no major break in size for any
  large items (going from shop fabrication to field
  fabrication).

21
Manufacturing Cost
22
Cash Flow Model Results
23
Cash Flow Summary
24
World Scale C2H4 Plants

• 500 mm lb/yr - 1980
• 1.0 mmm lb/yr - 1986
• 1.4 mmm lb/yr 1990
• 1.8 mmm lb/yr - 1996
• 2.4 mmm lb/yr 2000

25
Capacity Ammonia Plants

• NH3 example in Sarnia - 1980
• Dow - 500 T/D NH3 _at_ 50/ton
• CIL ICI - 1000 T/D _at_ 25/ton
• Dow shuts-down after 2 year because we could not
  compete.

26
Capacity for Batch Plants

• Typical capacity is based on 7600 to 8000
  operating hours per year depending on how many
  reactors are in operation.
• Reactor sizes vary from 3,000 to 10,000 U.S.
  gallons.
• Maximum size limited to 14 ft. diam. Based on
  shop fabrication and shipping restrictions.

27
Dow No Prototype Policy

• Never build a plant with a new prototype major
  equipment item eg a new compressor
• Equipment failure may lead to long duration
  shut-down.
• Loss of economic advantage.

28
Losses and Re-Run

• Losses are typically 2 per year.
• Take losses at finishing tank.
• Allow for re-running off spec material. This
  usually adds 10 to plant size but not to
  capacity.

29
Learning Curve

• It may take 5 years to reach capacity and the
  minimum operating cost.
• The learning curve can be built into your cash
  flow studies.

30
Allow for Growth

• Plant design should include expansion allowances.
• Design towers with 1 inch ballast tray units. To
  expand tower capacity convert trays to ½ inch
  mini ballast units.
• Exchangers allow spots in layout for spared
  reboilers or condensers.

31
End of Presentation

• Good luck on your project.
• Any questions?
• Dont hesitate to ask even the most simple
  questions.
• richardhaw_at_sympatico.ca