QBA Supplements 2007 – Cost Of Production Defined
Introduction
The Quarterly Business Analysis (QBA) reports are part of Nexant’s ChemSystems On‑Line® and Petroleum and Petrochemical Economics program and present quarterly reviews of price movements and analysis of margins and profitability for a broad range of refined oil products, commodity petrochemicals and polymers. The reports examine current market issues, focusing on their implications to profitability of the petrochemical industry. Current production economics and competitiveness are put into context by providing detailed analysis of historic costs and margins for individual products and the industry as a whole.
The supplement reports have been produced to provide supporting information to the QBA reports. In order to gain insight into profitability of commodity petrochemicals, production economics have been modelled for a range of different plant configurations manufacturing petrochemicals in key regional petrochemical markets (specifically Western Europe, United States and Asia Pacific). The objective of the supplement is to present the methodology and assumptions used to generate the cost of production models, which form the basis of the Quarterly Business Analysis. The reports are specifically geared to the provision of technological and cost data.
Table 1 Cost of Production for Styrene
Process: Liquid Phase Alkylation/Dehydrogenation
Leader Plant
Leader Laggard Plant Definition
In any given geographic region, there are frequently many different plants all simultaneously producing a given petrochemical. Each individual plant will have its own distinct production economics, depending upon process technology, plant scale, negotiated product prices, etc. This creates a broad spectrum of production economics across the region for each product. Nexant uses the concept of archetype Leader and Laggard plants to assess production economics spanning the range of actual production costs. The Leader plant is modelled on one of the lowest cost plants, while the Laggard plant is chosen to be representative of one of the highest cost producers at the top end of the cost curve.
Leader and Laggard plant definitions have been developed for all products covered in the QBA program, and the associated cost models are presented in the Supplement reports. The selection/definition of Leader and Laggard plants is reviewed periodically to reflect changes to the regional base of production assets including plant capacity expansions, process technology developments, and plant shutdowns. Leader and Laggard plant definitions have evolved over time, capturing developments in the regional portfolio of production units.
Figure 1 Definition of Leader and Laggard Plants
(the cost curve)
Definition of Production Costs
There are many separate elements of cost which are incurred in production of a particular petrochemical. The major components of production costs, and how they build up to different measures of production cost are summarized below:
Figure 2 Production Cost Elements
Variable cost is lowest measure of production cost for any plant. The variable cost assesses the net value of all products consumed in the chemical process and the cost of any utilities consumed through the process. Variable costs are directly related to the production volume and operating rate. During periods of down time for maintenance, no variable costs are incurred by the producer. The scope of the variable cost is defined as the average cost of acquiring raw materials, catalysts, chemicals, plus average utility costs, minus an allowance for the value of any revenue from co‑products.
In addition to the production related costs of consumables measured in the variable cost, a range of fixed costs are incurred in running any manufacturing facility and maintaining it in an operable state. These costs are termed “fixed costs,” since they are incurred at the same fixed charge regardless of throughput. In contrast to the variable costs, fixed costs are still incurred through periods of down time. Direct fixed costs account for the components of fixed costs which can be uniquely allocated to a specific production unit in its own right. The three components of direct fixed costs are direct manpower costs, associated salary burden and maintenance costs.
The cash cost of production is defined as all production costs excluding depreciation charges. This includes variable and fixed costs, as well as technical services and royalties where applicable. Cash costs do not include sales, corporate administration, allocated research and development costs, or interest on working capital. Rather, the cash cost represents the total cash expenditure required to continue plant operations.
Nexant’s “Quarterly Business Analysis Supplements” present cost of production models for archetype plants in Western Europe, United States and Asia Pacific. The reports are published as part of ChemSystems / Petroleum and Petrochemical Economics (PPE) Program. Subscriptions to the program are available from www.chemsystems.com. For further details, please contact Andrew Powell at + 44 207 950 1576 or email to apowell@nexant.com.
©2007 Nexant, Inc.
