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

Basis For Capacity & Location Marketing Factors Forecasting Business Environment Market Risk by Economic Modeling

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.

Growth Rate Example

Curve Fit Growth Rate

Glycol Growth Per Year

Select Plant Size

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

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.

Technology Advantages Must know in-house technology. Must know your competitor’s technology. Determine competitive advantages. Research based program. Licensing based program.

Raw Material Availability 20 year forecasts. Determine optimum delivery system. Negotiate long term supply contracts. Consider Partnerships (Dow’s Fractionator at Fort Saskatchewan).

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.

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

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.

Market Risk Capacity is determined using company economic models to meet company goals.

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.

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.

Time Factor Use the M&S 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

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

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).

Manufacturing Cost

Cash Flow Model Results

Cash Flow Summary

World Scale – C2H4 Plants 500 mm lb/yr - 1980 1.0 mmm lb/yr - 1986

Capacity – Ammonia Plants NH3 example in Sarnia - 1980 Dow - 500 T/D NH3 @ $50/ton CIL – ICI - 1000 T/D @ $25/ton Dow shuts-down after 2 year because we could not compete.

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.

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.

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.

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.

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.

End of Presentation Good luck on your project. Any questions? Don’t hesitate to ask even the most simple questions. richardhaw@sympatico.ca