Sunday 20 June 2021

Rule of Thumb: Investing and Scaling Up Polymer Production Plants

Hello and welcome to a new rule of thumb post. More rule of thumb posts can be found here.

In this post we discuss two topics: investment decision making based on scaling models and the growth in chemical businesses.

In general, the investment amount in new production capacity can be estimated using the following equation:

Equation 1: estimation of investment amount for new production capacity using the "Lang factor"

The exponent in this equation is called the “Lang Factor”. It can have different values and ranges typically between 0.6 to 0.7 (6/10-rule).

Investment example

In the following, an example of a capacity increase from 1 million tons material per year to two million tons material per years is shown. 

Investment example: doubling the production capacity leads only to a 57% investment increase compared to the original investment. 

Reasons why the costs are lower includes the lower operating costs (spreading the fixed costs over more product), reduced capital investment per unit, and an increased market clout.

Altogether, there is no linear relationship between investing and production output.

A word on growth of chemical businesses

On average, chemical and plastic manufacturers follow the regional Gross Domestic Product (GDP) growth. During crises, stock levels along the supply chain will be consumed and new purchases are decreased. Therefore, in an economic crisis, growth falls below GDP and after the crisis, demand is increasing leading to a growth above GDP level. Chemical businesses are cyclic businesses and similarities to the so-called pig cycle can be found.

More rule of thumb posts can be found here.

Thank you for reading and #findoutaboutplastics,

Greeting Herwig

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