Chemical economics and operations: feedstock advantage, utilization and the cycle
Why an ethane cracker in the Gulf or the US can be far cheaper than a naphtha cracker in Europe, why utilization drives cost per tonne, and how integrated sites and logistics work.
Industry brief, with a one-minute summary: ChemicalsKey takeaways
- In commodity chemicals, the cost of feedstock decides who wins.
- Integrated sites: many chemical companies place plants next to each other so one plant's output feeds the next by pipe, and waste heat and by-products are reused.
- Feedstock contracts: Gulf producers often buy gas feedstock from the national oil company at prices set by the government, which is a key part of their cost advantage.
- Turnarounds: large plants stop every few years for planned maintenance.
Key idea
In commodity chemicals, the cost of feedstock decides who wins. Producers with cheap feedstock, such as ethane from natural gas in the Gulf and the United States, can make ethylene for a fraction of the cost of producers who use naphtha in Europe or parts of Asia.
Worked case
Ethane cracker versus naphtha cracker
The prompt
Compare two fictional ethylene producers. A Gulf producer uses ethane: 1.3 tonnes of ethane at USD 200 per tonne make 1 tonne of ethylene, plus USD 140 of other cash costs. A European producer uses naphtha: its net feedstock cost is USD 650 per tonne of ethylene after credits for the co-products it also sells, plus USD 150 of other cash costs. Ethylene sells for USD 950 per tonne. What is each producer's cash margin per tonne?
The structure
- Cash margin = price minus (feedstock cost + other cash costs)
- Gulf: ethane used x ethane price + other costs
- Europe: net naphtha cost + other costs
Working it through
1. Gulf cash cost
1.3 tonnes of ethane at 200, plus 140.
Gulf cash cost (USD per tonne of ethylene):1.3 × 200 + 140 = 4002. Gulf cash margin
Price 950 minus 400.
Gulf cash margin (USD per tonne):950 - (1.3 × 200 + 140) = 5503. Europe cash cost
Net naphtha 650 plus 150.
Europe cash cost (USD per tonne of ethylene):650 + 150 = 8004. Europe cash margin
Price 950 minus 800.
Europe cash margin (USD per tonne):950 - (650 + 150) = 150
The recommendation
New capacity should go where feedstock is cheap, because the Gulf ethane producer earns about USD 550 per tonne against USD 150 for the European naphtha producer. First, the Gulf cash cost is USD 400 per tonne against USD 800 in Europe. Second, this means that if ethylene falls below USD 800, the European producer loses cash while the Gulf producer still earns well. The risk is that ethane supply is limited, and naphtha co-products can narrow the gap in some years. As a next step, test both margins across a range of ethylene prices.
Risks: Ethane is not always available in large amounts; some Gulf producers also use propane or naphtha; Naphtha crackers produce more valuable co-products, which can narrow the gap in some years.
Utilization and cost per tonne
A large chemical plant has high fixed costs: depreciation, maintenance, staff and overheads. These costs are the same whether it runs at 70 percent or 95 percent. So every drop in utilization raises the fixed cost carried by each tonne. When demand is weak or new capacity floods the market, all producers run less, costs per tonne rise, and prices fall at the same time. That double squeeze is the bottom of the chemical cycle.
Worked case
Fixed cost per tonne at different utilization rates
The prompt
Tessaline Chemicals (a fictional company) runs a polyethylene plant with capacity of 1.5 million tonnes a year and fixed costs of USD 180 million a year. What is the fixed cost per tonne at 90 percent utilization and at 70 percent?
The structure
- Fixed cost per tonne = fixed costs divided by tonnes produced
- Tonnes produced = capacity x utilization
Working it through
1. At 90 percent
Output 1.35 million tonnes.
Fixed cost at 90 percent (USD per tonne):180 ÷ (1.5 × 0.9) = 1332. At 70 percent
Output 1.05 million tonnes.
Fixed cost at 70 percent (USD per tonne):180 ÷ (1.5 × 0.7) = 1713. Difference
Extra fixed cost carried by each tonne.
Increase in fixed cost (USD per tonne):180 ÷ (1.5 × 0.7) - 180 ÷ (1.5 × 0.9) = 38.1
The recommendation
Tessaline should make utilization its first priority, because falling from 90 to 70 percent adds about USD 38 of fixed cost to every tonne, from about USD 133 to USD 171. First, the USD 180 million of fixed costs is spread over fewer tonnes. Second, in a business where the spread may be only a few hundred dollars per tonne, this means a USD 38 increase is large. The risk is new industry capacity pushing everyone's utilization down. As a next step, check industry capacity additions against our order book.
Supply chain and operations
- Integrated sites: many chemical companies place plants next to each other so one plant's output feeds the next by pipe, and waste heat and by-products are reused. BASF calls its version of this Verbund; large integrated sites also exist at Jubail in Saudi Arabia and on Jurong Island in Singapore.
- Feedstock contracts: Gulf producers often buy gas feedstock from the national oil company at prices set by the government, which is a key part of their cost advantage.
- Turnarounds: large plants stop every few years for planned maintenance. A turnaround that runs late costs lost sales every day.
- Logistics: many chemicals are hazardous, so they move in special tankers, rail cars, ISO tank containers and pipelines, under strict safety rules. Polymer pellets move in bags and containers to converters.
- Inventory and working capital: producers and distributors hold stock to serve customers reliably, which ties up cash. When prices fall, the value of that stock falls too.
- Specialty operations: many small batches, frequent changeovers between products, quality testing for each batch, and technical service teams that visit customers.
Making 1 tonne of polyethylene needs about 1.02 tonnes of ethylene. Ethylene costs USD 900 per tonne and polyethylene sells for USD 1,100 per tonne. What is the spread over ethylene per tonne of polyethylene, in USD?
Sources for this lesson (1)
- Recognized public explanations of case-interview concepts and frameworks
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