https://processdesign.mccormick.northwestern.edu/api.php?action=feedcontributions&user=RJKolbe&feedformat=atomprocessdesign - User contributions [en]2024-03-29T09:35:04ZUser contributionsMediaWiki 1.39.2https://processdesign.mccormick.northwestern.edu/index.php?title=Desalination_-_Team_A&diff=5224Desalination - Team A2016-03-12T02:59:10Z<p>RJKolbe: </p>
<hr />
<div>Author: Pear Dhiantravan<sup>[2016]</sup>, Reed Kolbe<sup>[2016]</sup>, Sheridan Lichtor<sup>[2016]</sup>, John Marsiglio<sup>[2016]</sup>, Ellen Zhuang<sup>[2016]</sup><br />
<br />
Instructors: Fengqi You, David Wegerer<br />
<br />
Winter 2016<br />
<br />
=Executive Summary=<br />
Seawater desalination is an attractive approach to address the world’s freshwater shortage in light of the increasing global water scarcity. Our team decided to tackle California's growing drought crisis by designing a multistage flash desalination plant in Richmond, CA. Based on market analysis of existing desalination plants and water demands, this is a strategic location for the desalination of 50 million gallons per day of water from the San Francisco Bay.<br />
<br />
The MSF process contains 18 flash stages in series. Seawater is taken in from the San Francisco Bay at a rate of 398 million gallons per day and mixed with brine recycled from the system. Within the MSF process, seawater is heated through a series of 18 heat exchangers and a brine heater before enters a series of 18 evaporation chambers. In the evaporation chambers, the seawater flashes and the freshwater vapor is condensed, collected, and sent to a water treatment facility. The brine stream proceeds to the next chamber, and the process continues. Upon exiting the last flashing chamber, the brine stream is split into a recycle brine stream that is mixed with the seawater inlet feed and a waste stream that is diluted with fresh seawater and returned to the sea. Overall, the process yield is 13%. This process was constructed in Aspen HYSYS and optimized around utility costs using the HYSYS Economic Analyzer. Based on duties, temperatures and pressures reported by HYSYS, as well as fundamental mass and energy balances, the equipment were sized appropriately and the economics of the process was analyzed.<br />
<br />
The design has a total capital cost of $485.2 MM, an annual operating cost of $144.7 MM ($103.7 MM of which is utilities), and an annual plant revenue of $134.3 MM. Economic analysis reveals that the project has a negative NPV of -$495.7 MM and operates at a loss of $10.4 MM per year. Thus, the proposed design is not profitable. Despite the current projections, it is important to consider the greater implications of running a desalination plant in the Bay Area. The population in the Bay Area is quickly growing while California is experiencing harsher droughts each year. Given the dire situations, the government may support the proposed clean water project with subsidies. Building the facility may be a strategic investment, especially since greater water scarcity is predicted in the future.<br />
<br />
Our design meets various environmental, ethical, social and health related constraints. The brine discharged back to the bay is diluted to at most 0.2% above the natural background salinity as required by law so that the plant does not impose harm on any local marine life. The demographic that the plant serves is largely invested in the protection of the environment, which we addressed by reducing energy consumption through direct energy integration with the nearby Chevron plant. Lastly, the product meets the specifications of the California Safe Water Drinking Act by producing water with no impurities.<br />
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<br />
__TOC__<br />
<br />
=Introduction=<br />
An increasing global water scarcity is fueling initiatives everywhere for clean water treatment, making efficient seawater desalination an attractive aim for chemical plant design. A 2015 market analysis found that the global desalination market earned revenues of $11.66 billion, and this number is expected to reach over $19 billion by 2019. Furthermore, the 17,000 desalination plants currently in operation are expected to double in number by 2020.<sup>1</sup><br />
<br />
As fresh water sources become increasingly scarce, strict water conservation measures are being observed. California is entering the fourth year of one of its most severe droughts on record. Cities are required to reduce their water usage by 35% to avoid facing fines.<sup>2</sup> In lieu of these pressing conditions, California is looking for ways to provide more accessible fresh water to its citizens. This high demand for clean water motivated our choosing Richmond, CA as our plant location. At Richmond, the desalination plant can convert readily available seawater from the San Francisco Bay into fresh water. We propose to desalinate 50 million gallons of water per day to be sent to water treatment plants for potability. This aim is based on the capacity of the desalination plant in Carlsbad, California, which services a similar population.<br />
<br />
The salinity of the water in the San Francisco bay is seasonal. During the dry seasons of summer and fall, salinity is high around 10 PSU (10,000 ppm) because water from the Pacific Ocean flows into the San Francisco Bay. During the wet winter season, fresh water from the rivers flows into the Bay, and salinity drops to around 2 PSU (2,000).<sup>3</sup> Designed to meet the “worst case” scenario, our plant will process 398 million gallons of water per day with 10,000 ppm of salt to produce 50 million gallons of water with 1,000 ppm of salt. This gives a yield of 13%.<br />
<br />
The desalination plant proposed consists of 18 flash stages in series. This report outlines our investigation of this potential water desalination plant, including design and optimization of the desalination process, an analysis of its energy consumption and environmental impacts, and a study of its economic implications.<br />
<br />
=Technical Approach=<br />
For the desalination step of our process, we selected a multistage flash (MSF) distillation process. Not only is MSF distillation a very viable method, but it is also the most common method, currently producing about 60% of the world’s desalinated water. MSF and reverse osmosis (RO) are the two major methods being used in large-scale desalination plants. Both processes require considerable amounts of energy. RO typically has a lower energy demand; however, the high impurity content of the Bay water would frequently necessitate membrane cleaning and/or exchange. Feed going through a RO system requires extensive pretreatment to remove biological organisms and other solids to control the pH and the chemical composition of the water. With the San Francisco Bay as our source of water, MSF is an attractive option because sediment and other large impurities can be separated from the feed before distillation occurs. Additionally, MSF distillation plants can be located near power plants and paired to their waste heat streams to conserve energy. This can reduce energy needs by half or two thirds, making MSF increasingly more practical. Due to the maintenance required in the RO system, the MSF distillation is the better option in terms of operation cost.<sup>4</sup><br />
<br />
A HYSYS model was built to simulate the MSF distillation section of the process, which spans after seawater pretreatment and before local potable water treatment. The model is used to simulate the distillation steps and to calculate necessary heating, cooling, and input flow rates to produce the required 50 million gallons of distillated water per day. For the simulation, the 398 million gallons per day of seawater feed stream is defined to be composed of 3.31 mol% sodium chloride (NaCl) and 96.69 mol% water. The percentage of NaCl is set to account for other ions and chemicals present after the pretreatment phase. NaCl alone is added to the HYSYS system due to the capabilities of the fluid package used to simulate this process, ElectroNRTL. The feed is set at 22°C, which is the approximate the temperature of the San Francisco Bay year round.<br />
<br />
=Process Design=<br />
==Design Overview==<br />
The proposed desalination plant uses MSF distillation to convert the San Francisco Bay water to fresh water. The final process design contains 18 flash stages in series. Overall, 398 million gallons per day of of brackish water is converted to 50 million gallons per day of deionized water, a 13% yield. The production meets the required production rate of 50 million gallons of freshwater per day. <br />
<br />
Seawater is taken in from the San Francisco Bay and mixed with the brine recycle stream produced downstream. The feed is then heated through a series of condensers and a heater. Distilled water vapor in each flash stage contacts the tubes carrying the seawater feed and condenses into a liquid stream by exchanging heat with the cooler seawater feed stream. The seawater is sent through a heater to increase its thermal energy before entering the first stage of the MSF. In each flashing stage, some of the water evaporates, leaving the salt behind. The freshwater vapors condense, as described above, and is collected and sent to a water treatment plant. The brine stream is split into the recycle stream and a waste stream, and the waste stream is diluted with fresh seawater before being discharged back into the bay.<br />
<br />
A process flow diagram of the process is depicted in Appendix A. <br />
<br />
==Pretreatment==<br />
Sediment is removed to prevent solids from plugging the process downstream. Scaling of the process units leads to decreased efficiency and more frequent unplanned downtime, and is controlled for by lowering pH. Acidifying the water will also remove CO2, which is a corrosive gas. To control for oxygen, oxygen scavengers will be included in the system to sequester it. Sodium bisulfate will be used as the scavenger.<sup>5</sup><br />
<br />
==Condensers (Heat Exchanger Networks)==<br />
In order to conserve and recycle energy, the condensation of the distillate and heating of the seawater feed will be coupled in countercurrent heat exchanger networks. These heat exchanger networks are condensers of the design. The cold feed, which is a mixture of fresh seawater and brine recycle, is fed through multiple heat exchangers in series. Each heat exchanger corresponds to a different evaporation chamber. This process consists of 18 heat exchangers: E-101, E-102, … E-117, and E-118, which correspond to evaporation chambers V-102, V-103, … V-118, and V-119, respectively. <br />
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The heat exchangers can be viewed similarly to a shell and tube setup, however there is no actual physical shell. The tubes simply run through the top of the evaporation chambers, where vaporized distilled water in the chamber acts as the shell side fluid. The tube bundles are arranged in long tube configuration and are aligned parallel to the direction of the flashing brine flow in the evaporation chamber. The evaporating brine in an evaporation chamber rise up to the the corresponding heat exchanger and condense on the outside of the tubes, creating collectable pure water. This condensing water is what heats up the seawater in the tubes. <br />
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E-101 was used as the basis for the condenser sizing since it has the highest heat requirement, and thus will be the largest heat exchanger. From the HYSYS model, the overall system requires 2.24 x 10<sup>6</sup> kW of duty. Assuming this energy requirement, 5000 tubes, and 18 m length tubes (the diameter of the evaporation chambers, explained further on the next page), the diameter of each tube was calculated to be 0.4 m. Based on the temperature of the streams and flow, the thickness of the tube is 7 x 10<sup>-4</sup> m.<br />
<br />
==Brine Heater==<br />
After the seawater exits the final heat exchanger, it enters a brine heater (E-119) where it is brought up to the temperature necessary for the flashing process to begin. This means that the seawater must be overheated compared to stage one, so that the seawater will flash in the evaporation chamber, i.e. release heat and vapor to reach equilibrium with stage conditions. After flowing through the condensers, the seawater enters the brine heater at 96.1 <sup>o</sup>C and is heated to 120 <sup>o</sup>C. The overall system requires 2.31 x 10<sup>6</sup> kW of duty. This is supplied by a total of 4.15 x 10<sup>6</sup> kg per hour of steam.<br />
<br />
==Evaporation Chambers==<br />
When the seawater has been brought to a temperature appropriate for flashing, it enters the first evaporation chamber (V-102). Upon entering the chamber, the water is flashed. Some of the water evaporates, leaving the salt behind. The vapor rises up to the heat exchanger tubes in each evaporation chamber and condenses on the outside into the distilled water product. This condensing water is what heats up the seawater in the tubes discussed above. The seawater that does not evaporate moves to the next stage, which operates at a higher temperature and lower pressure, and the process is repeated. This continues in series through a total of 18 flashing chambers (V-102, V-103, … V-118, and V-119). All of the distillate is collected into one stream and all of the brine is mixed with seawater before being disposed of back in the bay in order to dilute it enough so it does not have an adverse effect on marine life.<br />
<br />
Each respective heat exchanger fully condenses the vapor product stream from each stage. However, when all of the individual product streams are consolidated into the final combined product stream, some water exists in the vapor phase due to temperature and pressure changes associated with mixing all of the streams together. Although the vapor product stream from each stage condenses completely across its respective heat exchanger, the total product stream contains some water in the vapor phase due to the temperature change when the mixer sums all the streams. In order to fully condense this stream, which will be sent to local water treatment plans, a heat exchanger (E-120) is put in place to cool down the product using the process feed stream. <br />
<br />
The correlations of El-Dessouky and Ettouney were employed in order to size the flash chambers. They specified that conventional MSF plants that operate at a capacity between 27,000 and 36,000 m<sup>3</sup>/day use flashing stages of the dimensions 18 m diameter and 4 m height.<sup>6</sup><br />
<br />
==Valves==<br />
The model requires valves in between the evaporation chambers. The seawater streams flow through valves with large pressure drops to flash a portion the liquid into vapor that can then be separated in the vessels. Large pressure drops provide the thermodynamic driving force to vaporize more of the liquid, and are required to achieve high product yield. <br />
<br />
==Material of Construction==<br />
Before 1980, the shells and internals of the MSF units were commonly constructed from carbon steel. Seawater, however, corrodes carbon steel. To compensate for this, the thickness of the carbon steel has an additional corrosion allowance, which increases the size and weight of the equipment. After 1980, the stainless steel and duplex stainless steel became increasingly common. Stainless steel metal requires less thickness for equivalent strength and corrosion resistance, which allows for a reduction in the size, weight, and therefore cost of units. Major units in our process will be constructed from stainless steel.<sup>6</sup><br />
<br />
==Process Alternatives==<br />
In order to ensure that our design is fully optimized, we wanted to consider several alternatives for our process. We looked at alternatives associated with water pretreatment, the distillation process itself and product treatment.<br />
<br />
===Water Pretreatment===<br />
Scaling of the process units leads to decreased efficiency and more frequent unplanned downtime. Scaling can be controlled by adjusting pH, temperature, and bicarbonate concentration. We selected acidification to control for process scaling. This is because lowering a process temperature would decrease overall efficiency, and decreasing bicarbonate concentration would be comparatively expensive. Lowering pH would have the added benefit of controlling CO2 concentrations since CO2 is a corrosive gas. To control for corrosion we looked at how to remove oxygen. To target the oxygen we chose an oxygen scavenger. This was chosen over other options such as a deaerator, or a protective coating because a deaerator would have a large capital cost, and the equipment itself would experience corrosion, and a tank coating such as zinc orthophosphate has a mixed effectiveness.<sup>7</sup><br />
<br />
===MSF: Brine Recycle vs. Once-Through System===<br />
We explored two options for the overall layout of the MSF distillation plant. In the first, the brine passes through the process once; in the second, a portion of the brine is recycled from the last stage to the incoming seawater feed. The largest draw towards implementing a brine recycle is that it would significantly reduce the overall amount of seawater needed to produce the daily target of 50 million gallons per day. This in turn would lower the amount of energy required to run the pump feeding seawater to the process. Another positive is that, with a brine recycle, the amount of water conditioning chemicals that must be added to the seawater feed is reduced. The negative aspects mainly revolve around the fact that the solution throughout the process will be higher in salt concentration. This increase in salinity both raises the likelihood of scaling and corrosion in the plant and raises the amount of seawater that must be added to the final brine to make it safe for discharge back into the environment. Additionally, boiling point of each stage is raised when adding the brine recycle. After weighing both alternatives against one another, we have decided to include a brine recycle in our plant design. Most of the negative aspects of the brine recycle can be combated (e.g. include anti-scaling agents in the feed pretreatment), and the economic benefits of including the brine recycle are very significant.<sup>8</sup><br />
<br />
===MSF: Continuous vs. Batch===<br />
The distillation step can be done in continuous or batch processes. Batch distillation is more versatile and often used when the product is in small amounts and very high purity. A continuous distillation is more efficient thermodynamically and economically for large amounts of material of constant composition, whereas batch distillation is more effective for small amounts of material of varying compositions. Since the plant is processing large amounts of seawater of relatively constant composition, the distillation system will utilize continuous distillation.<sup>9</sup><br />
<br />
===MSF: Long Tube vs. Crossed Tube ===<br />
Inside the evaporator stage, the condenser tube bundles may be arranged in either long tube or cross tube design. In the long tube arrangement, the tubes are aligned parallel to the direction of the flashing brine flow. The tubes go from stage to stage without water boxes. In the cross tube arrangement, the tubes are lined perpendicular to the flow of the flashing brine. Water boxes transfer brine between the stages.<sup>10 11</sup> While the water boxes in crossed tube bundles allow for more customization, the long tube configuration allows for construction of large unit sizes, as there are manufacturing restrictions with cross tubes. Long tube design can easily accommodate a large number of stages, which lead us to choose long tube for our design.<sup>11 12</sup><br />
<br />
===MSF: Venting System===<br />
Noncondensable gases exist in the process because of air leakages into stages under vacuum conditions and the release of dissolved gases from the heated brine. These gases are removed by venting the system. An air cooler section concentrates the gas before they are vented, and baffles direct the vapor and condensates out. There are two venting arrangements to consider: series and parallel. The system in series moves gas from one stage directly to the next, and the only loss in the system is vapor in the last stage (since some vapor is extracted with gases). This system is economical, however this configuration increases the amount of noncondensable gases passing from one stage to the next, and disrupting the venting system in one stage will affect the entire system. In parallel venting, gas is released through parallel takeoff pipes at each stage. Although this arrangement allows for venting at any stage to be controlled, the design and maintenance is more complex, and more vapor is lost than in the venting system in series. A third alternative is to use a combination of venting in parallel and in series, which is the common method in industry. For this process, our team chose to do venting in parallel and in series.<sup>12</sup><br />
<br />
===Additional Energy Source Alternatives===<br />
Energy for the process can also be coupled with renewable energy sources to reduce the desalination plant’s carbon footprint. Energy integration can be direct or indirect. In direct integration, thermal waste heat from industrial sources provide thermal energy or pressure as energy sources. Direct integration is advantageous at the modular level, as it avoids energy losses with electricity conversion. Within indirect integration, there are modular integration and grid/utility-scale integration. Modular integration integrates the plant with wind turbines and other small-scale renewable power generators with mobile deployment. A “hybridization” of renewable power sources with natural gas power generation is also an option, and the coupling of the two provides a stable power source. Indirect renewable energy integration is growing as the cost of renewable energy continues to decreases and provides an economy of scale that direct integration does not, but there are several obstacles towards indirect integration, such as the plant’s finance and engineering the integration of the two systems.<sup>13</sup> This distillation plant will be directly integrated with neighboring plants such as Chevron that produce thermal waste heat.<br />
<br />
===Product Treatment===<br />
Since the product is distilled water, it needs additional ions to a concentration of around 0.01% before going to the end user. The three alternatives considered were building a water treatment facility on site, simply adding the correct salts to the product stream and then sending the stream for bacterial treatment at a water plant, or simply sending the product distilled water for complete treatment to another facility. Due to the number of nearby water treatment plants and their demand for water, we elected to simply send the product to a nearby water treatment facility.<br />
<br />
==Design Constraints and Tradeoffs==<br />
While designing our process, we wanted to make sure that we met several outside constraints, including environmental, political, ethical, social, sustainability, health and safety constraints. First and most importantly, we wanted to ensure that the brine discharged back to the bay would not harm local marine life. Our process was designed around the constraint of diluting the exiting brine to within 0.2% salinity of background seawater. This is not only compliant with California law, but was also verified to be safe for surrounding marine life through our own outside research. We also addressed many of these considerations by deciding to pursue direct energy integration with the nearby Chevron plant in order to reduce environmental impact of our process. Additionally, we ensured that our plant would be located in an area that is densely populated and in great need of fresh drinking water. Finally, we addressed health and safety considerations by making sure we would be able to send our product distilled water to local treatment plants for proper potabilization.<br />
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===Design Tradeoffs: Thermodynamics=== <br />
Adjusting elements within this process is iterative, and optimization thereof required changing multiple parameters at once. An example of this is in tuning the temperature increase by heater E-100; if the temperature of the stream entering the vessels is too high, the heat exchange between the vapor product and the feed stream will not be realizable because it causes the feed to be too hot to cool and condense the product. Higher temperatures, however, provide greater thermodynamic driving forces for flashing. Setting the entering stream temperature at 120°C provides enough heat for substantial flash at 130 kPa. This is the only heater required until the very last flash stage, which is added to provide more heat for vaporization. This heater (E-105) increases the stream temperature by 15°C, and the vapor product from the last vessel increases the feed stream temperature by almost 30°C. The added energy increases vaporization by 3%, which is a substantial 2.2 million kg/h. The temperature of the streams entering and leaving each stage decreases with each additional flash stage such that the last vessel has the lowest temperature, according to realistic operating guidelines. <br />
<br />
===Design Tradeoffs: Energy Consumption, Environmental Impacts, and Product Optimization===<br />
Increases in the pressure drop across any of the valves in this final design causes a temperature cross in the heat exchangers unless a proper increase in pump energy is provided. There is thus a design tradeoff between lowering energy usage and increasing product yield. For example, lowering the operating pressure of the process dictates that the pressure difference used to flash seawater must be smaller, possibly decreasing the amount that is vaporized. The final design aims for a yield of 50 million gallons per day. The 18 stage model was chosen for its low annual utility cost. This is a reflection of environmental mindfulness because energy consumption is an ongoing aspect of the process and should be lowered as much as possible.<br />
<br />
==Mass and Energy Balances==<br />
The model of the desalination system assumes that: (1) the properties are uniform in each phase within a stage, (2) heat losses are negligible due to the small surface area to volume ratio for each stage and properly insulated units (heat losses to the surrounding vary from 2 to 5% of the total system energy), (3) the distillate is salt free since the boiling point of water is much lower than that of salt, (4) the subcooling or superheating effects on the system energy balances are negligible, (5) the only contaminant is sodium chloride (there are no non-condensable gases to consider, so no vapors are vented), and (6) the process has 3 evaporation chambers.<br />
<br />
The major balances are that the feed is a mixture of the fresh seawater stream and the recycle stream, and that the brine stream exiting the last evaporation chamber is divided into the recycle stream and the waste stream. Within each stage, the change in mass of a phase over time is the balance between the net flow of that phase from the chamber and the rates of evaporation and condensation of water into and out of that phase. The equations governing the mass and energy balances on the system is displayed in Appendix C. <br />
<br />
=Optimization=<br />
As initiatives for reduced energy usage and increased environmental sustainability become more prevalent, efforts to minimize the utility cost in plants has increased to accommodate these incentives. Utilities are a continual source of expenditure and consumption, and a well-designed chemical process should seek to minimize this element. The annualized utility cost is a useful parameter to optimize given that its value depends on variations in energy costs; thus, annualized utility costs do not correlate with conventional indices of inflation, such as capital and labor costs. Additionally, utility costs, like other variable costs, can be minimized by improving the design or operational efficiency of the plant.<br />
<br />
In optimizing our MSF process, the design variable of focus was the number of stages to use in our process. The performance measure was the annualized utility cost, which was the parameter that was minimized for optimization. The process is constrained by the product specifications, which are kept constant and serve as the standard for comparison between each model. These specifications are to produce 50 million gallons of desalinated liquid water per day. <br />
<br />
One feasibility constraint in the process is the size of the heat exchangers, which must provide a large enough area for total condensation of the vapor stream coming out of the flash stages. In order to restrict the heat exchange area needed within each exchanger, the number of stages must be at least 11. Increasing the number of stages decreases the vapor flow rate at each, and decreases the heat exchange area required as well. An 11-stage process allows for appropriate heat exchange between the feed stream and the vapor product, according to the HYSYS economic analyzer. The optimization analysis thus was conducted incorporating only models with 11 or more stages. <br />
<br />
The HYSYS economic analyzer was used to systematically optimize the process by finding the model with the lowest annualized utility cost. The performance parameters kept constant across each model were: the inlet composition, pressure, and temperature, the brine outlet temperature, the total product flow rate and composition, and the flash stage schematic. Table 1 displays the annualized utility cost for each model, and illustrates that a clear dip in the utility cost occurs in an 18 stage model. Thus, 18 is the optimal number of stages to use for our MSF distillation given utility costs as the optimized parameter.<br />
[[File:Table_1.PNG|thumb|center|500x300px]]<br />
<br />
=Economic Evaluation=<br />
In order to evaluate our process from a fiscal standpoint, we used Aspen Process Economic Analyzer and Aspen cost estimator to determine capital and operating costs for our plant. These costs were calculated based on calculated equipment sizes, as well as energy requirements reported by our HYSYS model. The capital cost was found to be $485.2MM and annual total operating cost was found to be $144.7MM ($103.7MM of which was utilities). Annual plant revenue was estimated based on prices that water districts in the county currently pay for outside water sources, and was found to be $134.3MM.<sup>14</sup> <br />
<br />
The NPV analysis we conducted assumed that the plant would take two years to build, would operate at half capacity during the first year of operation (year 3), and have a 20 year lifetime. We also assumed that our plant would be in operation 350 days per year. A constant discount rate of 12% was assumed to hold throughout the plant’s lifetime. The final NPV of this project is -$495.7MM. This is due to both the large capital cost of the plant and the annual loss of $10.4MM while in full operation. A graph of cumulative cash flow versus time can be found in Appendix E. Tax rates and depreciation do not directly impact the NPV of this project due to operating at a loss, however for future calculations it should be noted that we used a straight line depreciation schedule over a seven year period with a 40% tax rate. <br />
<br />
Despite the current projections, it is important to consider the greater implications of running a desalination plant in the Bay Area. The population in the Bay Area is quickly growing, while California is experiencing harsher droughts each year. A consequence of this is the possibility of receiving government subsidies for our clean water product. The similarly scaled desalination plant in Carlsbad, CA operates at a loss as well, but receives significant government subsidies. Building this facility may be a strategic investment, especially since greater water scarcity is predicted in the future. <br />
<br />
=Sensitivity Analysis=<br />
We wanted to determine how sensitive NPV of our project is to the cost of capital, price of utilities and price we would be able to sell our clean water product at. We conducted this analysis by varying each of these variables independently between 0.5 times and 1.5 times the original value we calculated. As to be expected, NPV grows more negative with increasing capital costs and utility prices and decreasing water prices. Conversely, NPV becomes less negative as price of water rises and capital and utility costs decrease. A plot summarizing the effects of varying these costs can be found in Appendix E. NPV is most sensitive to the price at which we will be selling our clean water product. It is worth noting that NPV is more sensitive to utilities cost than it is to capital cost, which is why we focused on optimizing the cost of utilities. In future steps, trying to reduce utilities cost even more would be worth looking into to decrease the amount of money being lost on this project.<br />
<br />
=Conclusions and Final Recommendation=<br />
The final design achieves the project goal of producing 50 million gallons per day of distilled water at a yield of 13%, comparable to other similarly sized plants. An optimization of the number of MSF stages is realistic, and can be improved upon by taking into account other process parameters. <br />
<br />
The proposed design was optimized around utility costs, comparing plants with 11 to 25 stages. The process is constrained by product specifications and by the thermodynamics of the heat exchange between the feed and the product streams. Energy conservation was achieved in using the seawater feed to condense the final product, as well as in all of the heat exchangers increasing the thermal energy of the seawater feed stream before it enters the flash stages. <br />
<br />
In order to further optimize this process, other design parameters should be considered such as the brine recycle ratio, the cooler duty of the recycle stream, the pressure drop across each valve at the flash stages, and other economic factors. An optimization around maximizing NPV, for example, might be more comprehensive than that conducted regarding only utility costs. Tuning brine recycle rates could greatly improve process efficiency, and standardizing flash stage pressure drops would make operations more feasible and controlled. <br />
<br />
Given our in depth economic analysis, this project would lose an average of $10.4MM per year, and has an NPV of -$495.7MM for a 20 year plant lifetime. From an economic perspective alone it would not be a good project to build. However, other factors need to be considered when building a project with enormous public value. In recent years California droughts have become more severe. Implementing a drought-proof supply of water now could avert a disaster later on. Even without a large disaster, having the desalination plant could also be expected to pay off in the future with the increasing price of water. Considerations such as these were the deciding factors in building the Carlsbad desalination plant. Since there are currently no desalination plants in the Bay area we recommend that preparations should be made to move forward with a desalination plant.<br />
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<br />
=Appendix A. Process Flow Diagram=<br />
[[File:Appendix 1.PNG]]<br />
<br />
'''Figure A1''' Process Flow Diagram of the MSF System<br />
<br />
=Appendix B. HYSYS Simulation=<br />
=Appendix C. Mass and Energy Balances=<br />
=Appendix D. Summary of Process Units=<br />
=Appendix E. MSF Stage Parameters=<br />
=Appendix F. Process Units Calculations=<br />
=Appendix G. Economic Analysis=</div>RJKolbehttps://processdesign.mccormick.northwestern.edu/index.php?title=Desalination_-_Team_A&diff=5222Desalination - Team A2016-03-12T02:58:52Z<p>RJKolbe: </p>
<hr />
<div>Author: Pear Dhiantravan<sup>[2016]</sup>, Reed Kolbe<sup>[2016]</sup>, Sheridan Lichtor<sup>[2016]</sup>, John Marsiglio<sup>[2016]</sup>, Ellen Zhuang<sup>[2016]</sup><br />
<br />
Instructors: Fengqi You, David Wegerer<br />
<br />
Winter 2016<br />
<br />
=Executive Summary=<br />
Seawater desalination is an attractive approach to address the world’s freshwater shortage in light of the increasing global water scarcity. Our team decided to tackle California's growing drought crisis by designing a multistage flash desalination plant in Richmond, CA. Based on market analysis of existing desalination plants and water demands, this is a strategic location for the desalination of 50 million gallons per day of water from the San Francisco Bay.<br />
<br />
The MSF process contains 18 flash stages in series. Seawater is taken in from the San Francisco Bay at a rate of 398 million gallons per day and mixed with brine recycled from the system. Within the MSF process, seawater is heated through a series of 18 heat exchangers and a brine heater before enters a series of 18 evaporation chambers. In the evaporation chambers, the seawater flashes and the freshwater vapor is condensed, collected, and sent to a water treatment facility. The brine stream proceeds to the next chamber, and the process continues. Upon exiting the last flashing chamber, the brine stream is split into a recycle brine stream that is mixed with the seawater inlet feed and a waste stream that is diluted with fresh seawater and returned to the sea. Overall, the process yield is 13%. This process was constructed in Aspen HYSYS and optimized around utility costs using the HYSYS Economic Analyzer. Based on duties, temperatures and pressures reported by HYSYS, as well as fundamental mass and energy balances, the equipment were sized appropriately and the economics of the process was analyzed.<br />
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The design has a total capital cost of $485.2 MM, an annual operating cost of $144.7 MM ($103.7 MM of which is utilities), and an annual plant revenue of $134.3 MM. Economic analysis reveals that the project has a negative NPV of -$495.7 MM and operates at a loss of $10.4 MM per year. Thus, the proposed design is not profitable. Despite the current projections, it is important to consider the greater implications of running a desalination plant in the Bay Area. The population in the Bay Area is quickly growing while California is experiencing harsher droughts each year. Given the dire situations, the government may support the proposed clean water project with subsidies. Building the facility may be a strategic investment, especially since greater water scarcity is predicted in the future.<br />
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Our design meets various environmental, ethical, social and health related constraints. The brine discharged back to the bay is diluted to at most 0.2% above the natural background salinity as required by law so that the plant does not impose harm on any local marine life. The demographic that the plant serves is largely invested in the protection of the environment, which we addressed by reducing energy consumption through direct energy integration with the nearby Chevron plant. Lastly, the product meets the specifications of the California Safe Water Drinking Act by producing water with no impurities.<br />
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__TOC__<br />
<br />
=Introduction=<br />
An increasing global water scarcity is fueling initiatives everywhere for clean water treatment, making efficient seawater desalination an attractive aim for chemical plant design. A 2015 market analysis found that the global desalination market earned revenues of $11.66 billion, and this number is expected to reach over $19 billion by 2019. Furthermore, the 17,000 desalination plants currently in operation are expected to double in number by 2020.<sup>1</sup><br />
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As fresh water sources become increasingly scarce, strict water conservation measures are being observed. California is entering the fourth year of one of its most severe droughts on record. Cities are required to reduce their water usage by 35% to avoid facing fines.<sup>2</sup> In lieu of these pressing conditions, California is looking for ways to provide more accessible fresh water to its citizens. This high demand for clean water motivated our choosing Richmond, CA as our plant location. At Richmond, the desalination plant can convert readily available seawater from the San Francisco Bay into fresh water. We propose to desalinate 50 million gallons of water per day to be sent to water treatment plants for potability. This aim is based on the capacity of the desalination plant in Carlsbad, California, which services a similar population.<br />
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The salinity of the water in the San Francisco bay is seasonal. During the dry seasons of summer and fall, salinity is high around 10 PSU (10,000 ppm) because water from the Pacific Ocean flows into the San Francisco Bay. During the wet winter season, fresh water from the rivers flows into the Bay, and salinity drops to around 2 PSU (2,000).<sup>3</sup> Designed to meet the “worst case” scenario, our plant will process 398 million gallons of water per day with 10,000 ppm of salt to produce 50 million gallons of water with 1,000 ppm of salt. This gives a yield of 13%.<br />
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The desalination plant proposed consists of 18 flash stages in series. This report outlines our investigation of this potential water desalination plant, including design and optimization of the desalination process, an analysis of its energy consumption and environmental impacts, and a study of its economic implications.<br />
<br />
=Technical Approach=<br />
For the desalination step of our process, we selected a multistage flash (MSF) distillation process. Not only is MSF distillation a very viable method, but it is also the most common method, currently producing about 60% of the world’s desalinated water. MSF and reverse osmosis (RO) are the two major methods being used in large-scale desalination plants. Both processes require considerable amounts of energy. RO typically has a lower energy demand; however, the high impurity content of the Bay water would frequently necessitate membrane cleaning and/or exchange. Feed going through a RO system requires extensive pretreatment to remove biological organisms and other solids to control the pH and the chemical composition of the water. With the San Francisco Bay as our source of water, MSF is an attractive option because sediment and other large impurities can be separated from the feed before distillation occurs. Additionally, MSF distillation plants can be located near power plants and paired to their waste heat streams to conserve energy. This can reduce energy needs by half or two thirds, making MSF increasingly more practical. Due to the maintenance required in the RO system, the MSF distillation is the better option in terms of operation cost.<sup>4</sup><br />
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A HYSYS model was built to simulate the MSF distillation section of the process, which spans after seawater pretreatment and before local potable water treatment. The model is used to simulate the distillation steps and to calculate necessary heating, cooling, and input flow rates to produce the required 50 million gallons of distillated water per day. For the simulation, the 398 million gallons per day of seawater feed stream is defined to be composed of 3.31 mol% sodium chloride (NaCl) and 96.69 mol% water. The percentage of NaCl is set to account for other ions and chemicals present after the pretreatment phase. NaCl alone is added to the HYSYS system due to the capabilities of the fluid package used to simulate this process, ElectroNRTL. The feed is set at 22°C, which is the approximate the temperature of the San Francisco Bay year round.<br />
<br />
=Process Design=<br />
==Design Overview==<br />
The proposed desalination plant uses MSF distillation to convert the San Francisco Bay water to fresh water. The final process design contains 18 flash stages in series. Overall, 398 million gallons per day of of brackish water is converted to 50 million gallons per day of deionized water, a 13% yield. The production meets the required production rate of 50 million gallons of freshwater per day. <br />
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Seawater is taken in from the San Francisco Bay and mixed with the brine recycle stream produced downstream. The feed is then heated through a series of condensers and a heater. Distilled water vapor in each flash stage contacts the tubes carrying the seawater feed and condenses into a liquid stream by exchanging heat with the cooler seawater feed stream. The seawater is sent through a heater to increase its thermal energy before entering the first stage of the MSF. In each flashing stage, some of the water evaporates, leaving the salt behind. The freshwater vapors condense, as described above, and is collected and sent to a water treatment plant. The brine stream is split into the recycle stream and a waste stream, and the waste stream is diluted with fresh seawater before being discharged back into the bay.<br />
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A process flow diagram of the process is depicted in Appendix A. <br />
<br />
==Pretreatment==<br />
Sediment is removed to prevent solids from plugging the process downstream. Scaling of the process units leads to decreased efficiency and more frequent unplanned downtime, and is controlled for by lowering pH. Acidifying the water will also remove CO2, which is a corrosive gas. To control for oxygen, oxygen scavengers will be included in the system to sequester it. Sodium bisulfate will be used as the scavenger.<sup>5</sup><br />
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==Condensers (Heat Exchanger Networks)==<br />
In order to conserve and recycle energy, the condensation of the distillate and heating of the seawater feed will be coupled in countercurrent heat exchanger networks. These heat exchanger networks are condensers of the design. The cold feed, which is a mixture of fresh seawater and brine recycle, is fed through multiple heat exchangers in series. Each heat exchanger corresponds to a different evaporation chamber. This process consists of 18 heat exchangers: E-101, E-102, … E-117, and E-118, which correspond to evaporation chambers V-102, V-103, … V-118, and V-119, respectively. <br />
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The heat exchangers can be viewed similarly to a shell and tube setup, however there is no actual physical shell. The tubes simply run through the top of the evaporation chambers, where vaporized distilled water in the chamber acts as the shell side fluid. The tube bundles are arranged in long tube configuration and are aligned parallel to the direction of the flashing brine flow in the evaporation chamber. The evaporating brine in an evaporation chamber rise up to the the corresponding heat exchanger and condense on the outside of the tubes, creating collectable pure water. This condensing water is what heats up the seawater in the tubes. <br />
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E-101 was used as the basis for the condenser sizing since it has the highest heat requirement, and thus will be the largest heat exchanger. From the HYSYS model, the overall system requires 2.24 x 10<sup>6</sup> kW of duty. Assuming this energy requirement, 5000 tubes, and 18 m length tubes (the diameter of the evaporation chambers, explained further on the next page), the diameter of each tube was calculated to be 0.4 m. Based on the temperature of the streams and flow, the thickness of the tube is 7 x 10<sup>-4</sup> m.<br />
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==Brine Heater==<br />
After the seawater exits the final heat exchanger, it enters a brine heater (E-119) where it is brought up to the temperature necessary for the flashing process to begin. This means that the seawater must be overheated compared to stage one, so that the seawater will flash in the evaporation chamber, i.e. release heat and vapor to reach equilibrium with stage conditions. After flowing through the condensers, the seawater enters the brine heater at 96.1 <sup>o</sup>C and is heated to 120 <sup>o</sup>C. The overall system requires 2.31 x 10<sup>6</sup> kW of duty. This is supplied by a total of 4.15 x 10<sup>6</sup> kg per hour of steam.<br />
<br />
==Evaporation Chambers==<br />
When the seawater has been brought to a temperature appropriate for flashing, it enters the first evaporation chamber (V-102). Upon entering the chamber, the water is flashed. Some of the water evaporates, leaving the salt behind. The vapor rises up to the heat exchanger tubes in each evaporation chamber and condenses on the outside into the distilled water product. This condensing water is what heats up the seawater in the tubes discussed above. The seawater that does not evaporate moves to the next stage, which operates at a higher temperature and lower pressure, and the process is repeated. This continues in series through a total of 18 flashing chambers (V-102, V-103, … V-118, and V-119). All of the distillate is collected into one stream and all of the brine is mixed with seawater before being disposed of back in the bay in order to dilute it enough so it does not have an adverse effect on marine life.<br />
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Each respective heat exchanger fully condenses the vapor product stream from each stage. However, when all of the individual product streams are consolidated into the final combined product stream, some water exists in the vapor phase due to temperature and pressure changes associated with mixing all of the streams together. Although the vapor product stream from each stage condenses completely across its respective heat exchanger, the total product stream contains some water in the vapor phase due to the temperature change when the mixer sums all the streams. In order to fully condense this stream, which will be sent to local water treatment plans, a heat exchanger (E-120) is put in place to cool down the product using the process feed stream. <br />
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The correlations of El-Dessouky and Ettouney were employed in order to size the flash chambers. They specified that conventional MSF plants that operate at a capacity between 27,000 and 36,000 m<sup>3</sup>/day use flashing stages of the dimensions 18 m diameter and 4 m height.<sup>6</sup><br />
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==Valves==<br />
The model requires valves in between the evaporation chambers. The seawater streams flow through valves with large pressure drops to flash a portion the liquid into vapor that can then be separated in the vessels. Large pressure drops provide the thermodynamic driving force to vaporize more of the liquid, and are required to achieve high product yield. <br />
<br />
==Material of Construction==<br />
Before 1980, the shells and internals of the MSF units were commonly constructed from carbon steel. Seawater, however, corrodes carbon steel. To compensate for this, the thickness of the carbon steel has an additional corrosion allowance, which increases the size and weight of the equipment. After 1980, the stainless steel and duplex stainless steel became increasingly common. Stainless steel metal requires less thickness for equivalent strength and corrosion resistance, which allows for a reduction in the size, weight, and therefore cost of units. Major units in our process will be constructed from stainless steel.<sup>6</sup><br />
<br />
==Process Alternatives==<br />
In order to ensure that our design is fully optimized, we wanted to consider several alternatives for our process. We looked at alternatives associated with water pretreatment, the distillation process itself and product treatment.<br />
<br />
===Water Pretreatment===<br />
Scaling of the process units leads to decreased efficiency and more frequent unplanned downtime. Scaling can be controlled by adjusting pH, temperature, and bicarbonate concentration. We selected acidification to control for process scaling. This is because lowering a process temperature would decrease overall efficiency, and decreasing bicarbonate concentration would be comparatively expensive. Lowering pH would have the added benefit of controlling CO2 concentrations since CO2 is a corrosive gas. To control for corrosion we looked at how to remove oxygen. To target the oxygen we chose an oxygen scavenger. This was chosen over other options such as a deaerator, or a protective coating because a deaerator would have a large capital cost, and the equipment itself would experience corrosion, and a tank coating such as zinc orthophosphate has a mixed effectiveness.<sup>7</sup><br />
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===MSF: Brine Recycle vs. Once-Through System===<br />
We explored two options for the overall layout of the MSF distillation plant. In the first, the brine passes through the process once; in the second, a portion of the brine is recycled from the last stage to the incoming seawater feed. The largest draw towards implementing a brine recycle is that it would significantly reduce the overall amount of seawater needed to produce the daily target of 50 million gallons per day. This in turn would lower the amount of energy required to run the pump feeding seawater to the process. Another positive is that, with a brine recycle, the amount of water conditioning chemicals that must be added to the seawater feed is reduced. The negative aspects mainly revolve around the fact that the solution throughout the process will be higher in salt concentration. This increase in salinity both raises the likelihood of scaling and corrosion in the plant and raises the amount of seawater that must be added to the final brine to make it safe for discharge back into the environment. Additionally, boiling point of each stage is raised when adding the brine recycle. After weighing both alternatives against one another, we have decided to include a brine recycle in our plant design. Most of the negative aspects of the brine recycle can be combated (e.g. include anti-scaling agents in the feed pretreatment), and the economic benefits of including the brine recycle are very significant.<sup>8</sup><br />
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===MSF: Continuous vs. Batch===<br />
The distillation step can be done in continuous or batch processes. Batch distillation is more versatile and often used when the product is in small amounts and very high purity. A continuous distillation is more efficient thermodynamically and economically for large amounts of material of constant composition, whereas batch distillation is more effective for small amounts of material of varying compositions. Since the plant is processing large amounts of seawater of relatively constant composition, the distillation system will utilize continuous distillation.<sup>9</sup><br />
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===MSF: Long Tube vs. Crossed Tube ===<br />
Inside the evaporator stage, the condenser tube bundles may be arranged in either long tube or cross tube design. In the long tube arrangement, the tubes are aligned parallel to the direction of the flashing brine flow. The tubes go from stage to stage without water boxes. In the cross tube arrangement, the tubes are lined perpendicular to the flow of the flashing brine. Water boxes transfer brine between the stages.<sup>10 11</sup> While the water boxes in crossed tube bundles allow for more customization, the long tube configuration allows for construction of large unit sizes, as there are manufacturing restrictions with cross tubes. Long tube design can easily accommodate a large number of stages, which lead us to choose long tube for our design.<sup>11 12</sup><br />
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===MSF: Venting System===<br />
Noncondensable gases exist in the process because of air leakages into stages under vacuum conditions and the release of dissolved gases from the heated brine. These gases are removed by venting the system. An air cooler section concentrates the gas before they are vented, and baffles direct the vapor and condensates out. There are two venting arrangements to consider: series and parallel. The system in series moves gas from one stage directly to the next, and the only loss in the system is vapor in the last stage (since some vapor is extracted with gases). This system is economical, however this configuration increases the amount of noncondensable gases passing from one stage to the next, and disrupting the venting system in one stage will affect the entire system. In parallel venting, gas is released through parallel takeoff pipes at each stage. Although this arrangement allows for venting at any stage to be controlled, the design and maintenance is more complex, and more vapor is lost than in the venting system in series. A third alternative is to use a combination of venting in parallel and in series, which is the common method in industry. For this process, our team chose to do venting in parallel and in series.<sup>12</sup><br />
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===Additional Energy Source Alternatives===<br />
Energy for the process can also be coupled with renewable energy sources to reduce the desalination plant’s carbon footprint. Energy integration can be direct or indirect. In direct integration, thermal waste heat from industrial sources provide thermal energy or pressure as energy sources. Direct integration is advantageous at the modular level, as it avoids energy losses with electricity conversion. Within indirect integration, there are modular integration and grid/utility-scale integration. Modular integration integrates the plant with wind turbines and other small-scale renewable power generators with mobile deployment. A “hybridization” of renewable power sources with natural gas power generation is also an option, and the coupling of the two provides a stable power source. Indirect renewable energy integration is growing as the cost of renewable energy continues to decreases and provides an economy of scale that direct integration does not, but there are several obstacles towards indirect integration, such as the plant’s finance and engineering the integration of the two systems.<sup>13</sup> This distillation plant will be directly integrated with neighboring plants such as Chevron that produce thermal waste heat.<br />
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===Product Treatment===<br />
Since the product is distilled water, it needs additional ions to a concentration of around 0.01% before going to the end user. The three alternatives considered were building a water treatment facility on site, simply adding the correct salts to the product stream and then sending the stream for bacterial treatment at a water plant, or simply sending the product distilled water for complete treatment to another facility. Due to the number of nearby water treatment plants and their demand for water, we elected to simply send the product to a nearby water treatment facility.<br />
<br />
==Design Constraints and Tradeoffs==<br />
While designing our process, we wanted to make sure that we met several outside constraints, including environmental, political, ethical, social, sustainability, health and safety constraints. First and most importantly, we wanted to ensure that the brine discharged back to the bay would not harm local marine life. Our process was designed around the constraint of diluting the exiting brine to within 0.2% salinity of background seawater. This is not only compliant with California law, but was also verified to be safe for surrounding marine life through our own outside research. We also addressed many of these considerations by deciding to pursue direct energy integration with the nearby Chevron plant in order to reduce environmental impact of our process. Additionally, we ensured that our plant would be located in an area that is densely populated and in great need of fresh drinking water. Finally, we addressed health and safety considerations by making sure we would be able to send our product distilled water to local treatment plants for proper potabilization.<br />
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===Design Tradeoffs: Thermodynamics=== <br />
Adjusting elements within this process is iterative, and optimization thereof required changing multiple parameters at once. An example of this is in tuning the temperature increase by heater E-100; if the temperature of the stream entering the vessels is too high, the heat exchange between the vapor product and the feed stream will not be realizable because it causes the feed to be too hot to cool and condense the product. Higher temperatures, however, provide greater thermodynamic driving forces for flashing. Setting the entering stream temperature at 120°C provides enough heat for substantial flash at 130 kPa. This is the only heater required until the very last flash stage, which is added to provide more heat for vaporization. This heater (E-105) increases the stream temperature by 15°C, and the vapor product from the last vessel increases the feed stream temperature by almost 30°C. The added energy increases vaporization by 3%, which is a substantial 2.2 million kg/h. The temperature of the streams entering and leaving each stage decreases with each additional flash stage such that the last vessel has the lowest temperature, according to realistic operating guidelines. <br />
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===Design Tradeoffs: Energy Consumption, Environmental Impacts, and Product Optimization===<br />
Increases in the pressure drop across any of the valves in this final design causes a temperature cross in the heat exchangers unless a proper increase in pump energy is provided. There is thus a design tradeoff between lowering energy usage and increasing product yield. For example, lowering the operating pressure of the process dictates that the pressure difference used to flash seawater must be smaller, possibly decreasing the amount that is vaporized. The final design aims for a yield of 50 million gallons per day. The 18 stage model was chosen for its low annual utility cost. This is a reflection of environmental mindfulness because energy consumption is an ongoing aspect of the process and should be lowered as much as possible.<br />
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==Mass and Energy Balances==<br />
The model of the desalination system assumes that: (1) the properties are uniform in each phase within a stage, (2) heat losses are negligible due to the small surface area to volume ratio for each stage and properly insulated units (heat losses to the surrounding vary from 2 to 5% of the total system energy), (3) the distillate is salt free since the boiling point of water is much lower than that of salt, (4) the subcooling or superheating effects on the system energy balances are negligible, (5) the only contaminant is sodium chloride (there are no non-condensable gases to consider, so no vapors are vented), and (6) the process has 3 evaporation chambers.<br />
<br />
The major balances are that the feed is a mixture of the fresh seawater stream and the recycle stream, and that the brine stream exiting the last evaporation chamber is divided into the recycle stream and the waste stream. Within each stage, the change in mass of a phase over time is the balance between the net flow of that phase from the chamber and the rates of evaporation and condensation of water into and out of that phase. The equations governing the mass and energy balances on the system is displayed in Appendix C. <br />
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=Optimization=<br />
As initiatives for reduced energy usage and increased environmental sustainability become more prevalent, efforts to minimize the utility cost in plants has increased to accommodate these incentives. Utilities are a continual source of expenditure and consumption, and a well-designed chemical process should seek to minimize this element. The annualized utility cost is a useful parameter to optimize given that its value depends on variations in energy costs; thus, annualized utility costs do not correlate with conventional indices of inflation, such as capital and labor costs. Additionally, utility costs, like other variable costs, can be minimized by improving the design or operational efficiency of the plant.<br />
<br />
In optimizing our MSF process, the design variable of focus was the number of stages to use in our process. The performance measure was the annualized utility cost, which was the parameter that was minimized for optimization. The process is constrained by the product specifications, which are kept constant and serve as the standard for comparison between each model. These specifications are to produce 50 million gallons of desalinated liquid water per day. <br />
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One feasibility constraint in the process is the size of the heat exchangers, which must provide a large enough area for total condensation of the vapor stream coming out of the flash stages. In order to restrict the heat exchange area needed within each exchanger, the number of stages must be at least 11. Increasing the number of stages decreases the vapor flow rate at each, and decreases the heat exchange area required as well. An 11-stage process allows for appropriate heat exchange between the feed stream and the vapor product, according to the HYSYS economic analyzer. The optimization analysis thus was conducted incorporating only models with 11 or more stages. <br />
<br />
The HYSYS economic analyzer was used to systematically optimize the process by finding the model with the lowest annualized utility cost. The performance parameters kept constant across each model were: the inlet composition, pressure, and temperature, the brine outlet temperature, the total product flow rate and composition, and the flash stage schematic. Table 1 displays the annualized utility cost for each model, and illustrates that a clear dip in the utility cost occurs in an 18 stage model. Thus, 18 is the optimal number of stages to use for our MSF distillation given utility costs as the optimized parameter.<br />
[[File:Table_1.PNG|thumb|center|500x300px]]<br />
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=Economic Evaluation=<br />
In order to evaluate our process from a fiscal standpoint, we used Aspen Process Economic Analyzer and Aspen cost estimator to determine capital and operating costs for our plant. These costs were calculated based on calculated equipment sizes, as well as energy requirements reported by our HYSYS model. The capital cost was found to be $485.2MM and annual total operating cost was found to be $144.7MM ($103.7MM of which was utilities). Annual plant revenue was estimated based on prices that water districts in the county currently pay for outside water sources, and was found to be $134.3MM.<sup>14</sup> <br />
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The NPV analysis we conducted assumed that the plant would take two years to build, would operate at half capacity during the first year of operation (year 3), and have a 20 year lifetime. We also assumed that our plant would be in operation 350 days per year. A constant discount rate of 12% was assumed to hold throughout the plant’s lifetime. The final NPV of this project is -$495.7MM. This is due to both the large capital cost of the plant and the annual loss of $10.4MM while in full operation. A graph of cumulative cash flow versus time can be found in Appendix E. Tax rates and depreciation do not directly impact the NPV of this project due to operating at a loss, however for future calculations it should be noted that we used a straight line depreciation schedule over a seven year period with a 40% tax rate. <br />
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Despite the current projections, it is important to consider the greater implications of running a desalination plant in the Bay Area. The population in the Bay Area is quickly growing, while California is experiencing harsher droughts each year. A consequence of this is the possibility of receiving government subsidies for our clean water product. The similarly scaled desalination plant in Carlsbad, CA operates at a loss as well, but receives significant government subsidies. Building this facility may be a strategic investment, especially since greater water scarcity is predicted in the future. <br />
<br />
=Sensitivity Analysis=<br />
We wanted to determine how sensitive NPV of our project is to the cost of capital, price of utilities and price we would be able to sell our clean water product at. We conducted this analysis by varying each of these variables independently between 0.5 times and 1.5 times the original value we calculated. As to be expected, NPV grows more negative with increasing capital costs and utility prices and decreasing water prices. Conversely, NPV becomes less negative as price of water rises and capital and utility costs decrease. A plot summarizing the effects of varying these costs can be found in Appendix E. NPV is most sensitive to the price at which we will be selling our clean water product. It is worth noting that NPV is more sensitive to utilities cost than it is to capital cost, which is why we focused on optimizing the cost of utilities. In future steps, trying to reduce utilities cost even more would be worth looking into to decrease the amount of money being lost on this project.<br />
<br />
=Conclusions and Final Recommendation=<br />
The final design achieves the project goal of producing 50 million gallons per day of distilled water at a yield of 13%, comparable to other similarly sized plants. An optimization of the number of MSF stages is realistic, and can be improved upon by taking into account other process parameters. <br />
<br />
The proposed design was optimized around utility costs, comparing plants with 11 to 25 stages. The process is constrained by product specifications and by the thermodynamics of the heat exchange between the feed and the product streams. Energy conservation was achieved in using the seawater feed to condense the final product, as well as in all of the heat exchangers increasing the thermal energy of the seawater feed stream before it enters the flash stages. <br />
<br />
In order to further optimize this process, other design parameters should be considered such as the brine recycle ratio, the cooler duty of the recycle stream, the pressure drop across each valve at the flash stages, and other economic factors. An optimization around maximizing NPV, for example, might be more comprehensive than that conducted regarding only utility costs. Tuning brine recycle rates could greatly improve process efficiency, and standardizing flash stage pressure drops would make operations more feasible and controlled. <br />
<br />
Given our in depth economic analysis, this project would lose an average of $10.4MM per year, and has an NPV of -$495.7MM for a 20 year plant lifetime. From an economic perspective alone it would not be a good project to build. However, other factors need to be considered when building a project with enormous public value. In recent years California droughts have become more severe. Implementing a drought-proof supply of water now could avert a disaster later on. Even without a large disaster, having the desalination plant could also be expected to pay off in the future with the increasing price of water. Considerations such as these were the deciding factors in building the Carlsbad desalination plant. Since there are currently no desalination plants in the Bay area we recommend that preparations should be made to move forward with a desalination plant.<br />
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=Appendix A. Process Flow Diagram=<br />
[[File:Appendix 1.PNG]]<br />
<br />
'''Figure A1''' Process Flow Diagram of the MSF System<br />
<br />
=Appendix B. HYSYS Simulation=<br />
=Appendix C. Mass and Energy Balances=<br />
=Appendix D. Summary of Process Units=<br />
=Appendix E. MSF Stage Parameters=<br />
=Appendix F. Process Units Calculations=<br />
=Appendix G. Economic Analysis=</div>RJKolbehttps://processdesign.mccormick.northwestern.edu/index.php?title=Desalination_-_Team_A&diff=5221Desalination - Team A2016-03-12T02:58:32Z<p>RJKolbe: </p>
<hr />
<div>Author: Pear Dhiantravan<sup>[2016]</sup>, Reed Kolbe<sup>[2016]</sup>, Sheridan Lichtor<sup>[2016]</sup>, John Marsiglio<sup>[2016]</sup>, Ellen Zhuang<sup>[2016]</sup><br />
<br />
Instructors: Fengqi You, David Wegerer<br />
<br />
Winter 2016<br />
<br />
=Executive Summary=<br />
Seawater desalination is an attractive approach to address the world’s freshwater shortage in light of the increasing global water scarcity. Our team decided to tackle California's growing drought crisis by designing a multistage flash desalination plant in Richmond, CA. Based on market analysis of existing desalination plants and water demands, this is a strategic location for the desalination of 50 million gallons per day of water from the San Francisco Bay.<br />
<br />
The MSF process contains 18 flash stages in series. Seawater is taken in from the San Francisco Bay at a rate of 398 million gallons per day and mixed with brine recycled from the system. Within the MSF process, seawater is heated through a series of 18 heat exchangers and a brine heater before enters a series of 18 evaporation chambers. In the evaporation chambers, the seawater flashes and the freshwater vapor is condensed, collected, and sent to a water treatment facility. The brine stream proceeds to the next chamber, and the process continues. Upon exiting the last flashing chamber, the brine stream is split into a recycle brine stream that is mixed with the seawater inlet feed and a waste stream that is diluted with fresh seawater and returned to the sea. Overall, the process yield is 13%. This process was constructed in Aspen HYSYS and optimized around utility costs using the HYSYS Economic Analyzer. Based on duties, temperatures and pressures reported by HYSYS, as well as fundamental mass and energy balances, the equipment were sized appropriately and the economics of the process was analyzed.<br />
<br />
The design has a total capital cost of $485.2 MM, an annual operating cost of $144.7 MM ($103.7 MM of which is utilities), and an annual plant revenue of $134.3 MM. Economic analysis reveals that the project has a negative NPV of -$495.7 MM and operates at a loss of $10.4 MM per year. Thus, the proposed design is not profitable. Despite the current projections, it is important to consider the greater implications of running a desalination plant in the Bay Area. The population in the Bay Area is quickly growing while California is experiencing harsher droughts each year. Given the dire situations, the government may support the proposed clean water project with subsidies. Building the facility may be a strategic investment, especially since greater water scarcity is predicted in the future.<br />
<br />
Our design meets various environmental, ethical, social and health related constraints. The brine discharged back to the bay is diluted to at most 0.2% above the natural background salinity as required by law so that the plant does not impose harm on any local marine life. The demographic that the plant serves is largely invested in the protection of the environment, which we addressed by reducing energy consumption through direct energy integration with the nearby Chevron plant. Lastly, the product meets the specifications of the California Safe Water Drinking Act by producing water with no impurities.<br />
<br />
=Introduction=<br />
An increasing global water scarcity is fueling initiatives everywhere for clean water treatment, making efficient seawater desalination an attractive aim for chemical plant design. A 2015 market analysis found that the global desalination market earned revenues of $11.66 billion, and this number is expected to reach over $19 billion by 2019. Furthermore, the 17,000 desalination plants currently in operation are expected to double in number by 2020.<sup>1</sup><br />
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As fresh water sources become increasingly scarce, strict water conservation measures are being observed. California is entering the fourth year of one of its most severe droughts on record. Cities are required to reduce their water usage by 35% to avoid facing fines.<sup>2</sup> In lieu of these pressing conditions, California is looking for ways to provide more accessible fresh water to its citizens. This high demand for clean water motivated our choosing Richmond, CA as our plant location. At Richmond, the desalination plant can convert readily available seawater from the San Francisco Bay into fresh water. We propose to desalinate 50 million gallons of water per day to be sent to water treatment plants for potability. This aim is based on the capacity of the desalination plant in Carlsbad, California, which services a similar population.<br />
<br />
The salinity of the water in the San Francisco bay is seasonal. During the dry seasons of summer and fall, salinity is high around 10 PSU (10,000 ppm) because water from the Pacific Ocean flows into the San Francisco Bay. During the wet winter season, fresh water from the rivers flows into the Bay, and salinity drops to around 2 PSU (2,000).<sup>3</sup> Designed to meet the “worst case” scenario, our plant will process 398 million gallons of water per day with 10,000 ppm of salt to produce 50 million gallons of water with 1,000 ppm of salt. This gives a yield of 13%.<br />
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The desalination plant proposed consists of 18 flash stages in series. This report outlines our investigation of this potential water desalination plant, including design and optimization of the desalination process, an analysis of its energy consumption and environmental impacts, and a study of its economic implications.<br />
<br />
=Technical Approach=<br />
For the desalination step of our process, we selected a multistage flash (MSF) distillation process. Not only is MSF distillation a very viable method, but it is also the most common method, currently producing about 60% of the world’s desalinated water. MSF and reverse osmosis (RO) are the two major methods being used in large-scale desalination plants. Both processes require considerable amounts of energy. RO typically has a lower energy demand; however, the high impurity content of the Bay water would frequently necessitate membrane cleaning and/or exchange. Feed going through a RO system requires extensive pretreatment to remove biological organisms and other solids to control the pH and the chemical composition of the water. With the San Francisco Bay as our source of water, MSF is an attractive option because sediment and other large impurities can be separated from the feed before distillation occurs. Additionally, MSF distillation plants can be located near power plants and paired to their waste heat streams to conserve energy. This can reduce energy needs by half or two thirds, making MSF increasingly more practical. Due to the maintenance required in the RO system, the MSF distillation is the better option in terms of operation cost.<sup>4</sup><br />
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A HYSYS model was built to simulate the MSF distillation section of the process, which spans after seawater pretreatment and before local potable water treatment. The model is used to simulate the distillation steps and to calculate necessary heating, cooling, and input flow rates to produce the required 50 million gallons of distillated water per day. For the simulation, the 398 million gallons per day of seawater feed stream is defined to be composed of 3.31 mol% sodium chloride (NaCl) and 96.69 mol% water. The percentage of NaCl is set to account for other ions and chemicals present after the pretreatment phase. NaCl alone is added to the HYSYS system due to the capabilities of the fluid package used to simulate this process, ElectroNRTL. The feed is set at 22°C, which is the approximate the temperature of the San Francisco Bay year round.<br />
<br />
=Process Design=<br />
==Design Overview==<br />
The proposed desalination plant uses MSF distillation to convert the San Francisco Bay water to fresh water. The final process design contains 18 flash stages in series. Overall, 398 million gallons per day of of brackish water is converted to 50 million gallons per day of deionized water, a 13% yield. The production meets the required production rate of 50 million gallons of freshwater per day. <br />
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Seawater is taken in from the San Francisco Bay and mixed with the brine recycle stream produced downstream. The feed is then heated through a series of condensers and a heater. Distilled water vapor in each flash stage contacts the tubes carrying the seawater feed and condenses into a liquid stream by exchanging heat with the cooler seawater feed stream. The seawater is sent through a heater to increase its thermal energy before entering the first stage of the MSF. In each flashing stage, some of the water evaporates, leaving the salt behind. The freshwater vapors condense, as described above, and is collected and sent to a water treatment plant. The brine stream is split into the recycle stream and a waste stream, and the waste stream is diluted with fresh seawater before being discharged back into the bay.<br />
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A process flow diagram of the process is depicted in Appendix A. <br />
<br />
==Pretreatment==<br />
Sediment is removed to prevent solids from plugging the process downstream. Scaling of the process units leads to decreased efficiency and more frequent unplanned downtime, and is controlled for by lowering pH. Acidifying the water will also remove CO2, which is a corrosive gas. To control for oxygen, oxygen scavengers will be included in the system to sequester it. Sodium bisulfate will be used as the scavenger.<sup>5</sup><br />
<br />
==Condensers (Heat Exchanger Networks)==<br />
In order to conserve and recycle energy, the condensation of the distillate and heating of the seawater feed will be coupled in countercurrent heat exchanger networks. These heat exchanger networks are condensers of the design. The cold feed, which is a mixture of fresh seawater and brine recycle, is fed through multiple heat exchangers in series. Each heat exchanger corresponds to a different evaporation chamber. This process consists of 18 heat exchangers: E-101, E-102, … E-117, and E-118, which correspond to evaporation chambers V-102, V-103, … V-118, and V-119, respectively. <br />
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The heat exchangers can be viewed similarly to a shell and tube setup, however there is no actual physical shell. The tubes simply run through the top of the evaporation chambers, where vaporized distilled water in the chamber acts as the shell side fluid. The tube bundles are arranged in long tube configuration and are aligned parallel to the direction of the flashing brine flow in the evaporation chamber. The evaporating brine in an evaporation chamber rise up to the the corresponding heat exchanger and condense on the outside of the tubes, creating collectable pure water. This condensing water is what heats up the seawater in the tubes. <br />
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E-101 was used as the basis for the condenser sizing since it has the highest heat requirement, and thus will be the largest heat exchanger. From the HYSYS model, the overall system requires 2.24 x 10<sup>6</sup> kW of duty. Assuming this energy requirement, 5000 tubes, and 18 m length tubes (the diameter of the evaporation chambers, explained further on the next page), the diameter of each tube was calculated to be 0.4 m. Based on the temperature of the streams and flow, the thickness of the tube is 7 x 10<sup>-4</sup> m.<br />
<br />
==Brine Heater==<br />
After the seawater exits the final heat exchanger, it enters a brine heater (E-119) where it is brought up to the temperature necessary for the flashing process to begin. This means that the seawater must be overheated compared to stage one, so that the seawater will flash in the evaporation chamber, i.e. release heat and vapor to reach equilibrium with stage conditions. After flowing through the condensers, the seawater enters the brine heater at 96.1 <sup>o</sup>C and is heated to 120 <sup>o</sup>C. The overall system requires 2.31 x 10<sup>6</sup> kW of duty. This is supplied by a total of 4.15 x 10<sup>6</sup> kg per hour of steam.<br />
<br />
==Evaporation Chambers==<br />
When the seawater has been brought to a temperature appropriate for flashing, it enters the first evaporation chamber (V-102). Upon entering the chamber, the water is flashed. Some of the water evaporates, leaving the salt behind. The vapor rises up to the heat exchanger tubes in each evaporation chamber and condenses on the outside into the distilled water product. This condensing water is what heats up the seawater in the tubes discussed above. The seawater that does not evaporate moves to the next stage, which operates at a higher temperature and lower pressure, and the process is repeated. This continues in series through a total of 18 flashing chambers (V-102, V-103, … V-118, and V-119). All of the distillate is collected into one stream and all of the brine is mixed with seawater before being disposed of back in the bay in order to dilute it enough so it does not have an adverse effect on marine life.<br />
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Each respective heat exchanger fully condenses the vapor product stream from each stage. However, when all of the individual product streams are consolidated into the final combined product stream, some water exists in the vapor phase due to temperature and pressure changes associated with mixing all of the streams together. Although the vapor product stream from each stage condenses completely across its respective heat exchanger, the total product stream contains some water in the vapor phase due to the temperature change when the mixer sums all the streams. In order to fully condense this stream, which will be sent to local water treatment plans, a heat exchanger (E-120) is put in place to cool down the product using the process feed stream. <br />
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The correlations of El-Dessouky and Ettouney were employed in order to size the flash chambers. They specified that conventional MSF plants that operate at a capacity between 27,000 and 36,000 m<sup>3</sup>/day use flashing stages of the dimensions 18 m diameter and 4 m height.<sup>6</sup><br />
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==Valves==<br />
The model requires valves in between the evaporation chambers. The seawater streams flow through valves with large pressure drops to flash a portion the liquid into vapor that can then be separated in the vessels. Large pressure drops provide the thermodynamic driving force to vaporize more of the liquid, and are required to achieve high product yield. <br />
<br />
==Material of Construction==<br />
Before 1980, the shells and internals of the MSF units were commonly constructed from carbon steel. Seawater, however, corrodes carbon steel. To compensate for this, the thickness of the carbon steel has an additional corrosion allowance, which increases the size and weight of the equipment. After 1980, the stainless steel and duplex stainless steel became increasingly common. Stainless steel metal requires less thickness for equivalent strength and corrosion resistance, which allows for a reduction in the size, weight, and therefore cost of units. Major units in our process will be constructed from stainless steel.<sup>6</sup><br />
<br />
==Process Alternatives==<br />
In order to ensure that our design is fully optimized, we wanted to consider several alternatives for our process. We looked at alternatives associated with water pretreatment, the distillation process itself and product treatment.<br />
<br />
===Water Pretreatment===<br />
Scaling of the process units leads to decreased efficiency and more frequent unplanned downtime. Scaling can be controlled by adjusting pH, temperature, and bicarbonate concentration. We selected acidification to control for process scaling. This is because lowering a process temperature would decrease overall efficiency, and decreasing bicarbonate concentration would be comparatively expensive. Lowering pH would have the added benefit of controlling CO2 concentrations since CO2 is a corrosive gas. To control for corrosion we looked at how to remove oxygen. To target the oxygen we chose an oxygen scavenger. This was chosen over other options such as a deaerator, or a protective coating because a deaerator would have a large capital cost, and the equipment itself would experience corrosion, and a tank coating such as zinc orthophosphate has a mixed effectiveness.<sup>7</sup><br />
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===MSF: Brine Recycle vs. Once-Through System===<br />
We explored two options for the overall layout of the MSF distillation plant. In the first, the brine passes through the process once; in the second, a portion of the brine is recycled from the last stage to the incoming seawater feed. The largest draw towards implementing a brine recycle is that it would significantly reduce the overall amount of seawater needed to produce the daily target of 50 million gallons per day. This in turn would lower the amount of energy required to run the pump feeding seawater to the process. Another positive is that, with a brine recycle, the amount of water conditioning chemicals that must be added to the seawater feed is reduced. The negative aspects mainly revolve around the fact that the solution throughout the process will be higher in salt concentration. This increase in salinity both raises the likelihood of scaling and corrosion in the plant and raises the amount of seawater that must be added to the final brine to make it safe for discharge back into the environment. Additionally, boiling point of each stage is raised when adding the brine recycle. After weighing both alternatives against one another, we have decided to include a brine recycle in our plant design. Most of the negative aspects of the brine recycle can be combated (e.g. include anti-scaling agents in the feed pretreatment), and the economic benefits of including the brine recycle are very significant.<sup>8</sup><br />
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===MSF: Continuous vs. Batch===<br />
The distillation step can be done in continuous or batch processes. Batch distillation is more versatile and often used when the product is in small amounts and very high purity. A continuous distillation is more efficient thermodynamically and economically for large amounts of material of constant composition, whereas batch distillation is more effective for small amounts of material of varying compositions. Since the plant is processing large amounts of seawater of relatively constant composition, the distillation system will utilize continuous distillation.<sup>9</sup><br />
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===MSF: Long Tube vs. Crossed Tube ===<br />
Inside the evaporator stage, the condenser tube bundles may be arranged in either long tube or cross tube design. In the long tube arrangement, the tubes are aligned parallel to the direction of the flashing brine flow. The tubes go from stage to stage without water boxes. In the cross tube arrangement, the tubes are lined perpendicular to the flow of the flashing brine. Water boxes transfer brine between the stages.<sup>10 11</sup> While the water boxes in crossed tube bundles allow for more customization, the long tube configuration allows for construction of large unit sizes, as there are manufacturing restrictions with cross tubes. Long tube design can easily accommodate a large number of stages, which lead us to choose long tube for our design.<sup>11 12</sup><br />
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===MSF: Venting System===<br />
Noncondensable gases exist in the process because of air leakages into stages under vacuum conditions and the release of dissolved gases from the heated brine. These gases are removed by venting the system. An air cooler section concentrates the gas before they are vented, and baffles direct the vapor and condensates out. There are two venting arrangements to consider: series and parallel. The system in series moves gas from one stage directly to the next, and the only loss in the system is vapor in the last stage (since some vapor is extracted with gases). This system is economical, however this configuration increases the amount of noncondensable gases passing from one stage to the next, and disrupting the venting system in one stage will affect the entire system. In parallel venting, gas is released through parallel takeoff pipes at each stage. Although this arrangement allows for venting at any stage to be controlled, the design and maintenance is more complex, and more vapor is lost than in the venting system in series. A third alternative is to use a combination of venting in parallel and in series, which is the common method in industry. For this process, our team chose to do venting in parallel and in series.<sup>12</sup><br />
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===Additional Energy Source Alternatives===<br />
Energy for the process can also be coupled with renewable energy sources to reduce the desalination plant’s carbon footprint. Energy integration can be direct or indirect. In direct integration, thermal waste heat from industrial sources provide thermal energy or pressure as energy sources. Direct integration is advantageous at the modular level, as it avoids energy losses with electricity conversion. Within indirect integration, there are modular integration and grid/utility-scale integration. Modular integration integrates the plant with wind turbines and other small-scale renewable power generators with mobile deployment. A “hybridization” of renewable power sources with natural gas power generation is also an option, and the coupling of the two provides a stable power source. Indirect renewable energy integration is growing as the cost of renewable energy continues to decreases and provides an economy of scale that direct integration does not, but there are several obstacles towards indirect integration, such as the plant’s finance and engineering the integration of the two systems.<sup>13</sup> This distillation plant will be directly integrated with neighboring plants such as Chevron that produce thermal waste heat.<br />
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===Product Treatment===<br />
Since the product is distilled water, it needs additional ions to a concentration of around 0.01% before going to the end user. The three alternatives considered were building a water treatment facility on site, simply adding the correct salts to the product stream and then sending the stream for bacterial treatment at a water plant, or simply sending the product distilled water for complete treatment to another facility. Due to the number of nearby water treatment plants and their demand for water, we elected to simply send the product to a nearby water treatment facility.<br />
<br />
==Design Constraints and Tradeoffs==<br />
While designing our process, we wanted to make sure that we met several outside constraints, including environmental, political, ethical, social, sustainability, health and safety constraints. First and most importantly, we wanted to ensure that the brine discharged back to the bay would not harm local marine life. Our process was designed around the constraint of diluting the exiting brine to within 0.2% salinity of background seawater. This is not only compliant with California law, but was also verified to be safe for surrounding marine life through our own outside research. We also addressed many of these considerations by deciding to pursue direct energy integration with the nearby Chevron plant in order to reduce environmental impact of our process. Additionally, we ensured that our plant would be located in an area that is densely populated and in great need of fresh drinking water. Finally, we addressed health and safety considerations by making sure we would be able to send our product distilled water to local treatment plants for proper potabilization.<br />
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===Design Tradeoffs: Thermodynamics=== <br />
Adjusting elements within this process is iterative, and optimization thereof required changing multiple parameters at once. An example of this is in tuning the temperature increase by heater E-100; if the temperature of the stream entering the vessels is too high, the heat exchange between the vapor product and the feed stream will not be realizable because it causes the feed to be too hot to cool and condense the product. Higher temperatures, however, provide greater thermodynamic driving forces for flashing. Setting the entering stream temperature at 120°C provides enough heat for substantial flash at 130 kPa. This is the only heater required until the very last flash stage, which is added to provide more heat for vaporization. This heater (E-105) increases the stream temperature by 15°C, and the vapor product from the last vessel increases the feed stream temperature by almost 30°C. The added energy increases vaporization by 3%, which is a substantial 2.2 million kg/h. The temperature of the streams entering and leaving each stage decreases with each additional flash stage such that the last vessel has the lowest temperature, according to realistic operating guidelines. <br />
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===Design Tradeoffs: Energy Consumption, Environmental Impacts, and Product Optimization===<br />
Increases in the pressure drop across any of the valves in this final design causes a temperature cross in the heat exchangers unless a proper increase in pump energy is provided. There is thus a design tradeoff between lowering energy usage and increasing product yield. For example, lowering the operating pressure of the process dictates that the pressure difference used to flash seawater must be smaller, possibly decreasing the amount that is vaporized. The final design aims for a yield of 50 million gallons per day. The 18 stage model was chosen for its low annual utility cost. This is a reflection of environmental mindfulness because energy consumption is an ongoing aspect of the process and should be lowered as much as possible.<br />
<br />
==Mass and Energy Balances==<br />
The model of the desalination system assumes that: (1) the properties are uniform in each phase within a stage, (2) heat losses are negligible due to the small surface area to volume ratio for each stage and properly insulated units (heat losses to the surrounding vary from 2 to 5% of the total system energy), (3) the distillate is salt free since the boiling point of water is much lower than that of salt, (4) the subcooling or superheating effects on the system energy balances are negligible, (5) the only contaminant is sodium chloride (there are no non-condensable gases to consider, so no vapors are vented), and (6) the process has 3 evaporation chambers.<br />
<br />
The major balances are that the feed is a mixture of the fresh seawater stream and the recycle stream, and that the brine stream exiting the last evaporation chamber is divided into the recycle stream and the waste stream. Within each stage, the change in mass of a phase over time is the balance between the net flow of that phase from the chamber and the rates of evaporation and condensation of water into and out of that phase. The equations governing the mass and energy balances on the system is displayed in Appendix C. <br />
<br />
=Optimization=<br />
As initiatives for reduced energy usage and increased environmental sustainability become more prevalent, efforts to minimize the utility cost in plants has increased to accommodate these incentives. Utilities are a continual source of expenditure and consumption, and a well-designed chemical process should seek to minimize this element. The annualized utility cost is a useful parameter to optimize given that its value depends on variations in energy costs; thus, annualized utility costs do not correlate with conventional indices of inflation, such as capital and labor costs. Additionally, utility costs, like other variable costs, can be minimized by improving the design or operational efficiency of the plant.<br />
<br />
In optimizing our MSF process, the design variable of focus was the number of stages to use in our process. The performance measure was the annualized utility cost, which was the parameter that was minimized for optimization. The process is constrained by the product specifications, which are kept constant and serve as the standard for comparison between each model. These specifications are to produce 50 million gallons of desalinated liquid water per day. <br />
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One feasibility constraint in the process is the size of the heat exchangers, which must provide a large enough area for total condensation of the vapor stream coming out of the flash stages. In order to restrict the heat exchange area needed within each exchanger, the number of stages must be at least 11. Increasing the number of stages decreases the vapor flow rate at each, and decreases the heat exchange area required as well. An 11-stage process allows for appropriate heat exchange between the feed stream and the vapor product, according to the HYSYS economic analyzer. The optimization analysis thus was conducted incorporating only models with 11 or more stages. <br />
<br />
The HYSYS economic analyzer was used to systematically optimize the process by finding the model with the lowest annualized utility cost. The performance parameters kept constant across each model were: the inlet composition, pressure, and temperature, the brine outlet temperature, the total product flow rate and composition, and the flash stage schematic. Table 1 displays the annualized utility cost for each model, and illustrates that a clear dip in the utility cost occurs in an 18 stage model. Thus, 18 is the optimal number of stages to use for our MSF distillation given utility costs as the optimized parameter.<br />
[[File:Table_1.PNG|thumb|center|500x300px]]<br />
<br />
=Economic Evaluation=<br />
In order to evaluate our process from a fiscal standpoint, we used Aspen Process Economic Analyzer and Aspen cost estimator to determine capital and operating costs for our plant. These costs were calculated based on calculated equipment sizes, as well as energy requirements reported by our HYSYS model. The capital cost was found to be $485.2MM and annual total operating cost was found to be $144.7MM ($103.7MM of which was utilities). Annual plant revenue was estimated based on prices that water districts in the county currently pay for outside water sources, and was found to be $134.3MM.<sup>14</sup> <br />
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The NPV analysis we conducted assumed that the plant would take two years to build, would operate at half capacity during the first year of operation (year 3), and have a 20 year lifetime. We also assumed that our plant would be in operation 350 days per year. A constant discount rate of 12% was assumed to hold throughout the plant’s lifetime. The final NPV of this project is -$495.7MM. This is due to both the large capital cost of the plant and the annual loss of $10.4MM while in full operation. A graph of cumulative cash flow versus time can be found in Appendix E. Tax rates and depreciation do not directly impact the NPV of this project due to operating at a loss, however for future calculations it should be noted that we used a straight line depreciation schedule over a seven year period with a 40% tax rate. <br />
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Despite the current projections, it is important to consider the greater implications of running a desalination plant in the Bay Area. The population in the Bay Area is quickly growing, while California is experiencing harsher droughts each year. A consequence of this is the possibility of receiving government subsidies for our clean water product. The similarly scaled desalination plant in Carlsbad, CA operates at a loss as well, but receives significant government subsidies. Building this facility may be a strategic investment, especially since greater water scarcity is predicted in the future. <br />
<br />
=Sensitivity Analysis=<br />
We wanted to determine how sensitive NPV of our project is to the cost of capital, price of utilities and price we would be able to sell our clean water product at. We conducted this analysis by varying each of these variables independently between 0.5 times and 1.5 times the original value we calculated. As to be expected, NPV grows more negative with increasing capital costs and utility prices and decreasing water prices. Conversely, NPV becomes less negative as price of water rises and capital and utility costs decrease. A plot summarizing the effects of varying these costs can be found in Appendix E. NPV is most sensitive to the price at which we will be selling our clean water product. It is worth noting that NPV is more sensitive to utilities cost than it is to capital cost, which is why we focused on optimizing the cost of utilities. In future steps, trying to reduce utilities cost even more would be worth looking into to decrease the amount of money being lost on this project.<br />
<br />
=Conclusions and Final Recommendation=<br />
The final design achieves the project goal of producing 50 million gallons per day of distilled water at a yield of 13%, comparable to other similarly sized plants. An optimization of the number of MSF stages is realistic, and can be improved upon by taking into account other process parameters. <br />
<br />
The proposed design was optimized around utility costs, comparing plants with 11 to 25 stages. The process is constrained by product specifications and by the thermodynamics of the heat exchange between the feed and the product streams. Energy conservation was achieved in using the seawater feed to condense the final product, as well as in all of the heat exchangers increasing the thermal energy of the seawater feed stream before it enters the flash stages. <br />
<br />
In order to further optimize this process, other design parameters should be considered such as the brine recycle ratio, the cooler duty of the recycle stream, the pressure drop across each valve at the flash stages, and other economic factors. An optimization around maximizing NPV, for example, might be more comprehensive than that conducted regarding only utility costs. Tuning brine recycle rates could greatly improve process efficiency, and standardizing flash stage pressure drops would make operations more feasible and controlled. <br />
<br />
Given our in depth economic analysis, this project would lose an average of $10.4MM per year, and has an NPV of -$495.7MM for a 20 year plant lifetime. From an economic perspective alone it would not be a good project to build. However, other factors need to be considered when building a project with enormous public value. In recent years California droughts have become more severe. Implementing a drought-proof supply of water now could avert a disaster later on. Even without a large disaster, having the desalination plant could also be expected to pay off in the future with the increasing price of water. Considerations such as these were the deciding factors in building the Carlsbad desalination plant. Since there are currently no desalination plants in the Bay area we recommend that preparations should be made to move forward with a desalination plant.<br />
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=Appendix A. Process Flow Diagram=<br />
[[File:Appendix 1.PNG]]<br />
<br />
'''Figure A1''' Process Flow Diagram of the MSF System<br />
<br />
=Appendix B. HYSYS Simulation=<br />
=Appendix C. Mass and Energy Balances=<br />
=Appendix D. Summary of Process Units=<br />
=Appendix E. MSF Stage Parameters=<br />
=Appendix F. Process Units Calculations=<br />
=Appendix G. Economic Analysis=</div>RJKolbehttps://processdesign.mccormick.northwestern.edu/index.php?title=Estimation_of_production_cost_and_revenue&diff=4612Estimation of production cost and revenue2016-02-21T22:50:05Z<p>RJKolbe: </p>
<hr />
<div>Authors: Nick Pinkerton, Karen Schmidt, James Xamplas (ChE 352 in Winter 2014), Reed Kolbe (ChE 352, Winter 2016)<br />
<br />
Steward: David Chen, Fengqi You <br />
<br />
==Variable Cost of Production==<br />
Variable costs of production are dependent primarily on plant output and rate of production. There are many variables to consider when costing a plant. <br />
# Raw materials consumed<br />
# Utilities-steam, electricity, cooling water, fuel, etc.<br />
# Consumables - acids, bases, solvents, catalysts, etc.<br />
# Disposal<br />
# Shipping<br />
The majority of the variable costs for a production plant are the raw materials and utilities costs. Variable costs can be greatly cut through optimization techniques and intelligent plant design (Towler and Sinnott, 2013).<br />
===Raw Materials Cost===<br />
Calculating the annual cost of a raw material is calculated by simply multiplying the feed rate of the process by the appropriate price per volume or mass. These are the costs of chemical feed stocks required by the process. Feed stocks flow rates are obtained from PFD (Turton et al., 2013).There are several ways to optimize this cost to ensure that a process is not costing more than it should. First one should assess the actual consumption of a plant to see if it is significantly different from what should be expected based on process stoichiometry and selectivities (Towler and Sinnott, 2013). Finding may prove that a process is less efficient than it originally claimed.<br />
It is smart to benchmark a new plant design against an existing plant or pilot plant. Raw materials are typically the largest contributor to overall variable costs. For bulk chemicals and petrochemicals, raw materials represent 80-90% of the total cash cost of production (CCOP). <br />
===Utilities Cost===<br />
These are the costs of the various utilities streams required by the process. The flowrates for the utilities streams are located on the PFD (Turton et al., 2013). This includes:<br />
*Fuel gas, oil, or coal<br />
*Electric power<br />
*Steam<br />
*Cooling water<br />
*Process water<br />
*Boiler feed water<br />
*Air<br />
*Inert gas<br />
*Refrigeration<br />
<br />
Utility streams are excellent ways to streamline a process and are often indicative of how efficient of a process the project is. Process methods such as steam generation and pinch analysis can be used to greatly reduce utility costs across a plant. Further analysis of pinch analysis techniques and optimizing heat exchanger networks can be found in plant design texts such as first reference from Gavin Towler. The determination of process utility costs is often more difficult than the determination of raw material costs; however, the utilities are typically between 5-10% of CCOP (Towler and Sinnott, 2013). The cost of heating a process can be reduced by using process waste streams as fuel which consequently also reduces the need for waste disposal.<br />
<br />
===Waste Disposal Costs===<br />
These are defined as the cost of waste treatment to protect the environment (Turton et al., 2013). These are materials that cannot be recycled or sold off as by-products. Often times these streams require additives or additional treatment to meet governmental regulations. <br />
Hydrocarbon waste can often be incinerated directly to the atmosphere or used as process fuel to heat other streams in the system. Using the stream as process fuel allows the fuel value of the stream to be recovered into the system. The substituted value can be calculated by multiplying the conventional fuel price by the heat of combustion of the waste stream. <br />
<br />
<math>P_{WFV} = P_F * \Delta H_C^o</math><br />
<br />
where <br />
<math>P_{WFV}</math> = waste value of fuel ($/lb or $/kg)<br />
<br />
<math>P_F</math> = price of fuel ($/MMBtu or $/GJ)<br />
<br />
<math>\Delta H_C^o</math> = heat of combustion (MMBtu/lb or GJ/kg)<br />
<br />
Dilute aqueous streams must be sent to wastewater treatment typically prior to purging from the plant. Acidic or basic wastes are neutralized prior to treatment by salting out the acid or base. The cost of wastewater treatment is typically about $6 per 1000 gal but this is only an estimate that doesn't account for regional charges (Towler and Sinnott, 2013).<br />
<br />
Solid waste treatment can typically be sent to a landfill at a cost of approximately $50/ton (Towler and Sinnott, 2013). <br />
<br />
Hazardous wastes arise from the production of concentrated liquid streams that cannot be incinerated. Hazardous wastes should be avoided if possible, but that is not always feasible for some processes. The cost of hazardous waste disposal is strongly dependent on the location of the plant, the plants proximity to waste disposal plants and the degree of hazard of the waste.<br />
<br />
==Fixed Cost of Production==<br />
Fixed costs are those whose amounts are independent of production rates. Much of these costs are personnel salaries, taxes, insurance, and legal payments.<br />
===Labor Costs===<br />
These are the costs attributed to the personnel required to operate the process plant (Turton et al., 2013).<br />
<br />
The number of operators required per shift, <math>N_{OL}</math> can be estimated by<br />
<br />
<math>N_{OL}=(6.29+31.7P^2+0.23N_{np})^{0.5}</math><br />
<br />
where <math>P</math> is the number of processing steps involving particulate solids and <math>N_{np}</math> is the number of other processing steps (Turton et al., 2013). For each of the <math>N_{OL}</math> operators per 8-hour shift, approximately 4.5 operators must be hired for a plant that runs 24 hours per day, to account for the 3 shifts per day and the 3 weeks of leave typically taken by each operator per year (Turton et al., 2013). The salary for a chemical plant operator varies by location, and the estimator should look up the average value for the area.<br />
<br />
===Maintenance Costs===<br />
These are the costs associated with labor and materials necessary to maintain plant production. An estimate of these are 6% of the fixed capital investment (Turton et al., 2013).<br />
<br />
===Research and Development===<br />
These are the costs of research done in developing the process and/or products. This includes salaries for researchers as well as funds for research related equipment and supplies. An estimate of these costs are 5% of the total manufacturing cost (Turton et al., 2013).<br />
<br />
===Taxes and Insurance===<br />
Taxes vary by location, but a first estimate of property taxes and liability insurance is 3% of the fixed capital investment (Turton et al., 2013).<br />
<br />
===Plant Overhead===<br />
Overhead costs are the miscellaneous but necessary costs of running a business, including payroll, employee benefits, and janitorial services. This may be estimated as 70% of the operating labor costs, added to 4% of the fixed capital costs (Turton et al., 2013).<br />
<br />
===Licensing and Royalties===<br />
The costs of paying for the use of intellectual property clearly varies, but an estimate that may be used is 3% of the total manufacturing cost (Turton et al., 2013).<br />
<br />
==Revenues==<br />
The revenues of a process are the income earned form sales of the main products and the by-products. Revenue can be impacted by market fluctuations and production rates.<br />
===By-Product Revenues===<br />
Besides selling the main product from a process, by-products from separations and reactions can also be valuable in the market. Often it is more difficult to decide which by-products to recover and purify than it is to make decisions on the main product. <br />
<br />
By-products made in stoichiometric ratios from reactions must be either sold off or managed through waste disposal. Other by-products are sometimes produced through feed impurities or by nonselective reactions. There are several potential valuable by-products from a process: <br />
# Materials produced in stoichiometric quantities by the reactions that create the main product. If they are not recovered then the waste disposal expenses will be large.<br />
# Components that are produced in high yield by side reactions. <br />
# Components formed in high yield from feed impurities. Many sulfurs are produced as a by-product of fuels manufacture.<br />
# Components that are produced in low yield but have high value. An example includes acetophenone which is recovered as a by-product of phenol manufacture.<br />
# Degraded consumables (e.g. solvents, etc.) that have reuse value.<br />
<br />
A rule of thumb that can be used for preliminary screening of by-products for large plants is that for by-product recovery to be economically feasible the net benefit must be greater than $200,000 a year. A net benefit can be calculated by adding the possible resale value of the by-product and the avoided waste disposal cost (Towler and Sinnott, 2013). <br />
<br />
===Margin===<br />
The gross margin of a process is defined as the sum of product and by-product revenues minus the raw material cost. <br />
<br />
Gross margin = Revenues - Raw materials costs<br />
<br />
Because raw materials are most often the most expensive variable cost of a process, the gross margin is a good gauge as to what the total profitability of a process will be. Raw materials and product pricing are often subject to high degrees of variability which can be difficult to forecast. The size of margins are highly versatile depending on the <br />
industry. For many petrochemical industries the margin may be only 10%; however, for industries such as food additives and pharmaceuticals the margins are generally much higher (Towler and Sinnott, 2013).<br />
<br />
===Profits===<br />
There are several standards for calculating company profits. The cash cost of production (CCOP) is the sum of the fixed and variable production costs. <br />
<br />
<math>CCOP = VCOP + FCOP</math><br />
<br />
where <math>VCOP</math> is the variable cost of production and <math>FCOP</math> is the fixed cost of production. <br />
<br />
Gross profit, which should not be confused with gross margin, is then calculated by the following equation,<br />
<br />
<math>Gross\ profit = Main\ product\ revenues - CCOP</math><br />
<br />
Finally profit can be calculated by subtracting the income taxes that the plant would be subject to depending on the tax code of the county the plant is located in. <br />
<br />
<math>Net\ profit = gross\ profit - taxes</math><br />
<br />
==Pricing Products and Raw Materials==<br />
The revenues and costs of a project are vital to determining its economic feasibility. To calculate these values one needs to multiply the respective product and feed streams by their respective prices. The major difficulty of this process is determining the prices that should be used in this formula. When analyzing a plant, not only do the current prices need to be acknowledged but also the stability of the market to forecast future fluctuations and deviations. <br />
===Pricing Fundamentals===<br />
The pricing of a substance is determined by the fundamental economic principles of supply and demand. A supply curve and demand curve can be graphed and added to determine the market equilibrium price and projected market size. There are many ways a company can combat if the market equilibrium pricing is not suitable for a process. One of these ways is changing the market that the company is selling to. Instead of selling industrial grade product there may be markets for pharmaceutical grade or food grade that would allow for a company to sell their product at higher margins. Another avenue to look into is changing the geographic market being sold to. Rarely is there a global synchronous market, but rather a variation depending on where in the world the product is being sold. It is possible that a company could make more money by dedicating their sales to the Asian market as opposed to the US or vise versa. <br />
===Price Data Sources===<br />
There are many resources when trying to determine the price of a chemical or utility. This are important for looking at current pricing information as well as historical data that can be used for forecasting purposes. <br />
====Internal Company Forecasts====<br />
Large companies will often have the marketing or development departments develop a forecasting database that can be used internally in the company. Forecasts of this magnitude will often have multiple scenarios and projects that are evaluated under the given parameters. Companies may even license these forecasts to other companies for high fees if they desire. <br />
<br />
[[File:Capture.JPG]]<br />
<br />
Table 1 provides common industry acronyms that are used to indicate certain key words when determining pricing information.<br />
<br />
====Trade Journals====<br />
There are also many publications that report pricing data weekly. ''ICIS Chemical Business Americas'' used to publish the prices for hundreds of chemicals but have more recently changed their data to an online database that requires a subscription. This service is very expensive, but necessary for many companies. ''Oil and Gas Journal'' publishes the market prices of many crude oils and other petrochemicals using data from several continents. This journal also provides margin data for many refineries and plants on a monthly basis. ''Chemical Week'' provides the spot and contract prices for 22 chemicals in the US and European markets.<br />
<br />
====Consultants====<br />
If trade journals are not adequate for the information needed, some companies will contract consultants to do deep research into the subject. Consultants are excellent resources for providing economic and marketing information but come at a large price. There are several companies that provide this type of service but some of the larger firms include: ''Purvin and Gertz'', ''Cambidge Energy Research Associates'', ''Chemical Markets Associates Inc.'', and ''SRI: The Chemical Economics Handbook''<br />
<br />
====Online Brokers and Suppliers====<br />
Often time price data can be supplied by the supplier themselves and using online directories. Restraint should be used when quoting these prices however because they are often spot prices that are much higher than what would be expected from bulk contract supplying.<br />
<br />
==Example Case: Estimating Cost of Production==<br />
<br />
Use the following information to estimate the manufacturing cost of a plant producing 120*10^6 lb/year with a product price of $0.20/lb. <br />
<br />
:Fixed Capital: $15,000,000<br />
:Working Capital: $3,000,000<br />
:'''Fixed and Working Capital = FC + WC = $18,000,000'''<br />
:Raw Material Cost: $9,600,000/yr<br />
:Utilities: $1,440,000/yr<br />
:Labor: $1,800,000/yr<br />
:Maintenance (6% yr f.c.): $900,000/yr<br />
:Supplies (2% yr f.c.): $300,000/yr<br />
:Depreciation (8%/yr): $1,200,000/yr<br />
:Taxes, insurance (3%/yr): $450,000/yr<br />
:'''Total Manufacturing Cost = RMC + U + L + M + S + D + T = $15,690,000/yr'''<br />
:'''Gross Sales = Production * Product price = $24,000,000/yr'''<br />
:'''Gross Profit = Gross Sales - Manufacturing Cost = $8,310,000/yr'''<br />
<br />
==Market Effects on Process Design==<br />
Process design, like most other things, is inherently dependent on global markets, and the economy as a whole. Process design can depend on locational markets. For example, if an expected long run exchange rate between two specific currencies makes production of a specific chemical more profitable in a colder climate such as Russia as opposed to a warmer climate such as Mexico, this may have an effect on how the process to produce this specific chemical should be designed. Relative inflation rates of different countries can have similar effects on process design. Additionally, markets for key production inputs can have an effect on process design. If a company was designing a large scale production plant which required massive amounts of steel, the global market for steel (or to a lesser extent, iron mines) would impact how/where this company would choose to design and build their process. Also worth noting is the fact that the state of the economy as a whole may impact process design as well. If the economy is in a recession, funds are likely to be more tightly managed within a company. Thusly, it may make sense for a process engineer to design a process that operates on a smaller scale. Not only will this decrease the cost of running the process (lower utilities costs, lower costs for process inputs), but since less product will be produced, this will also reduce the risk of having the company running an inventory. This is a positive, as running an inventory can lead to losing even more money during a recession. Conversely, a healthy economy may encourage the design of facilities with larger production capabilities. This section aims to look at several recent examples of macroeconomic markets affecting process design, similar to the hypothetical situations described above.<br />
<br />
Back in 2009, when the USA, UK, and many other first world countries were facing a harsh recession, both the profitability and scale of many production processes diminished. The Royal Society of Chemistry found that many chemical companies with plants located in England, when faced with the recession, elected to shut down production entirely rather than simply slow down production (RSC, 2009). Many of these plant closings were accompanied with the construction of new plants in areas of the world less affected by the recession, including the Middle East. Many notable international companies, such as Dow, were involved in this migration from countries entrenched in recession to countries where production would be more economical. While this may seem obvious, it is still worth noting that a process engineer needs to take into account the state of the economy in the location where a production facility is looking to be built.<br />
<br />
Building off of what the Royal Society of Chemistry found, a 2010 KPMG case study aimed to further analyze the effects of the recession on chemical production plants. Though the KPMG case study was based on United States production, the economic climate in the UK was similar to that of the United States, so similar conclusions can be drawn from both studies. What KPMG found in the United States in 2010 backed up what the Royal Society of Chemistry found in England in 2009. The United States was seeing a similar outsourcing of both old production facilities that were being shut down and new production facilities that, though initially proposed for construction in the United States, were being outsourced. However, KPMG went further in depth to analyze how specific markets in the United States were affecting chemical production plants. They found that the domestic auto industry and the construction sector heavily influenced the number and scale of chemical plants being proposed for construction in the USA. This makes sense, as these are two of the largest markets for chemicals in the USA. By 2010, the domestic auto industry was rebounding, and this was found to be largely correlated with an increase in demand for US chemicals (KPMG, 2010). This highlights that a process engineer must consider what sectors use the output of his process (in this scenario, various chemicals) as an input to their process. Analyzing these specific markets in several competitive locations could provide the final input into determining where to build a production facility.<br />
<br />
Another case study, conducted by CNN, analyzed the world market for rare earth minerals. Rare earth minerals are vital to the preparation of catalysts, which impacts a large portion of the chemical engineering industry. Additionally, rare earth minerals are used extensively in a wide variety of consumer products, including but not limited to hybrid cars and smartphone chips. Any process engineer looking to design a plant where production utilizes rare earth minerals should analyze this global market in order to influence his decisions that go into designing the process. The case study conducted by CNN highlights the fact that China is the dominant player in the global market for rare earth minerals (Yan, 2015). Per National Center for Policy Analysis, with whom CNN consulted during their case study, China controls about 95% of global rare earth mineral production, and holds half of the world’s resources of these metals. A specific subset of rare earth minerals, rare earth oxides, are vital components of many catalysts. Figure 1 below shows just how strong of a monopoly China has on these rare earth oxides in the global market. The supply crunch brought on by China forced the lone United States producer of rare earth metals, Molycorp, into bankruptcy. China having a near monopoly on the global market for rare earth metals means that they can exert their dominance on the market in several fashions. One such example came in 2010, when Beijing abruptly reducing their export quota for rare earth minerals lead to skyrocketing prices. A process engineer who’s proposed design includes the use of any catalyst using these rare earth metals must take all of these possibilities into account. In this example, does the influence China has on the global rare earth metals market make it more sensible to build a plant in China? Or maybe the volatility of the prices is too concerning, which could lead to the process engineer being forced to redesign his process without the use of a catalyst. Though this would certainly reduce product yield, it could be the case that the markets for the metals that make the necessary catalyst render the process without the catalyst more profitable on a per unit basis. This rare earth metal example is just one of many; the overall lesson is that a process engineer must evaluate the global markets for all important inputs to his process, as the profitability of different designs will be heavily influenced by these markets.<br />
<br />
[[File:reo.jpg|frame|center|border|<div align=center> Figure 1: Global rare earth oxide production trends from 1956-2010 (Tse, 2011) <div>]]<br />
<div align=left><br />
<br />
<br />
A third case study conducted by the Economic Policy Institute analyzed broad world market effects in the form of trade agreements. A trade agreement is a tax, tariff and trade treaty between two or more nations that often includes investment guarantees. One prominent example of a trade agreement is the North American Free Trade Agreement (NAFTA), which was signed in 1993. NAFTA is a trilateral rules based trade bloc between the United States, Canada and Mexico. One of the biggest effects of NAFTA was the movement of chemical and manufacturing plants from the United States to Canada and Mexico. In the first decade of the act (1993-2002), approximately 880,000 U.S. jobs were lost to Canada and Mexico (Scott, 2003). As a result of the influx of jobs, real wages dropped in Mexico, causing the operation of plants and processing facilities in Mexico to be more profitable than in the United States. This in turn lead to more factories moving to Mexico, and the cycle perpetuated. NAFTA is just one example of many trade agreements which had this effect. Globally, trade agreements between developed and developing countries leads to a migration of jobs (and the accompanying lowering of wages) to the developing countries. A process engineer needs to analyze trade agreements between the country in which he works and any countries with which his country has trade agreements. Not only will he likely find cheaper labor in other countries, but depending on the trade agreement, there may be tax breaks, import deals, or a variety of other money saving clauses written in the trade agreement. Overall, regardless of whatever the process may be, a process engineer can save his company millions of dollars by simply analyzing trade agreements and optimizing plant location.<br />
<br />
====Example====<br />
<br />
As a final example to sum up some of these global market impacts on a process engineer’s decisions, imagine the following hypothetical process: the production of a new biofuel using ethanol as an input, a catalyzed packed bed reactor to produce the biofuel with carbon dioxide being one of the byproducts, and a distillation column required to purify the product. Let us say that the process engineer is deciding between China and the United States as a location for the plant.<br />
<br />
First of all, seeing as how ethanol is the main feed, if is obviously necessary to look into the global market for ethanol. As can be seen below in Figure 2, the United States and Brazil are the two dominant players in terms of production. This would mean that, despite the relative volatility of ethanol prices, it is reasonable to expect that ethanol would be the cheapest in either of these two countries, since acquiring ethanol would not include shipping costs and/or import tariffs. This favors the United States as the location for this plantAs a quick tangent, since a large amount of ethanol is derived from corn, a process engineer should look into future expected trends for corn globally.<br />
<br />
Next comes the catalyzed reactor. As highlighted previously, China dwarfs the United States in terms of control of the rare earth metals that go into producing many catalysts. Due to the dominance of China in the rare earth oxide catalysts market, this would favor China as a location for production. Based on the fact that the two important inputs for this process (ethanol and the catalyst) aren’t both cheaper in either the U.S. or China, a process engineer could alter the process to favor one location. For example, if plant production in the U.S. was desirable, perhaps a lesser quality catalyst without as many rare earth metals could be utilized, which would require a larger amount of ethanol in the feed to meet a desired product quantity. This would cut costs on the catalyst (which is much more expensive in the U.S.) while the increase in costs for ethanol (due to increased quantity) would not outweigh the savings on catalyst.<br />
<br />
The two main products exiting this hypothetical reactor are product biofuel and byproduct carbon dioxide. China recently announced that they will implement a national cap-and-trade system for greenhouse gas emissions in 2017, whereas the United States currently has no policy for taxing greenhouse gas emissions. However, it is highly likely that the United States will soon implement a carbon tax policy similar to Canada’s successful carbon tax policy introduced in 2008. Let us suppose for the sake of this example that a carbon tax will be implemented in the United States in 2017, the same time as China’s policy will come into effect. The cap-and-trade system in China and carbon tax system in the U.S. are very different policies. A carbon tax imposes a flat tax on each unit of carbon dioxide emitted, whereas a cap-and-trade system sets a maximum level of pollution and sells emissions permits to companies allowing them to emit up to the maximum level. Depending on the scale of the process and the quantity of carbon dioxide being released, one policy might be much more favorable, and thusly a process engineer must look into this further.<br />
<br />
A final aspect to consider is simply the costs associated with any plant. Though there are many costs associated with building and running a plant, two large costs will be analyzed here. The cost of steel required to build the plant, and the cost of labor required to operate the plant. Even though the price of steel is relatively volatile, the per unit costs in China and the U.S. have remained quite close to one another. As for labor, costs are generally lower in China overall, but a process engineer must look into specific salaries for each position at the production facility. Even though China as a whole has less expensive labor, a plant operator for biofuels production may be a much higher paying position in China than it is in the U.S. Overall, taking all of these factors into account, it may make sense for a process engineer to either favor production in one country over another, or alter the process in order to favor one country if he is not in control of where the production facility is being built.<br />
<br />
The above analyses cover only a fraction of what a process engineer must consider. The analyses conducted highlight some of the major components, but there are many others that must be considered as well. Global market effects are endless, and play a large part in helping a good process engineer determine how to design a process and where to build a production facility.<br />
<br />
[[File:Ethanol.JPG|frame|center|border|<div align=center> Figure 2: Global ethanol production from 2007-2011 (evsroll.com) <div>]]<br />
<br />
<br />
[[File:Steel.JPG|frame|center|border|<div align=center> Figure 3: Global steel prices from 2006-2012 (Gue, 2012) <div>]]<br />
<div align=left><br />
<br />
==Conclusion==<br />
Thermodynamics and kinetics are essential to designing an operational plant, but at the end of the day profits and margins are what make plants go from the engineering paper pad to operating continuously. Before any ground is broken, estimation of production costs and revenues are absolutely necessary to assure CEO's and shareholders that this process is a profitable and worth while venture. There are many avenues to achieve these answers with some being more accurate than others. The best indicator of these answers will be in pilot plant design which will provide appropriate estimations for scaled up processes.<br />
<br />
==References==<br />
<br />
Biegler LT, Grossmann IE, Westerberg AW. Systematic Methods of Chemical Process Design. Upper Saddle River: Prentice Hall; 1997. <br />
<br />
Peters MS, Timmerhaus KD. Plant Design and Economics for Chemical Engineers. 5th ed. New York: McGraw Hill; 2003.<br />
<br />
Seider WD, Seader JD, Lewin DR. Process Design Principles: Synthesis, Analysis, and Evaluation. 3rd ed. New York: Wiley; 2004.<br />
<br />
Towler G, Sinnott R. Chemical Engineering Design: Principles, Practice and Economics of Plant and Process Design. 2nd ed. Boston: Elsevier; 2013.<br />
<br />
Turton R, Bailie RC, Whiting WB, Shaewitz JA, Bhattacharyya D. Analysis, Synthesis, and Design of Chemical Processes. 4th ed. Upper Saddle River: Prentice-Hall; 2012.<br />
<br />
Chemicals Sector Struggles in Recession. Royal Society of Chemistry, rsc.org. July 29, 2009<br />
<br />
The Outlook for the US Chemical Industry. KPMG, kpmg.com. 2010.<br />
<br />
Yan S. China is About to Tighten its Grip on Rare Earth Minerals. CNN, money.cnn.com. June 5, 2015<br />
<br />
Tse P. China’s Rare-Earth Industry. USGS. pubs.usgs.gov. 2011. Accessed February 21, 2016<br />
<br />
Scott R.E. The High Price of “Free” Trade: NAFTA’s Failure has Cost the United States Jobs Across the Nation. Economic Policy Institute, www.epi.org. November 17, 2003<br />
<br />
Renewable Energy Ethanol. EVs Rock. http://evsroll.com/Renewable_Energy_Ethanol.html. Accessed February 21, 2016<br />
<br />
Gue E. Where Steel Prices are Headed. Investing.com, www.investing.com. April 3, 2012. Accessed February 21, 2016</div>RJKolbehttps://processdesign.mccormick.northwestern.edu/index.php?title=Estimation_of_production_cost_and_revenue&diff=4610Estimation of production cost and revenue2016-02-21T22:40:02Z<p>RJKolbe: /* Example */</p>
<hr />
<div>Authors: Nick Pinkerton, Karen Schmidt, James Xamplas (ChE 352 in Winter 2014), Reed Kolbe (ChE 352, Winter 2016)<br />
<br />
Steward: David Chen, Fengqi You <br />
<br />
==Variable Cost of Production==<br />
Variable costs of production are dependent primarily on plant output and rate of production. There are many variables to consider when costing a plant. <br />
# Raw materials consumed<br />
# Utilities-steam, electricity, cooling water, fuel, etc.<br />
# Consumables - acids, bases, solvents, catalysts, etc.<br />
# Disposal<br />
# Shipping<br />
The majority of the variable costs for a production plant are the raw materials and utilities costs. Variable costs can be greatly cut through optimization techniques and intelligent plant design (Towler and Sinnott, 2013).<br />
===Raw Materials Cost===<br />
Calculating the annual cost of a raw material is calculated by simply multiplying the feed rate of the process by the appropriate price per volume or mass. These are the costs of chemical feed stocks required by the process. Feed stocks flow rates are obtained from PFD (Turton et al., 2013).There are several ways to optimize this cost to ensure that a process is not costing more than it should. First one should assess the actual consumption of a plant to see if it is significantly different from what should be expected based on process stoichiometry and selectivities (Towler and Sinnott, 2013). Finding may prove that a process is less efficient than it originally claimed.<br />
It is smart to benchmark a new plant design against an existing plant or pilot plant. Raw materials are typically the largest contributor to overall variable costs. For bulk chemicals and petrochemicals, raw materials represent 80-90% of the total cash cost of production (CCOP). <br />
===Utilities Cost===<br />
These are the costs of the various utilities streams required by the process. The flowrates for the utilities streams are located on the PFD (Turton et al., 2013). This includes:<br />
*Fuel gas, oil, or coal<br />
*Electric power<br />
*Steam<br />
*Cooling water<br />
*Process water<br />
*Boiler feed water<br />
*Air<br />
*Inert gas<br />
*Refrigeration<br />
<br />
Utility streams are excellent ways to streamline a process and are often indicative of how efficient of a process the project is. Process methods such as steam generation and pinch analysis can be used to greatly reduce utility costs across a plant. Further analysis of pinch analysis techniques and optimizing heat exchanger networks can be found in plant design texts such as first reference from Gavin Towler. The determination of process utility costs is often more difficult than the determination of raw material costs; however, the utilities are typically between 5-10% of CCOP (Towler and Sinnott, 2013). The cost of heating a process can be reduced by using process waste streams as fuel which consequently also reduces the need for waste disposal.<br />
<br />
===Waste Disposal Costs===<br />
These are defined as the cost of waste treatment to protect the environment (Turton et al., 2013). These are materials that cannot be recycled or sold off as by-products. Often times these streams require additives or additional treatment to meet governmental regulations. <br />
Hydrocarbon waste can often be incinerated directly to the atmosphere or used as process fuel to heat other streams in the system. Using the stream as process fuel allows the fuel value of the stream to be recovered into the system. The substituted value can be calculated by multiplying the conventional fuel price by the heat of combustion of the waste stream. <br />
<br />
<math>P_{WFV} = P_F * \Delta H_C^o</math><br />
<br />
where <br />
<math>P_{WFV}</math> = waste value of fuel ($/lb or $/kg)<br />
<br />
<math>P_F</math> = price of fuel ($/MMBtu or $/GJ)<br />
<br />
<math>\Delta H_C^o</math> = heat of combustion (MMBtu/lb or GJ/kg)<br />
<br />
Dilute aqueous streams must be sent to wastewater treatment typically prior to purging from the plant. Acidic or basic wastes are neutralized prior to treatment by salting out the acid or base. The cost of wastewater treatment is typically about $6 per 1000 gal but this is only an estimate that doesn't account for regional charges (Towler and Sinnott, 2013).<br />
<br />
Solid waste treatment can typically be sent to a landfill at a cost of approximately $50/ton (Towler and Sinnott, 2013). <br />
<br />
Hazardous wastes arise from the production of concentrated liquid streams that cannot be incinerated. Hazardous wastes should be avoided if possible, but that is not always feasible for some processes. The cost of hazardous waste disposal is strongly dependent on the location of the plant, the plants proximity to waste disposal plants and the degree of hazard of the waste.<br />
<br />
==Fixed Cost of Production==<br />
Fixed costs are those whose amounts are independent of production rates. Much of these costs are personnel salaries, taxes, insurance, and legal payments.<br />
===Labor Costs===<br />
These are the costs attributed to the personnel required to operate the process plant (Turton et al., 2013).<br />
<br />
The number of operators required per shift, <math>N_{OL}</math> can be estimated by<br />
<br />
<math>N_{OL}=(6.29+31.7P^2+0.23N_{np})^{0.5}</math><br />
<br />
where <math>P</math> is the number of processing steps involving particulate solids and <math>N_{np}</math> is the number of other processing steps (Turton et al., 2013). For each of the <math>N_{OL}</math> operators per 8-hour shift, approximately 4.5 operators must be hired for a plant that runs 24 hours per day, to account for the 3 shifts per day and the 3 weeks of leave typically taken by each operator per year (Turton et al., 2013). The salary for a chemical plant operator varies by location, and the estimator should look up the average value for the area.<br />
<br />
===Maintenance Costs===<br />
These are the costs associated with labor and materials necessary to maintain plant production. An estimate of these are 6% of the fixed capital investment (Turton et al., 2013).<br />
<br />
===Research and Development===<br />
These are the costs of research done in developing the process and/or products. This includes salaries for researchers as well as funds for research related equipment and supplies. An estimate of these costs are 5% of the total manufacturing cost (Turton et al., 2013).<br />
<br />
===Taxes and Insurance===<br />
Taxes vary by location, but a first estimate of property taxes and liability insurance is 3% of the fixed capital investment (Turton et al., 2013).<br />
<br />
===Plant Overhead===<br />
Overhead costs are the miscellaneous but necessary costs of running a business, including payroll, employee benefits, and janitorial services. This may be estimated as 70% of the operating labor costs, added to 4% of the fixed capital costs (Turton et al., 2013).<br />
<br />
===Licensing and Royalties===<br />
The costs of paying for the use of intellectual property clearly varies, but an estimate that may be used is 3% of the total manufacturing cost (Turton et al., 2013).<br />
<br />
==Revenues==<br />
The revenues of a process are the income earned form sales of the main products and the by-products. Revenue can be impacted by market fluctuations and production rates.<br />
===By-Product Revenues===<br />
Besides selling the main product from a process, by-products from separations and reactions can also be valuable in the market. Often it is more difficult to decide which by-products to recover and purify than it is to make decisions on the main product. <br />
<br />
By-products made in stoichiometric ratios from reactions must be either sold off or managed through waste disposal. Other by-products are sometimes produced through feed impurities or by nonselective reactions. There are several potential valuable by-products from a process: <br />
# Materials produced in stoichiometric quantities by the reactions that create the main product. If they are not recovered then the waste disposal expenses will be large.<br />
# Components that are produced in high yield by side reactions. <br />
# Components formed in high yield from feed impurities. Many sulfurs are produced as a by-product of fuels manufacture.<br />
# Components that are produced in low yield but have high value. An example includes acetophenone which is recovered as a by-product of phenol manufacture.<br />
# Degraded consumables (e.g. solvents, etc.) that have reuse value.<br />
<br />
A rule of thumb that can be used for preliminary screening of by-products for large plants is that for by-product recovery to be economically feasible the net benefit must be greater than $200,000 a year. A net benefit can be calculated by adding the possible resale value of the by-product and the avoided waste disposal cost (Towler and Sinnott, 2013). <br />
<br />
===Margin===<br />
The gross margin of a process is defined as the sum of product and by-product revenues minus the raw material cost. <br />
<br />
Gross margin = Revenues - Raw materials costs<br />
<br />
Because raw materials are most often the most expensive variable cost of a process, the gross margin is a good gauge as to what the total profitability of a process will be. Raw materials and product pricing are often subject to high degrees of variability which can be difficult to forecast. The size of margins are highly versatile depending on the <br />
industry. For many petrochemical industries the margin may be only 10%; however, for industries such as food additives and pharmaceuticals the margins are generally much higher (Towler and Sinnott, 2013).<br />
<br />
===Profits===<br />
There are several standards for calculating company profits. The cash cost of production (CCOP) is the sum of the fixed and variable production costs. <br />
<br />
<math>CCOP = VCOP + FCOP</math><br />
<br />
where <math>VCOP</math> is the variable cost of production and <math>FCOP</math> is the fixed cost of production. <br />
<br />
Gross profit, which should not be confused with gross margin, is then calculated by the following equation,<br />
<br />
<math>Gross\ profit = Main\ product\ revenues - CCOP</math><br />
<br />
Finally profit can be calculated by subtracting the income taxes that the plant would be subject to depending on the tax code of the county the plant is located in. <br />
<br />
<math>Net\ profit = gross\ profit - taxes</math><br />
<br />
==Pricing Products and Raw Materials==<br />
The revenues and costs of a project are vital to determining its economic feasibility. To calculate these values one needs to multiply the respective product and feed streams by their respective prices. The major difficulty of this process is determining the prices that should be used in this formula. When analyzing a plant, not only do the current prices need to be acknowledged but also the stability of the market to forecast future fluctuations and deviations. <br />
===Pricing Fundamentals===<br />
The pricing of a substance is determined by the fundamental economic principles of supply and demand. A supply curve and demand curve can be graphed and added to determine the market equilibrium price and projected market size. There are many ways a company can combat if the market equilibrium pricing is not suitable for a process. One of these ways is changing the market that the company is selling to. Instead of selling industrial grade product there may be markets for pharmaceutical grade or food grade that would allow for a company to sell their product at higher margins. Another avenue to look into is changing the geographic market being sold to. Rarely is there a global synchronous market, but rather a variation depending on where in the world the product is being sold. It is possible that a company could make more money by dedicating their sales to the Asian market as opposed to the US or vise versa. <br />
===Price Data Sources===<br />
There are many resources when trying to determine the price of a chemical or utility. This are important for looking at current pricing information as well as historical data that can be used for forecasting purposes. <br />
====Internal Company Forecasts====<br />
Large companies will often have the marketing or development departments develop a forecasting database that can be used internally in the company. Forecasts of this magnitude will often have multiple scenarios and projects that are evaluated under the given parameters. Companies may even license these forecasts to other companies for high fees if they desire. <br />
<br />
[[File:Capture.JPG]]<br />
<br />
Table 1 provides common industry acronyms that are used to indicate certain key words when determining pricing information.<br />
<br />
====Trade Journals====<br />
There are also many publications that report pricing data weekly. ''ICIS Chemical Business Americas'' used to publish the prices for hundreds of chemicals but have more recently changed their data to an online database that requires a subscription. This service is very expensive, but necessary for many companies. ''Oil and Gas Journal'' publishes the market prices of many crude oils and other petrochemicals using data from several continents. This journal also provides margin data for many refineries and plants on a monthly basis. ''Chemical Week'' provides the spot and contract prices for 22 chemicals in the US and European markets.<br />
<br />
====Consultants====<br />
If trade journals are not adequate for the information needed, some companies will contract consultants to do deep research into the subject. Consultants are excellent resources for providing economic and marketing information but come at a large price. There are several companies that provide this type of service but some of the larger firms include: ''Purvin and Gertz'', ''Cambidge Energy Research Associates'', ''Chemical Markets Associates Inc.'', and ''SRI: The Chemical Economics Handbook''<br />
<br />
====Online Brokers and Suppliers====<br />
Often time price data can be supplied by the supplier themselves and using online directories. Restraint should be used when quoting these prices however because they are often spot prices that are much higher than what would be expected from bulk contract supplying.<br />
<br />
==Example Case: Estimating Cost of Production==<br />
<br />
Use the following information to estimate the manufacturing cost of a plant producing 120*10^6 lb/year with a product price of $0.20/lb. <br />
<br />
:Fixed Capital: $15,000,000<br />
:Working Capital: $3,000,000<br />
:'''Fixed and Working Capital = FC + WC = $18,000,000'''<br />
:Raw Material Cost: $9,600,000/yr<br />
:Utilities: $1,440,000/yr<br />
:Labor: $1,800,000/yr<br />
:Maintenance (6% yr f.c.): $900,000/yr<br />
:Supplies (2% yr f.c.): $300,000/yr<br />
:Depreciation (8%/yr): $1,200,000/yr<br />
:Taxes, insurance (3%/yr): $450,000/yr<br />
:'''Total Manufacturing Cost = RMC + U + L + M + S + D + T = $15,690,000/yr'''<br />
:'''Gross Sales = Production * Product price = $24,000,000/yr'''<br />
:'''Gross Profit = Gross Sales - Manufacturing Cost = $8,310,000/yr'''<br />
<br />
==Market Effects on Process Design==<br />
Process design, like most other things, is inherently dependent on global markets, and the economy as a whole. Process design can depend on locational markets. For example, if an expected long run exchange rate between two specific currencies makes production of a specific chemical more profitable in a colder climate such as Russia as opposed to a warmer climate such as Mexico, this may have an effect on how the process to produce this specific chemical should be designed. Relative inflation rates of different countries can have similar effects on process design. Additionally, markets for key production inputs can have an effect on process design. If a company was designing a large scale production plant which required massive amounts of steel, the global market for steel (or to a lesser extent, iron mines) would impact how/where this company would choose to design and build their process. Also worth noting is the fact that the state of the economy as a whole may impact process design as well. If the economy is in a recession, funds are likely to be more tightly managed within a company. Thusly, it may make sense for a process engineer to design a process that operates on a smaller scale. Not only will this decrease the cost of running the process (lower utilities costs, lower costs for process inputs), but since less product will be produced, this will also reduce the risk of having the company running an inventory. This is a positive, as running an inventory can lead to losing even more money during a recession. Conversely, a healthy economy may encourage the design of facilities with larger production capabilities. This section aims to look at several recent examples of macroeconomic markets affecting process design, similar to the hypothetical situations described above.<br />
<br />
Back in 2009, when the USA, UK, and many other first world countries were facing a harsh recession, both the profitability and scale of many production processes diminished. The Royal Society of Chemistry found that many chemical companies with plants located in England, when faced with the recession, elected to shut down production entirely rather than simply slow down production (RSC, 2009). Many of these plant closings were accompanied with the construction of new plants in areas of the world less affected by the recession, including the Middle East. Many notable international companies, such as Dow, were involved in this migration from countries entrenched in recession to countries where production would be more economical. While this may seem obvious, it is still worth noting that a process engineer needs to take into account the state of the economy in the location where a production facility is looking to be built.<br />
<br />
Building off of what the Royal Society of Chemistry found, a 2010 KPMG case study aimed to further analyze the effects of the recession on chemical production plants. Though the KPMG case study was based on United States production, the economic climate in the UK was similar to that of the United States, so similar conclusions can be drawn from both studies. What KPMG found in the United States in 2010 backed up what the Royal Society of Chemistry found in England in 2009. The United States was seeing a similar outsourcing of both old production facilities that were being shut down and new production facilities that, though initially proposed for construction in the United States, were being outsourced. However, KPMG went further in depth to analyze how specific markets in the United States were affecting chemical production plants. They found that the domestic auto industry and the construction sector heavily influenced the number and scale of chemical plants being proposed for construction in the USA. This makes sense, as these are two of the largest markets for chemicals in the USA. By 2010, the domestic auto industry was rebounding, and this was found to be largely correlated with an increase in demand for US chemicals (KPMG, 2010). This highlights that a process engineer must consider what sectors use the output of his process (in this scenario, various chemicals) as an input to their process. Analyzing these specific markets in several competitive locations could provide the final input into determining where to build a production facility.<br />
<br />
Another case study, conducted by CNN, analyzed the world market for rare earth minerals. Rare earth minerals are vital to the preparation of catalysts, which impacts a large portion of the chemical engineering industry. Additionally, rare earth minerals are used extensively in a wide variety of consumer products, including but not limited to hybrid cars and smartphone chips. Any process engineer looking to design a plant where production utilizes rare earth minerals should analyze this global market in order to influence his decisions that go into designing the process. The case study conducted by CNN highlights the fact that China is the dominant player in the global market for rare earth minerals (Yan, 2015). Per National Center for Policy Analysis, with whom CNN consulted during their case study, China controls about 95% of global rare earth mineral production, and holds half of the world’s resources of these metals. A specific subset of rare earth minerals, rare earth oxides, are vital components of many catalysts. Figure 1 below shows just how strong of a monopoly China has on these rare earth oxides in the global market. The supply crunch brought on by China forced the lone United States producer of rare earth metals, Molycorp, into bankruptcy. China having a near monopoly on the global market for rare earth metals means that they can exert their dominance on the market in several fashions. One such example came in 2010, when Beijing abruptly reducing their export quota for rare earth minerals lead to skyrocketing prices. A process engineer who’s proposed design includes the use of any catalyst using these rare earth metals must take all of these possibilities into account. In this example, does the influence China has on the global rare earth metals market make it more sensible to build a plant in China? Or maybe the volatility of the prices is too concerning, which could lead to the process engineer being forced to redesign his process without the use of a catalyst. Though this would certainly reduce product yield, it could be the case that the markets for the metals that make the necessary catalyst render the process without the catalyst more profitable on a per unit basis. This rare earth metal example is just one of many; the overall lesson is that a process engineer must evaluate the global markets for all important inputs to his process, as the profitability of different designs will be heavily influenced by these markets.<br />
<br />
[[File:reo.jpg|frame|center|border|<div align=center> Figure 1: Global rare earth oxide production trends from 1956-2010 <div>]]<br />
<div align=left><br />
<br />
<br />
A third case study conducted by the Economic Policy Institute analyzed broad world market effects in the form of trade agreements. A trade agreement is a tax, tariff and trade treaty between two or more nations that often includes investment guarantees. One prominent example of a trade agreement is the North American Free Trade Agreement (NAFTA), which was signed in 1993. NAFTA is a trilateral rules based trade bloc between the United States, Canada and Mexico. One of the biggest effects of NAFTA was the movement of chemical and manufacturing plants from the United States to Canada and Mexico. In the first decade of the act (1993-2002), approximately 880,000 U.S. jobs were lost to Canada and Mexico (Scott, 2003). As a result of the influx of jobs, real wages dropped in Mexico, causing the operation of plants and processing facilities in Mexico to be more profitable than in the United States. This in turn lead to more factories moving to Mexico, and the cycle perpetuated. NAFTA is just one example of many trade agreements which had this effect. Globally, trade agreements between developed and developing countries leads to a migration of jobs (and the accompanying lowering of wages) to the developing countries. A process engineer needs to analyze trade agreements between the country in which he works and any countries with which his country has trade agreements. Not only will he likely find cheaper labor in other countries, but depending on the trade agreement, there may be tax breaks, import deals, or a variety of other money saving clauses written in the trade agreement. Overall, regardless of whatever the process may be, a process engineer can save his company millions of dollars by simply analyzing trade agreements and optimizing plant location.<br />
<br />
====Example====<br />
<br />
As a final example to sum up some of these global market impacts on a process engineer’s decisions, imagine the following hypothetical process: the production of a new biofuel using ethanol as an input, a catalyzed packed bed reactor to produce the biofuel with carbon dioxide being one of the byproducts, and a distillation column required to purify the product. Let us say that the process engineer is deciding between China and the United States as a location for the plant.<br />
<br />
First of all, seeing as how ethanol is the main feed, if is obviously necessary to look into the global market for ethanol. As can be seen below in Figure 2, the United States and Brazil are the two dominant players in terms of production. This would mean that, despite the relative volatility of ethanol prices, it is reasonable to expect that ethanol would be the cheapest in either of these two countries, since acquiring ethanol would not include shipping costs and/or import tariffs. This favors the United States as the location for this plantAs a quick tangent, since a large amount of ethanol is derived from corn, a process engineer should look into future expected trends for corn globally.<br />
<br />
Next comes the catalyzed reactor. As highlighted previously, China dwarfs the United States in terms of control of the rare earth metals that go into producing many catalysts. Due to the dominance of China in the rare earth oxide catalysts market, this would favor China as a location for production. Based on the fact that the two important inputs for this process (ethanol and the catalyst) aren’t both cheaper in either the U.S. or China, a process engineer could alter the process to favor one location. For example, if plant production in the U.S. was desirable, perhaps a lesser quality catalyst without as many rare earth metals could be utilized, which would require a larger amount of ethanol in the feed to meet a desired product quantity. This would cut costs on the catalyst (which is much more expensive in the U.S.) while the increase in costs for ethanol (due to increased quantity) would not outweigh the savings on catalyst.<br />
<br />
The two main products exiting this hypothetical reactor are product biofuel and byproduct carbon dioxide. China recently announced that they will implement a national cap-and-trade system for greenhouse gas emissions in 2017, whereas the United States currently has no policy for taxing greenhouse gas emissions. However, it is highly likely that the United States will soon implement a carbon tax policy similar to Canada’s successful carbon tax policy introduced in 2008. Let us suppose for the sake of this example that a carbon tax will be implemented in the United States in 2017, the same time as China’s policy will come into effect. The cap-and-trade system in China and carbon tax system in the U.S. are very different policies. A carbon tax imposes a flat tax on each unit of carbon dioxide emitted, whereas a cap-and-trade system sets a maximum level of pollution and sells emissions permits to companies allowing them to emit up to the maximum level. Depending on the scale of the process and the quantity of carbon dioxide being released, one policy might be much more favorable, and thusly a process engineer must look into this further.<br />
<br />
A final aspect to consider is simply the costs associated with any plant. Though there are many costs associated with building and running a plant, two large costs will be analyzed here. The cost of steel required to build the plant, and the cost of labor required to operate the plant. Even though the price of steel is relatively volatile, the per unit costs in China and the U.S. have remained quite close to one another. As for labor, costs are generally lower in China overall, but a process engineer must look into specific salaries for each position at the production facility. Even though China as a whole has less expensive labor, a plant operator for biofuels production may be a much higher paying position in China than it is in the U.S. Overall, taking all of these factors into account, it may make sense for a process engineer to either favor production in one country over another, or alter the process in order to favor one country if he is not in control of where the production facility is being built.<br />
<br />
The above analyses cover only a fraction of what a process engineer must consider. The analyses conducted highlight some of the major components, but there are many others that must be considered as well. Global market effects are endless, and play a large part in helping a good process engineer determine how to design a process and where to build a production facility.<br />
<br />
[[File:Ethanol.JPG|frame|center|border|<div align=center> Figure 2: Global ethanol production from 2007-2011 <div>]]<br />
<br />
<br />
[[File:Steel.JPG|frame|center|border|<div align=center> Figure 3: Global steel prices from 2006-2012 <div>]]<br />
<div align=left><br />
<br />
==Conclusion==<br />
Thermodynamics and kinetics are essential to designing an operational plant, but at the end of the day profits and margins are what make plants go from the engineering paper pad to operating continuously. Before any ground is broken, estimation of production costs and revenues are absolutely necessary to assure CEO's and shareholders that this process is a profitable and worth while venture. There are many avenues to achieve these answers with some being more accurate than others. The best indicator of these answers will be in pilot plant design which will provide appropriate estimations for scaled up processes.<br />
<br />
==References==<br />
<br />
Biegler LT, Grossmann IE, Westerberg AW. Systematic Methods of Chemical Process Design. Upper Saddle River: Prentice Hall; 1997. <br />
<br />
Peters MS, Timmerhaus KD. Plant Design and Economics for Chemical Engineers. 5th ed. New York: McGraw Hill; 2003.<br />
<br />
Seider WD, Seader JD, Lewin DR. Process Design Principles: Synthesis, Analysis, and Evaluation. 3rd ed. New York: Wiley; 2004.<br />
<br />
Towler G, Sinnott R. Chemical Engineering Design: Principles, Practice and Economics of Plant and Process Design. 2nd ed. Boston: Elsevier; 2013.<br />
<br />
Turton R, Bailie RC, Whiting WB, Shaewitz JA, Bhattacharyya D. Analysis, Synthesis, and Design of Chemical Processes. 4th ed. Upper Saddle River: Prentice-Hall; 2012.<br />
<br />
Chemicals Sector Struggles in Recession. Royal Society of Chemistry, rsc.org. July 29, 2009<br />
<br />
The Outlook for the US Chemical Industry. KPMG, kpmg.com. 2010.<br />
<br />
Yan S. China is About to Tighten its Grip on Rare Earth Minerals. CNN, money.cnn.com. June 5, 2015<br />
<br />
Scott R.E. The High Price of “Free” Trade: NAFTA’s Failure has Cost the United States Jobs Across the Nation. Economic Policy Institute, www.epi.org. November 17, 2003</div>RJKolbehttps://processdesign.mccormick.northwestern.edu/index.php?title=Estimation_of_production_cost_and_revenue&diff=4609Estimation of production cost and revenue2016-02-21T22:39:38Z<p>RJKolbe: /* Example */</p>
<hr />
<div>Authors: Nick Pinkerton, Karen Schmidt, James Xamplas (ChE 352 in Winter 2014), Reed Kolbe (ChE 352, Winter 2016)<br />
<br />
Steward: David Chen, Fengqi You <br />
<br />
==Variable Cost of Production==<br />
Variable costs of production are dependent primarily on plant output and rate of production. There are many variables to consider when costing a plant. <br />
# Raw materials consumed<br />
# Utilities-steam, electricity, cooling water, fuel, etc.<br />
# Consumables - acids, bases, solvents, catalysts, etc.<br />
# Disposal<br />
# Shipping<br />
The majority of the variable costs for a production plant are the raw materials and utilities costs. Variable costs can be greatly cut through optimization techniques and intelligent plant design (Towler and Sinnott, 2013).<br />
===Raw Materials Cost===<br />
Calculating the annual cost of a raw material is calculated by simply multiplying the feed rate of the process by the appropriate price per volume or mass. These are the costs of chemical feed stocks required by the process. Feed stocks flow rates are obtained from PFD (Turton et al., 2013).There are several ways to optimize this cost to ensure that a process is not costing more than it should. First one should assess the actual consumption of a plant to see if it is significantly different from what should be expected based on process stoichiometry and selectivities (Towler and Sinnott, 2013). Finding may prove that a process is less efficient than it originally claimed.<br />
It is smart to benchmark a new plant design against an existing plant or pilot plant. Raw materials are typically the largest contributor to overall variable costs. For bulk chemicals and petrochemicals, raw materials represent 80-90% of the total cash cost of production (CCOP). <br />
===Utilities Cost===<br />
These are the costs of the various utilities streams required by the process. The flowrates for the utilities streams are located on the PFD (Turton et al., 2013). This includes:<br />
*Fuel gas, oil, or coal<br />
*Electric power<br />
*Steam<br />
*Cooling water<br />
*Process water<br />
*Boiler feed water<br />
*Air<br />
*Inert gas<br />
*Refrigeration<br />
<br />
Utility streams are excellent ways to streamline a process and are often indicative of how efficient of a process the project is. Process methods such as steam generation and pinch analysis can be used to greatly reduce utility costs across a plant. Further analysis of pinch analysis techniques and optimizing heat exchanger networks can be found in plant design texts such as first reference from Gavin Towler. The determination of process utility costs is often more difficult than the determination of raw material costs; however, the utilities are typically between 5-10% of CCOP (Towler and Sinnott, 2013). The cost of heating a process can be reduced by using process waste streams as fuel which consequently also reduces the need for waste disposal.<br />
<br />
===Waste Disposal Costs===<br />
These are defined as the cost of waste treatment to protect the environment (Turton et al., 2013). These are materials that cannot be recycled or sold off as by-products. Often times these streams require additives or additional treatment to meet governmental regulations. <br />
Hydrocarbon waste can often be incinerated directly to the atmosphere or used as process fuel to heat other streams in the system. Using the stream as process fuel allows the fuel value of the stream to be recovered into the system. The substituted value can be calculated by multiplying the conventional fuel price by the heat of combustion of the waste stream. <br />
<br />
<math>P_{WFV} = P_F * \Delta H_C^o</math><br />
<br />
where <br />
<math>P_{WFV}</math> = waste value of fuel ($/lb or $/kg)<br />
<br />
<math>P_F</math> = price of fuel ($/MMBtu or $/GJ)<br />
<br />
<math>\Delta H_C^o</math> = heat of combustion (MMBtu/lb or GJ/kg)<br />
<br />
Dilute aqueous streams must be sent to wastewater treatment typically prior to purging from the plant. Acidic or basic wastes are neutralized prior to treatment by salting out the acid or base. The cost of wastewater treatment is typically about $6 per 1000 gal but this is only an estimate that doesn't account for regional charges (Towler and Sinnott, 2013).<br />
<br />
Solid waste treatment can typically be sent to a landfill at a cost of approximately $50/ton (Towler and Sinnott, 2013). <br />
<br />
Hazardous wastes arise from the production of concentrated liquid streams that cannot be incinerated. Hazardous wastes should be avoided if possible, but that is not always feasible for some processes. The cost of hazardous waste disposal is strongly dependent on the location of the plant, the plants proximity to waste disposal plants and the degree of hazard of the waste.<br />
<br />
==Fixed Cost of Production==<br />
Fixed costs are those whose amounts are independent of production rates. Much of these costs are personnel salaries, taxes, insurance, and legal payments.<br />
===Labor Costs===<br />
These are the costs attributed to the personnel required to operate the process plant (Turton et al., 2013).<br />
<br />
The number of operators required per shift, <math>N_{OL}</math> can be estimated by<br />
<br />
<math>N_{OL}=(6.29+31.7P^2+0.23N_{np})^{0.5}</math><br />
<br />
where <math>P</math> is the number of processing steps involving particulate solids and <math>N_{np}</math> is the number of other processing steps (Turton et al., 2013). For each of the <math>N_{OL}</math> operators per 8-hour shift, approximately 4.5 operators must be hired for a plant that runs 24 hours per day, to account for the 3 shifts per day and the 3 weeks of leave typically taken by each operator per year (Turton et al., 2013). The salary for a chemical plant operator varies by location, and the estimator should look up the average value for the area.<br />
<br />
===Maintenance Costs===<br />
These are the costs associated with labor and materials necessary to maintain plant production. An estimate of these are 6% of the fixed capital investment (Turton et al., 2013).<br />
<br />
===Research and Development===<br />
These are the costs of research done in developing the process and/or products. This includes salaries for researchers as well as funds for research related equipment and supplies. An estimate of these costs are 5% of the total manufacturing cost (Turton et al., 2013).<br />
<br />
===Taxes and Insurance===<br />
Taxes vary by location, but a first estimate of property taxes and liability insurance is 3% of the fixed capital investment (Turton et al., 2013).<br />
<br />
===Plant Overhead===<br />
Overhead costs are the miscellaneous but necessary costs of running a business, including payroll, employee benefits, and janitorial services. This may be estimated as 70% of the operating labor costs, added to 4% of the fixed capital costs (Turton et al., 2013).<br />
<br />
===Licensing and Royalties===<br />
The costs of paying for the use of intellectual property clearly varies, but an estimate that may be used is 3% of the total manufacturing cost (Turton et al., 2013).<br />
<br />
==Revenues==<br />
The revenues of a process are the income earned form sales of the main products and the by-products. Revenue can be impacted by market fluctuations and production rates.<br />
===By-Product Revenues===<br />
Besides selling the main product from a process, by-products from separations and reactions can also be valuable in the market. Often it is more difficult to decide which by-products to recover and purify than it is to make decisions on the main product. <br />
<br />
By-products made in stoichiometric ratios from reactions must be either sold off or managed through waste disposal. Other by-products are sometimes produced through feed impurities or by nonselective reactions. There are several potential valuable by-products from a process: <br />
# Materials produced in stoichiometric quantities by the reactions that create the main product. If they are not recovered then the waste disposal expenses will be large.<br />
# Components that are produced in high yield by side reactions. <br />
# Components formed in high yield from feed impurities. Many sulfurs are produced as a by-product of fuels manufacture.<br />
# Components that are produced in low yield but have high value. An example includes acetophenone which is recovered as a by-product of phenol manufacture.<br />
# Degraded consumables (e.g. solvents, etc.) that have reuse value.<br />
<br />
A rule of thumb that can be used for preliminary screening of by-products for large plants is that for by-product recovery to be economically feasible the net benefit must be greater than $200,000 a year. A net benefit can be calculated by adding the possible resale value of the by-product and the avoided waste disposal cost (Towler and Sinnott, 2013). <br />
<br />
===Margin===<br />
The gross margin of a process is defined as the sum of product and by-product revenues minus the raw material cost. <br />
<br />
Gross margin = Revenues - Raw materials costs<br />
<br />
Because raw materials are most often the most expensive variable cost of a process, the gross margin is a good gauge as to what the total profitability of a process will be. Raw materials and product pricing are often subject to high degrees of variability which can be difficult to forecast. The size of margins are highly versatile depending on the <br />
industry. For many petrochemical industries the margin may be only 10%; however, for industries such as food additives and pharmaceuticals the margins are generally much higher (Towler and Sinnott, 2013).<br />
<br />
===Profits===<br />
There are several standards for calculating company profits. The cash cost of production (CCOP) is the sum of the fixed and variable production costs. <br />
<br />
<math>CCOP = VCOP + FCOP</math><br />
<br />
where <math>VCOP</math> is the variable cost of production and <math>FCOP</math> is the fixed cost of production. <br />
<br />
Gross profit, which should not be confused with gross margin, is then calculated by the following equation,<br />
<br />
<math>Gross\ profit = Main\ product\ revenues - CCOP</math><br />
<br />
Finally profit can be calculated by subtracting the income taxes that the plant would be subject to depending on the tax code of the county the plant is located in. <br />
<br />
<math>Net\ profit = gross\ profit - taxes</math><br />
<br />
==Pricing Products and Raw Materials==<br />
The revenues and costs of a project are vital to determining its economic feasibility. To calculate these values one needs to multiply the respective product and feed streams by their respective prices. The major difficulty of this process is determining the prices that should be used in this formula. When analyzing a plant, not only do the current prices need to be acknowledged but also the stability of the market to forecast future fluctuations and deviations. <br />
===Pricing Fundamentals===<br />
The pricing of a substance is determined by the fundamental economic principles of supply and demand. A supply curve and demand curve can be graphed and added to determine the market equilibrium price and projected market size. There are many ways a company can combat if the market equilibrium pricing is not suitable for a process. One of these ways is changing the market that the company is selling to. Instead of selling industrial grade product there may be markets for pharmaceutical grade or food grade that would allow for a company to sell their product at higher margins. Another avenue to look into is changing the geographic market being sold to. Rarely is there a global synchronous market, but rather a variation depending on where in the world the product is being sold. It is possible that a company could make more money by dedicating their sales to the Asian market as opposed to the US or vise versa. <br />
===Price Data Sources===<br />
There are many resources when trying to determine the price of a chemical or utility. This are important for looking at current pricing information as well as historical data that can be used for forecasting purposes. <br />
====Internal Company Forecasts====<br />
Large companies will often have the marketing or development departments develop a forecasting database that can be used internally in the company. Forecasts of this magnitude will often have multiple scenarios and projects that are evaluated under the given parameters. Companies may even license these forecasts to other companies for high fees if they desire. <br />
<br />
[[File:Capture.JPG]]<br />
<br />
Table 1 provides common industry acronyms that are used to indicate certain key words when determining pricing information.<br />
<br />
====Trade Journals====<br />
There are also many publications that report pricing data weekly. ''ICIS Chemical Business Americas'' used to publish the prices for hundreds of chemicals but have more recently changed their data to an online database that requires a subscription. This service is very expensive, but necessary for many companies. ''Oil and Gas Journal'' publishes the market prices of many crude oils and other petrochemicals using data from several continents. This journal also provides margin data for many refineries and plants on a monthly basis. ''Chemical Week'' provides the spot and contract prices for 22 chemicals in the US and European markets.<br />
<br />
====Consultants====<br />
If trade journals are not adequate for the information needed, some companies will contract consultants to do deep research into the subject. Consultants are excellent resources for providing economic and marketing information but come at a large price. There are several companies that provide this type of service but some of the larger firms include: ''Purvin and Gertz'', ''Cambidge Energy Research Associates'', ''Chemical Markets Associates Inc.'', and ''SRI: The Chemical Economics Handbook''<br />
<br />
====Online Brokers and Suppliers====<br />
Often time price data can be supplied by the supplier themselves and using online directories. Restraint should be used when quoting these prices however because they are often spot prices that are much higher than what would be expected from bulk contract supplying.<br />
<br />
==Example Case: Estimating Cost of Production==<br />
<br />
Use the following information to estimate the manufacturing cost of a plant producing 120*10^6 lb/year with a product price of $0.20/lb. <br />
<br />
:Fixed Capital: $15,000,000<br />
:Working Capital: $3,000,000<br />
:'''Fixed and Working Capital = FC + WC = $18,000,000'''<br />
:Raw Material Cost: $9,600,000/yr<br />
:Utilities: $1,440,000/yr<br />
:Labor: $1,800,000/yr<br />
:Maintenance (6% yr f.c.): $900,000/yr<br />
:Supplies (2% yr f.c.): $300,000/yr<br />
:Depreciation (8%/yr): $1,200,000/yr<br />
:Taxes, insurance (3%/yr): $450,000/yr<br />
:'''Total Manufacturing Cost = RMC + U + L + M + S + D + T = $15,690,000/yr'''<br />
:'''Gross Sales = Production * Product price = $24,000,000/yr'''<br />
:'''Gross Profit = Gross Sales - Manufacturing Cost = $8,310,000/yr'''<br />
<br />
==Market Effects on Process Design==<br />
Process design, like most other things, is inherently dependent on global markets, and the economy as a whole. Process design can depend on locational markets. For example, if an expected long run exchange rate between two specific currencies makes production of a specific chemical more profitable in a colder climate such as Russia as opposed to a warmer climate such as Mexico, this may have an effect on how the process to produce this specific chemical should be designed. Relative inflation rates of different countries can have similar effects on process design. Additionally, markets for key production inputs can have an effect on process design. If a company was designing a large scale production plant which required massive amounts of steel, the global market for steel (or to a lesser extent, iron mines) would impact how/where this company would choose to design and build their process. Also worth noting is the fact that the state of the economy as a whole may impact process design as well. If the economy is in a recession, funds are likely to be more tightly managed within a company. Thusly, it may make sense for a process engineer to design a process that operates on a smaller scale. Not only will this decrease the cost of running the process (lower utilities costs, lower costs for process inputs), but since less product will be produced, this will also reduce the risk of having the company running an inventory. This is a positive, as running an inventory can lead to losing even more money during a recession. Conversely, a healthy economy may encourage the design of facilities with larger production capabilities. This section aims to look at several recent examples of macroeconomic markets affecting process design, similar to the hypothetical situations described above.<br />
<br />
Back in 2009, when the USA, UK, and many other first world countries were facing a harsh recession, both the profitability and scale of many production processes diminished. The Royal Society of Chemistry found that many chemical companies with plants located in England, when faced with the recession, elected to shut down production entirely rather than simply slow down production (RSC, 2009). Many of these plant closings were accompanied with the construction of new plants in areas of the world less affected by the recession, including the Middle East. Many notable international companies, such as Dow, were involved in this migration from countries entrenched in recession to countries where production would be more economical. While this may seem obvious, it is still worth noting that a process engineer needs to take into account the state of the economy in the location where a production facility is looking to be built.<br />
<br />
Building off of what the Royal Society of Chemistry found, a 2010 KPMG case study aimed to further analyze the effects of the recession on chemical production plants. Though the KPMG case study was based on United States production, the economic climate in the UK was similar to that of the United States, so similar conclusions can be drawn from both studies. What KPMG found in the United States in 2010 backed up what the Royal Society of Chemistry found in England in 2009. The United States was seeing a similar outsourcing of both old production facilities that were being shut down and new production facilities that, though initially proposed for construction in the United States, were being outsourced. However, KPMG went further in depth to analyze how specific markets in the United States were affecting chemical production plants. They found that the domestic auto industry and the construction sector heavily influenced the number and scale of chemical plants being proposed for construction in the USA. This makes sense, as these are two of the largest markets for chemicals in the USA. By 2010, the domestic auto industry was rebounding, and this was found to be largely correlated with an increase in demand for US chemicals (KPMG, 2010). This highlights that a process engineer must consider what sectors use the output of his process (in this scenario, various chemicals) as an input to their process. Analyzing these specific markets in several competitive locations could provide the final input into determining where to build a production facility.<br />
<br />
Another case study, conducted by CNN, analyzed the world market for rare earth minerals. Rare earth minerals are vital to the preparation of catalysts, which impacts a large portion of the chemical engineering industry. Additionally, rare earth minerals are used extensively in a wide variety of consumer products, including but not limited to hybrid cars and smartphone chips. Any process engineer looking to design a plant where production utilizes rare earth minerals should analyze this global market in order to influence his decisions that go into designing the process. The case study conducted by CNN highlights the fact that China is the dominant player in the global market for rare earth minerals (Yan, 2015). Per National Center for Policy Analysis, with whom CNN consulted during their case study, China controls about 95% of global rare earth mineral production, and holds half of the world’s resources of these metals. A specific subset of rare earth minerals, rare earth oxides, are vital components of many catalysts. Figure 1 below shows just how strong of a monopoly China has on these rare earth oxides in the global market. The supply crunch brought on by China forced the lone United States producer of rare earth metals, Molycorp, into bankruptcy. China having a near monopoly on the global market for rare earth metals means that they can exert their dominance on the market in several fashions. One such example came in 2010, when Beijing abruptly reducing their export quota for rare earth minerals lead to skyrocketing prices. A process engineer who’s proposed design includes the use of any catalyst using these rare earth metals must take all of these possibilities into account. In this example, does the influence China has on the global rare earth metals market make it more sensible to build a plant in China? Or maybe the volatility of the prices is too concerning, which could lead to the process engineer being forced to redesign his process without the use of a catalyst. Though this would certainly reduce product yield, it could be the case that the markets for the metals that make the necessary catalyst render the process without the catalyst more profitable on a per unit basis. This rare earth metal example is just one of many; the overall lesson is that a process engineer must evaluate the global markets for all important inputs to his process, as the profitability of different designs will be heavily influenced by these markets.<br />
<br />
[[File:reo.jpg|frame|center|border|<div align=center> Figure 1: Global rare earth oxide production trends from 1956-2010 <div>]]<br />
<div align=left><br />
<br />
<br />
A third case study conducted by the Economic Policy Institute analyzed broad world market effects in the form of trade agreements. A trade agreement is a tax, tariff and trade treaty between two or more nations that often includes investment guarantees. One prominent example of a trade agreement is the North American Free Trade Agreement (NAFTA), which was signed in 1993. NAFTA is a trilateral rules based trade bloc between the United States, Canada and Mexico. One of the biggest effects of NAFTA was the movement of chemical and manufacturing plants from the United States to Canada and Mexico. In the first decade of the act (1993-2002), approximately 880,000 U.S. jobs were lost to Canada and Mexico (Scott, 2003). As a result of the influx of jobs, real wages dropped in Mexico, causing the operation of plants and processing facilities in Mexico to be more profitable than in the United States. This in turn lead to more factories moving to Mexico, and the cycle perpetuated. NAFTA is just one example of many trade agreements which had this effect. Globally, trade agreements between developed and developing countries leads to a migration of jobs (and the accompanying lowering of wages) to the developing countries. A process engineer needs to analyze trade agreements between the country in which he works and any countries with which his country has trade agreements. Not only will he likely find cheaper labor in other countries, but depending on the trade agreement, there may be tax breaks, import deals, or a variety of other money saving clauses written in the trade agreement. Overall, regardless of whatever the process may be, a process engineer can save his company millions of dollars by simply analyzing trade agreements and optimizing plant location.<br />
<br />
====Example====<br />
<br />
As a final example to sum up some of these global market impacts on a process engineer’s decisions, imagine the following hypothetical process: the production of a new biofuel using ethanol as an input, a catalyzed packed bed reactor to produce the biofuel with carbon dioxide being one of the byproducts, and a distillation column required to purify the product. Let us say that the process engineer is deciding between China and the United States as a location for the plant.<br />
<br />
First of all, seeing as how ethanol is the main feed, if is obviously necessary to look into the global market for ethanol. As can be seen below in Figure 2, the United States and Brazil are the two dominant players in terms of production. This would mean that, despite the relative volatility of ethanol prices, it is reasonable to expect that ethanol would be the cheapest in either of these two countries, since acquiring ethanol would not include shipping costs and/or import tariffs. This favors the United States as the location for this plantAs a quick tangent, since a large amount of ethanol is derived from corn, a process engineer should look into future expected trends for corn globally.<br />
<br />
Next comes the catalyzed reactor. As highlighted previously, China dwarfs the United States in terms of control of the rare earth metals that go into producing many catalysts. Due to the dominance of China in the rare earth oxide catalysts market, this would favor China as a location for production. Based on the fact that the two important inputs for this process (ethanol and the catalyst) aren’t both cheaper in either the U.S. or China, a process engineer could alter the process to favor one location. For example, if plant production in the U.S. was desirable, perhaps a lesser quality catalyst without as many rare earth metals could be utilized, which would require a larger amount of ethanol in the feed to meet a desired product quantity. This would cut costs on the catalyst (which is much more expensive in the U.S.) while the increase in costs for ethanol (due to increased quantity) would not outweigh the savings on catalyst.<br />
<br />
The two main products exiting this hypothetical reactor are product biofuel and byproduct carbon dioxide. China recently announced that they will implement a national cap-and-trade system for greenhouse gas emissions in 2017, whereas the United States currently has no policy for taxing greenhouse gas emissions. However, it is highly likely that the United States will soon implement a carbon tax policy similar to Canada’s successful carbon tax policy introduced in 2008. Let us suppose for the sake of this example that a carbon tax will be implemented in the United States in 2017, the same time as China’s policy will come into effect. The cap-and-trade system in China and carbon tax system in the U.S. are very different policies. A carbon tax imposes a flat tax on each unit of carbon dioxide emitted, whereas a cap-and-trade system sets a maximum level of pollution and sells emissions permits to companies allowing them to emit up to the maximum level. Depending on the scale of the process and the quantity of carbon dioxide being released, one policy might be much more favorable, and thusly a process engineer must look into this further.<br />
<br />
A final aspect to consider is simply the costs associated with any plant. Though there are many costs associated with building and running a plant, two large costs will be analyzed here. The cost of steel required to build the plant, and the cost of labor required to operate the plant. Even though the price of steel is relatively volatile, the per unit costs in China and the U.S. have remained quite close to one another. As for labor, costs are generally lower in China overall, but a process engineer must look into specific salaries for each position at the production facility. Even though China as a whole has less expensive labor, a plant operator for biofuels production may be a much higher paying position in China than it is in the U.S. Overall, taking all of these factors into account, it may make sense for a process engineer to either favor production in one country over another, or alter the process in order to favor one country if he is not in control of where the production facility is being built.<br />
<br />
The above analyses cover only a fraction of what a process engineer must consider. The analyses conducted highlight some of the major components, but there are many others that must be considered as well. Global market effects are endless, and play a large part in helping a good process engineer determine how to design a process and where to build a production facility.<br />
<br />
[[File:Ethanol.JPG|frame|center|border|<div align=center> Figure 2: Global ethanol production from 2007-2011 <div>]]<br />
<br />
[[File:Steel.JPG|frame|center|border|<div align=center> Figure 1: Global steel prices from 2006-2012 <div>]]<br />
<div align=left><br />
<br />
==Conclusion==<br />
Thermodynamics and kinetics are essential to designing an operational plant, but at the end of the day profits and margins are what make plants go from the engineering paper pad to operating continuously. Before any ground is broken, estimation of production costs and revenues are absolutely necessary to assure CEO's and shareholders that this process is a profitable and worth while venture. There are many avenues to achieve these answers with some being more accurate than others. The best indicator of these answers will be in pilot plant design which will provide appropriate estimations for scaled up processes.<br />
<br />
==References==<br />
<br />
Biegler LT, Grossmann IE, Westerberg AW. Systematic Methods of Chemical Process Design. Upper Saddle River: Prentice Hall; 1997. <br />
<br />
Peters MS, Timmerhaus KD. Plant Design and Economics for Chemical Engineers. 5th ed. New York: McGraw Hill; 2003.<br />
<br />
Seider WD, Seader JD, Lewin DR. Process Design Principles: Synthesis, Analysis, and Evaluation. 3rd ed. New York: Wiley; 2004.<br />
<br />
Towler G, Sinnott R. Chemical Engineering Design: Principles, Practice and Economics of Plant and Process Design. 2nd ed. Boston: Elsevier; 2013.<br />
<br />
Turton R, Bailie RC, Whiting WB, Shaewitz JA, Bhattacharyya D. Analysis, Synthesis, and Design of Chemical Processes. 4th ed. Upper Saddle River: Prentice-Hall; 2012.<br />
<br />
Chemicals Sector Struggles in Recession. Royal Society of Chemistry, rsc.org. July 29, 2009<br />
<br />
The Outlook for the US Chemical Industry. KPMG, kpmg.com. 2010.<br />
<br />
Yan S. China is About to Tighten its Grip on Rare Earth Minerals. CNN, money.cnn.com. June 5, 2015<br />
<br />
Scott R.E. The High Price of “Free” Trade: NAFTA’s Failure has Cost the United States Jobs Across the Nation. Economic Policy Institute, www.epi.org. November 17, 2003</div>RJKolbehttps://processdesign.mccormick.northwestern.edu/index.php?title=Estimation_of_production_cost_and_revenue&diff=4608Estimation of production cost and revenue2016-02-21T22:38:50Z<p>RJKolbe: /* Example */</p>
<hr />
<div>Authors: Nick Pinkerton, Karen Schmidt, James Xamplas (ChE 352 in Winter 2014), Reed Kolbe (ChE 352, Winter 2016)<br />
<br />
Steward: David Chen, Fengqi You <br />
<br />
==Variable Cost of Production==<br />
Variable costs of production are dependent primarily on plant output and rate of production. There are many variables to consider when costing a plant. <br />
# Raw materials consumed<br />
# Utilities-steam, electricity, cooling water, fuel, etc.<br />
# Consumables - acids, bases, solvents, catalysts, etc.<br />
# Disposal<br />
# Shipping<br />
The majority of the variable costs for a production plant are the raw materials and utilities costs. Variable costs can be greatly cut through optimization techniques and intelligent plant design (Towler and Sinnott, 2013).<br />
===Raw Materials Cost===<br />
Calculating the annual cost of a raw material is calculated by simply multiplying the feed rate of the process by the appropriate price per volume or mass. These are the costs of chemical feed stocks required by the process. Feed stocks flow rates are obtained from PFD (Turton et al., 2013).There are several ways to optimize this cost to ensure that a process is not costing more than it should. First one should assess the actual consumption of a plant to see if it is significantly different from what should be expected based on process stoichiometry and selectivities (Towler and Sinnott, 2013). Finding may prove that a process is less efficient than it originally claimed.<br />
It is smart to benchmark a new plant design against an existing plant or pilot plant. Raw materials are typically the largest contributor to overall variable costs. For bulk chemicals and petrochemicals, raw materials represent 80-90% of the total cash cost of production (CCOP). <br />
===Utilities Cost===<br />
These are the costs of the various utilities streams required by the process. The flowrates for the utilities streams are located on the PFD (Turton et al., 2013). This includes:<br />
*Fuel gas, oil, or coal<br />
*Electric power<br />
*Steam<br />
*Cooling water<br />
*Process water<br />
*Boiler feed water<br />
*Air<br />
*Inert gas<br />
*Refrigeration<br />
<br />
Utility streams are excellent ways to streamline a process and are often indicative of how efficient of a process the project is. Process methods such as steam generation and pinch analysis can be used to greatly reduce utility costs across a plant. Further analysis of pinch analysis techniques and optimizing heat exchanger networks can be found in plant design texts such as first reference from Gavin Towler. The determination of process utility costs is often more difficult than the determination of raw material costs; however, the utilities are typically between 5-10% of CCOP (Towler and Sinnott, 2013). The cost of heating a process can be reduced by using process waste streams as fuel which consequently also reduces the need for waste disposal.<br />
<br />
===Waste Disposal Costs===<br />
These are defined as the cost of waste treatment to protect the environment (Turton et al., 2013). These are materials that cannot be recycled or sold off as by-products. Often times these streams require additives or additional treatment to meet governmental regulations. <br />
Hydrocarbon waste can often be incinerated directly to the atmosphere or used as process fuel to heat other streams in the system. Using the stream as process fuel allows the fuel value of the stream to be recovered into the system. The substituted value can be calculated by multiplying the conventional fuel price by the heat of combustion of the waste stream. <br />
<br />
<math>P_{WFV} = P_F * \Delta H_C^o</math><br />
<br />
where <br />
<math>P_{WFV}</math> = waste value of fuel ($/lb or $/kg)<br />
<br />
<math>P_F</math> = price of fuel ($/MMBtu or $/GJ)<br />
<br />
<math>\Delta H_C^o</math> = heat of combustion (MMBtu/lb or GJ/kg)<br />
<br />
Dilute aqueous streams must be sent to wastewater treatment typically prior to purging from the plant. Acidic or basic wastes are neutralized prior to treatment by salting out the acid or base. The cost of wastewater treatment is typically about $6 per 1000 gal but this is only an estimate that doesn't account for regional charges (Towler and Sinnott, 2013).<br />
<br />
Solid waste treatment can typically be sent to a landfill at a cost of approximately $50/ton (Towler and Sinnott, 2013). <br />
<br />
Hazardous wastes arise from the production of concentrated liquid streams that cannot be incinerated. Hazardous wastes should be avoided if possible, but that is not always feasible for some processes. The cost of hazardous waste disposal is strongly dependent on the location of the plant, the plants proximity to waste disposal plants and the degree of hazard of the waste.<br />
<br />
==Fixed Cost of Production==<br />
Fixed costs are those whose amounts are independent of production rates. Much of these costs are personnel salaries, taxes, insurance, and legal payments.<br />
===Labor Costs===<br />
These are the costs attributed to the personnel required to operate the process plant (Turton et al., 2013).<br />
<br />
The number of operators required per shift, <math>N_{OL}</math> can be estimated by<br />
<br />
<math>N_{OL}=(6.29+31.7P^2+0.23N_{np})^{0.5}</math><br />
<br />
where <math>P</math> is the number of processing steps involving particulate solids and <math>N_{np}</math> is the number of other processing steps (Turton et al., 2013). For each of the <math>N_{OL}</math> operators per 8-hour shift, approximately 4.5 operators must be hired for a plant that runs 24 hours per day, to account for the 3 shifts per day and the 3 weeks of leave typically taken by each operator per year (Turton et al., 2013). The salary for a chemical plant operator varies by location, and the estimator should look up the average value for the area.<br />
<br />
===Maintenance Costs===<br />
These are the costs associated with labor and materials necessary to maintain plant production. An estimate of these are 6% of the fixed capital investment (Turton et al., 2013).<br />
<br />
===Research and Development===<br />
These are the costs of research done in developing the process and/or products. This includes salaries for researchers as well as funds for research related equipment and supplies. An estimate of these costs are 5% of the total manufacturing cost (Turton et al., 2013).<br />
<br />
===Taxes and Insurance===<br />
Taxes vary by location, but a first estimate of property taxes and liability insurance is 3% of the fixed capital investment (Turton et al., 2013).<br />
<br />
===Plant Overhead===<br />
Overhead costs are the miscellaneous but necessary costs of running a business, including payroll, employee benefits, and janitorial services. This may be estimated as 70% of the operating labor costs, added to 4% of the fixed capital costs (Turton et al., 2013).<br />
<br />
===Licensing and Royalties===<br />
The costs of paying for the use of intellectual property clearly varies, but an estimate that may be used is 3% of the total manufacturing cost (Turton et al., 2013).<br />
<br />
==Revenues==<br />
The revenues of a process are the income earned form sales of the main products and the by-products. Revenue can be impacted by market fluctuations and production rates.<br />
===By-Product Revenues===<br />
Besides selling the main product from a process, by-products from separations and reactions can also be valuable in the market. Often it is more difficult to decide which by-products to recover and purify than it is to make decisions on the main product. <br />
<br />
By-products made in stoichiometric ratios from reactions must be either sold off or managed through waste disposal. Other by-products are sometimes produced through feed impurities or by nonselective reactions. There are several potential valuable by-products from a process: <br />
# Materials produced in stoichiometric quantities by the reactions that create the main product. If they are not recovered then the waste disposal expenses will be large.<br />
# Components that are produced in high yield by side reactions. <br />
# Components formed in high yield from feed impurities. Many sulfurs are produced as a by-product of fuels manufacture.<br />
# Components that are produced in low yield but have high value. An example includes acetophenone which is recovered as a by-product of phenol manufacture.<br />
# Degraded consumables (e.g. solvents, etc.) that have reuse value.<br />
<br />
A rule of thumb that can be used for preliminary screening of by-products for large plants is that for by-product recovery to be economically feasible the net benefit must be greater than $200,000 a year. A net benefit can be calculated by adding the possible resale value of the by-product and the avoided waste disposal cost (Towler and Sinnott, 2013). <br />
<br />
===Margin===<br />
The gross margin of a process is defined as the sum of product and by-product revenues minus the raw material cost. <br />
<br />
Gross margin = Revenues - Raw materials costs<br />
<br />
Because raw materials are most often the most expensive variable cost of a process, the gross margin is a good gauge as to what the total profitability of a process will be. Raw materials and product pricing are often subject to high degrees of variability which can be difficult to forecast. The size of margins are highly versatile depending on the <br />
industry. For many petrochemical industries the margin may be only 10%; however, for industries such as food additives and pharmaceuticals the margins are generally much higher (Towler and Sinnott, 2013).<br />
<br />
===Profits===<br />
There are several standards for calculating company profits. The cash cost of production (CCOP) is the sum of the fixed and variable production costs. <br />
<br />
<math>CCOP = VCOP + FCOP</math><br />
<br />
where <math>VCOP</math> is the variable cost of production and <math>FCOP</math> is the fixed cost of production. <br />
<br />
Gross profit, which should not be confused with gross margin, is then calculated by the following equation,<br />
<br />
<math>Gross\ profit = Main\ product\ revenues - CCOP</math><br />
<br />
Finally profit can be calculated by subtracting the income taxes that the plant would be subject to depending on the tax code of the county the plant is located in. <br />
<br />
<math>Net\ profit = gross\ profit - taxes</math><br />
<br />
==Pricing Products and Raw Materials==<br />
The revenues and costs of a project are vital to determining its economic feasibility. To calculate these values one needs to multiply the respective product and feed streams by their respective prices. The major difficulty of this process is determining the prices that should be used in this formula. When analyzing a plant, not only do the current prices need to be acknowledged but also the stability of the market to forecast future fluctuations and deviations. <br />
===Pricing Fundamentals===<br />
The pricing of a substance is determined by the fundamental economic principles of supply and demand. A supply curve and demand curve can be graphed and added to determine the market equilibrium price and projected market size. There are many ways a company can combat if the market equilibrium pricing is not suitable for a process. One of these ways is changing the market that the company is selling to. Instead of selling industrial grade product there may be markets for pharmaceutical grade or food grade that would allow for a company to sell their product at higher margins. Another avenue to look into is changing the geographic market being sold to. Rarely is there a global synchronous market, but rather a variation depending on where in the world the product is being sold. It is possible that a company could make more money by dedicating their sales to the Asian market as opposed to the US or vise versa. <br />
===Price Data Sources===<br />
There are many resources when trying to determine the price of a chemical or utility. This are important for looking at current pricing information as well as historical data that can be used for forecasting purposes. <br />
====Internal Company Forecasts====<br />
Large companies will often have the marketing or development departments develop a forecasting database that can be used internally in the company. Forecasts of this magnitude will often have multiple scenarios and projects that are evaluated under the given parameters. Companies may even license these forecasts to other companies for high fees if they desire. <br />
<br />
[[File:Capture.JPG]]<br />
<br />
Table 1 provides common industry acronyms that are used to indicate certain key words when determining pricing information.<br />
<br />
====Trade Journals====<br />
There are also many publications that report pricing data weekly. ''ICIS Chemical Business Americas'' used to publish the prices for hundreds of chemicals but have more recently changed their data to an online database that requires a subscription. This service is very expensive, but necessary for many companies. ''Oil and Gas Journal'' publishes the market prices of many crude oils and other petrochemicals using data from several continents. This journal also provides margin data for many refineries and plants on a monthly basis. ''Chemical Week'' provides the spot and contract prices for 22 chemicals in the US and European markets.<br />
<br />
====Consultants====<br />
If trade journals are not adequate for the information needed, some companies will contract consultants to do deep research into the subject. Consultants are excellent resources for providing economic and marketing information but come at a large price. There are several companies that provide this type of service but some of the larger firms include: ''Purvin and Gertz'', ''Cambidge Energy Research Associates'', ''Chemical Markets Associates Inc.'', and ''SRI: The Chemical Economics Handbook''<br />
<br />
====Online Brokers and Suppliers====<br />
Often time price data can be supplied by the supplier themselves and using online directories. Restraint should be used when quoting these prices however because they are often spot prices that are much higher than what would be expected from bulk contract supplying.<br />
<br />
==Example Case: Estimating Cost of Production==<br />
<br />
Use the following information to estimate the manufacturing cost of a plant producing 120*10^6 lb/year with a product price of $0.20/lb. <br />
<br />
:Fixed Capital: $15,000,000<br />
:Working Capital: $3,000,000<br />
:'''Fixed and Working Capital = FC + WC = $18,000,000'''<br />
:Raw Material Cost: $9,600,000/yr<br />
:Utilities: $1,440,000/yr<br />
:Labor: $1,800,000/yr<br />
:Maintenance (6% yr f.c.): $900,000/yr<br />
:Supplies (2% yr f.c.): $300,000/yr<br />
:Depreciation (8%/yr): $1,200,000/yr<br />
:Taxes, insurance (3%/yr): $450,000/yr<br />
:'''Total Manufacturing Cost = RMC + U + L + M + S + D + T = $15,690,000/yr'''<br />
:'''Gross Sales = Production * Product price = $24,000,000/yr'''<br />
:'''Gross Profit = Gross Sales - Manufacturing Cost = $8,310,000/yr'''<br />
<br />
==Market Effects on Process Design==<br />
Process design, like most other things, is inherently dependent on global markets, and the economy as a whole. Process design can depend on locational markets. For example, if an expected long run exchange rate between two specific currencies makes production of a specific chemical more profitable in a colder climate such as Russia as opposed to a warmer climate such as Mexico, this may have an effect on how the process to produce this specific chemical should be designed. Relative inflation rates of different countries can have similar effects on process design. Additionally, markets for key production inputs can have an effect on process design. If a company was designing a large scale production plant which required massive amounts of steel, the global market for steel (or to a lesser extent, iron mines) would impact how/where this company would choose to design and build their process. Also worth noting is the fact that the state of the economy as a whole may impact process design as well. If the economy is in a recession, funds are likely to be more tightly managed within a company. Thusly, it may make sense for a process engineer to design a process that operates on a smaller scale. Not only will this decrease the cost of running the process (lower utilities costs, lower costs for process inputs), but since less product will be produced, this will also reduce the risk of having the company running an inventory. This is a positive, as running an inventory can lead to losing even more money during a recession. Conversely, a healthy economy may encourage the design of facilities with larger production capabilities. This section aims to look at several recent examples of macroeconomic markets affecting process design, similar to the hypothetical situations described above.<br />
<br />
Back in 2009, when the USA, UK, and many other first world countries were facing a harsh recession, both the profitability and scale of many production processes diminished. The Royal Society of Chemistry found that many chemical companies with plants located in England, when faced with the recession, elected to shut down production entirely rather than simply slow down production (RSC, 2009). Many of these plant closings were accompanied with the construction of new plants in areas of the world less affected by the recession, including the Middle East. Many notable international companies, such as Dow, were involved in this migration from countries entrenched in recession to countries where production would be more economical. While this may seem obvious, it is still worth noting that a process engineer needs to take into account the state of the economy in the location where a production facility is looking to be built.<br />
<br />
Building off of what the Royal Society of Chemistry found, a 2010 KPMG case study aimed to further analyze the effects of the recession on chemical production plants. Though the KPMG case study was based on United States production, the economic climate in the UK was similar to that of the United States, so similar conclusions can be drawn from both studies. What KPMG found in the United States in 2010 backed up what the Royal Society of Chemistry found in England in 2009. The United States was seeing a similar outsourcing of both old production facilities that were being shut down and new production facilities that, though initially proposed for construction in the United States, were being outsourced. However, KPMG went further in depth to analyze how specific markets in the United States were affecting chemical production plants. They found that the domestic auto industry and the construction sector heavily influenced the number and scale of chemical plants being proposed for construction in the USA. This makes sense, as these are two of the largest markets for chemicals in the USA. By 2010, the domestic auto industry was rebounding, and this was found to be largely correlated with an increase in demand for US chemicals (KPMG, 2010). This highlights that a process engineer must consider what sectors use the output of his process (in this scenario, various chemicals) as an input to their process. Analyzing these specific markets in several competitive locations could provide the final input into determining where to build a production facility.<br />
<br />
Another case study, conducted by CNN, analyzed the world market for rare earth minerals. Rare earth minerals are vital to the preparation of catalysts, which impacts a large portion of the chemical engineering industry. Additionally, rare earth minerals are used extensively in a wide variety of consumer products, including but not limited to hybrid cars and smartphone chips. Any process engineer looking to design a plant where production utilizes rare earth minerals should analyze this global market in order to influence his decisions that go into designing the process. The case study conducted by CNN highlights the fact that China is the dominant player in the global market for rare earth minerals (Yan, 2015). Per National Center for Policy Analysis, with whom CNN consulted during their case study, China controls about 95% of global rare earth mineral production, and holds half of the world’s resources of these metals. A specific subset of rare earth minerals, rare earth oxides, are vital components of many catalysts. Figure 1 below shows just how strong of a monopoly China has on these rare earth oxides in the global market. The supply crunch brought on by China forced the lone United States producer of rare earth metals, Molycorp, into bankruptcy. China having a near monopoly on the global market for rare earth metals means that they can exert their dominance on the market in several fashions. One such example came in 2010, when Beijing abruptly reducing their export quota for rare earth minerals lead to skyrocketing prices. A process engineer who’s proposed design includes the use of any catalyst using these rare earth metals must take all of these possibilities into account. In this example, does the influence China has on the global rare earth metals market make it more sensible to build a plant in China? Or maybe the volatility of the prices is too concerning, which could lead to the process engineer being forced to redesign his process without the use of a catalyst. Though this would certainly reduce product yield, it could be the case that the markets for the metals that make the necessary catalyst render the process without the catalyst more profitable on a per unit basis. This rare earth metal example is just one of many; the overall lesson is that a process engineer must evaluate the global markets for all important inputs to his process, as the profitability of different designs will be heavily influenced by these markets.<br />
<br />
[[File:reo.jpg|frame|center|border|<div align=center> Figure 1: Global rare earth oxide production trends from 1956-2010 <div>]]<br />
<div align=left><br />
<br />
<br />
A third case study conducted by the Economic Policy Institute analyzed broad world market effects in the form of trade agreements. A trade agreement is a tax, tariff and trade treaty between two or more nations that often includes investment guarantees. One prominent example of a trade agreement is the North American Free Trade Agreement (NAFTA), which was signed in 1993. NAFTA is a trilateral rules based trade bloc between the United States, Canada and Mexico. One of the biggest effects of NAFTA was the movement of chemical and manufacturing plants from the United States to Canada and Mexico. In the first decade of the act (1993-2002), approximately 880,000 U.S. jobs were lost to Canada and Mexico (Scott, 2003). As a result of the influx of jobs, real wages dropped in Mexico, causing the operation of plants and processing facilities in Mexico to be more profitable than in the United States. This in turn lead to more factories moving to Mexico, and the cycle perpetuated. NAFTA is just one example of many trade agreements which had this effect. Globally, trade agreements between developed and developing countries leads to a migration of jobs (and the accompanying lowering of wages) to the developing countries. A process engineer needs to analyze trade agreements between the country in which he works and any countries with which his country has trade agreements. Not only will he likely find cheaper labor in other countries, but depending on the trade agreement, there may be tax breaks, import deals, or a variety of other money saving clauses written in the trade agreement. Overall, regardless of whatever the process may be, a process engineer can save his company millions of dollars by simply analyzing trade agreements and optimizing plant location.<br />
<br />
====Example====<br />
<br />
As a final example to sum up some of these global market impacts on a process engineer’s decisions, imagine the following hypothetical process: the production of a new biofuel using ethanol as an input, a catalyzed packed bed reactor to produce the biofuel with carbon dioxide being one of the byproducts, and a distillation column required to purify the product. Let us say that the process engineer is deciding between China and the United States as a location for the plant.<br />
<br />
First of all, seeing as how ethanol is the main feed, if is obviously necessary to look into the global market for ethanol. As can be seen below in Figure 2, the United States and Brazil are the two dominant players in terms of production. This would mean that, despite the relative volatility of ethanol prices, it is reasonable to expect that ethanol would be the cheapest in either of these two countries, since acquiring ethanol would not include shipping costs and/or import tariffs. This favors the United States as the location for this plantAs a quick tangent, since a large amount of ethanol is derived from corn, a process engineer should look into future expected trends for corn globally.<br />
<br />
Next comes the catalyzed reactor. As highlighted previously, China dwarfs the United States in terms of control of the rare earth metals that go into producing many catalysts. Due to the dominance of China in the rare earth oxide catalysts market, this would favor China as a location for production. Based on the fact that the two important inputs for this process (ethanol and the catalyst) aren’t both cheaper in either the U.S. or China, a process engineer could alter the process to favor one location. For example, if plant production in the U.S. was desirable, perhaps a lesser quality catalyst without as many rare earth metals could be utilized, which would require a larger amount of ethanol in the feed to meet a desired product quantity. This would cut costs on the catalyst (which is much more expensive in the U.S.) while the increase in costs for ethanol (due to increased quantity) would not outweigh the savings on catalyst.<br />
<br />
The two main products exiting this hypothetical reactor are product biofuel and byproduct carbon dioxide. China recently announced that they will implement a national cap-and-trade system for greenhouse gas emissions in 2017, whereas the United States currently has no policy for taxing greenhouse gas emissions. However, it is highly likely that the United States will soon implement a carbon tax policy similar to Canada’s successful carbon tax policy introduced in 2008. Let us suppose for the sake of this example that a carbon tax will be implemented in the United States in 2017, the same time as China’s policy will come into effect. The cap-and-trade system in China and carbon tax system in the U.S. are very different policies. A carbon tax imposes a flat tax on each unit of carbon dioxide emitted, whereas a cap-and-trade system sets a maximum level of pollution and sells emissions permits to companies allowing them to emit up to the maximum level. Depending on the scale of the process and the quantity of carbon dioxide being released, one policy might be much more favorable, and thusly a process engineer must look into this further.<br />
<br />
A final aspect to consider is simply the costs associated with any plant. Though there are many costs associated with building and running a plant, two large costs will be analyzed here. The cost of steel required to build the plant, and the cost of labor required to operate the plant. Even though the price of steel is relatively volatile, the per unit costs in China and the U.S. have remained quite close to one another. As for labor, costs are generally lower in China overall, but a process engineer must look into specific salaries for each position at the production facility. Even though China as a whole has less expensive labor, a plant operator for biofuels production may be a much higher paying position in China than it is in the U.S. Overall, taking all of these factors into account, it may make sense for a process engineer to either favor production in one country over another, or alter the process in order to favor one country if he is not in control of where the production facility is being built.<br />
<br />
The above analyses cover only a fraction of what a process engineer must consider. The analyses conducted highlight some of the major components, but there are many others that must be considered as well. Global market effects are endless, and play a large part in helping a good process engineer determine how to design a process and where to build a production facility.<br />
<br />
[[File:Ethanol.JPG|frame|center|border|<div align=center> Figure 2: Global ethanol production from 2007-2011 <div>]]<br />
<br />
[[File:steel.jpg|frame|center|border|<div align=center> Figure 1: Global steel prices from 2006-2012 <div>]]<br />
<div align=left><br />
<br />
==Conclusion==<br />
Thermodynamics and kinetics are essential to designing an operational plant, but at the end of the day profits and margins are what make plants go from the engineering paper pad to operating continuously. Before any ground is broken, estimation of production costs and revenues are absolutely necessary to assure CEO's and shareholders that this process is a profitable and worth while venture. There are many avenues to achieve these answers with some being more accurate than others. The best indicator of these answers will be in pilot plant design which will provide appropriate estimations for scaled up processes.<br />
<br />
==References==<br />
<br />
Biegler LT, Grossmann IE, Westerberg AW. Systematic Methods of Chemical Process Design. Upper Saddle River: Prentice Hall; 1997. <br />
<br />
Peters MS, Timmerhaus KD. Plant Design and Economics for Chemical Engineers. 5th ed. New York: McGraw Hill; 2003.<br />
<br />
Seider WD, Seader JD, Lewin DR. Process Design Principles: Synthesis, Analysis, and Evaluation. 3rd ed. New York: Wiley; 2004.<br />
<br />
Towler G, Sinnott R. Chemical Engineering Design: Principles, Practice and Economics of Plant and Process Design. 2nd ed. Boston: Elsevier; 2013.<br />
<br />
Turton R, Bailie RC, Whiting WB, Shaewitz JA, Bhattacharyya D. Analysis, Synthesis, and Design of Chemical Processes. 4th ed. Upper Saddle River: Prentice-Hall; 2012.<br />
<br />
Chemicals Sector Struggles in Recession. Royal Society of Chemistry, rsc.org. July 29, 2009<br />
<br />
The Outlook for the US Chemical Industry. KPMG, kpmg.com. 2010.<br />
<br />
Yan S. China is About to Tighten its Grip on Rare Earth Minerals. CNN, money.cnn.com. June 5, 2015<br />
<br />
Scott R.E. The High Price of “Free” Trade: NAFTA’s Failure has Cost the United States Jobs Across the Nation. Economic Policy Institute, www.epi.org. November 17, 2003</div>RJKolbehttps://processdesign.mccormick.northwestern.edu/index.php?title=File:Ethanol.JPG&diff=4605File:Ethanol.JPG2016-02-21T22:37:21Z<p>RJKolbe: RJKolbe uploaded a new version of &quot;File:Ethanol.JPG&quot;</p>
<hr />
<div></div>RJKolbehttps://processdesign.mccormick.northwestern.edu/index.php?title=Estimation_of_production_cost_and_revenue&diff=4601Estimation of production cost and revenue2016-02-21T22:34:17Z<p>RJKolbe: /* Market Effects on Process Design */</p>
<hr />
<div>Authors: Nick Pinkerton, Karen Schmidt, James Xamplas (ChE 352 in Winter 2014), Reed Kolbe (ChE 352, Winter 2016)<br />
<br />
Steward: David Chen, Fengqi You <br />
<br />
==Variable Cost of Production==<br />
Variable costs of production are dependent primarily on plant output and rate of production. There are many variables to consider when costing a plant. <br />
# Raw materials consumed<br />
# Utilities-steam, electricity, cooling water, fuel, etc.<br />
# Consumables - acids, bases, solvents, catalysts, etc.<br />
# Disposal<br />
# Shipping<br />
The majority of the variable costs for a production plant are the raw materials and utilities costs. Variable costs can be greatly cut through optimization techniques and intelligent plant design (Towler and Sinnott, 2013).<br />
===Raw Materials Cost===<br />
Calculating the annual cost of a raw material is calculated by simply multiplying the feed rate of the process by the appropriate price per volume or mass. These are the costs of chemical feed stocks required by the process. Feed stocks flow rates are obtained from PFD (Turton et al., 2013).There are several ways to optimize this cost to ensure that a process is not costing more than it should. First one should assess the actual consumption of a plant to see if it is significantly different from what should be expected based on process stoichiometry and selectivities (Towler and Sinnott, 2013). Finding may prove that a process is less efficient than it originally claimed.<br />
It is smart to benchmark a new plant design against an existing plant or pilot plant. Raw materials are typically the largest contributor to overall variable costs. For bulk chemicals and petrochemicals, raw materials represent 80-90% of the total cash cost of production (CCOP). <br />
===Utilities Cost===<br />
These are the costs of the various utilities streams required by the process. The flowrates for the utilities streams are located on the PFD (Turton et al., 2013). This includes:<br />
*Fuel gas, oil, or coal<br />
*Electric power<br />
*Steam<br />
*Cooling water<br />
*Process water<br />
*Boiler feed water<br />
*Air<br />
*Inert gas<br />
*Refrigeration<br />
<br />
Utility streams are excellent ways to streamline a process and are often indicative of how efficient of a process the project is. Process methods such as steam generation and pinch analysis can be used to greatly reduce utility costs across a plant. Further analysis of pinch analysis techniques and optimizing heat exchanger networks can be found in plant design texts such as first reference from Gavin Towler. The determination of process utility costs is often more difficult than the determination of raw material costs; however, the utilities are typically between 5-10% of CCOP (Towler and Sinnott, 2013). The cost of heating a process can be reduced by using process waste streams as fuel which consequently also reduces the need for waste disposal.<br />
<br />
===Waste Disposal Costs===<br />
These are defined as the cost of waste treatment to protect the environment (Turton et al., 2013). These are materials that cannot be recycled or sold off as by-products. Often times these streams require additives or additional treatment to meet governmental regulations. <br />
Hydrocarbon waste can often be incinerated directly to the atmosphere or used as process fuel to heat other streams in the system. Using the stream as process fuel allows the fuel value of the stream to be recovered into the system. The substituted value can be calculated by multiplying the conventional fuel price by the heat of combustion of the waste stream. <br />
<br />
<math>P_{WFV} = P_F * \Delta H_C^o</math><br />
<br />
where <br />
<math>P_{WFV}</math> = waste value of fuel ($/lb or $/kg)<br />
<br />
<math>P_F</math> = price of fuel ($/MMBtu or $/GJ)<br />
<br />
<math>\Delta H_C^o</math> = heat of combustion (MMBtu/lb or GJ/kg)<br />
<br />
Dilute aqueous streams must be sent to wastewater treatment typically prior to purging from the plant. Acidic or basic wastes are neutralized prior to treatment by salting out the acid or base. The cost of wastewater treatment is typically about $6 per 1000 gal but this is only an estimate that doesn't account for regional charges (Towler and Sinnott, 2013).<br />
<br />
Solid waste treatment can typically be sent to a landfill at a cost of approximately $50/ton (Towler and Sinnott, 2013). <br />
<br />
Hazardous wastes arise from the production of concentrated liquid streams that cannot be incinerated. Hazardous wastes should be avoided if possible, but that is not always feasible for some processes. The cost of hazardous waste disposal is strongly dependent on the location of the plant, the plants proximity to waste disposal plants and the degree of hazard of the waste.<br />
<br />
==Fixed Cost of Production==<br />
Fixed costs are those whose amounts are independent of production rates. Much of these costs are personnel salaries, taxes, insurance, and legal payments.<br />
===Labor Costs===<br />
These are the costs attributed to the personnel required to operate the process plant (Turton et al., 2013).<br />
<br />
The number of operators required per shift, <math>N_{OL}</math> can be estimated by<br />
<br />
<math>N_{OL}=(6.29+31.7P^2+0.23N_{np})^{0.5}</math><br />
<br />
where <math>P</math> is the number of processing steps involving particulate solids and <math>N_{np}</math> is the number of other processing steps (Turton et al., 2013). For each of the <math>N_{OL}</math> operators per 8-hour shift, approximately 4.5 operators must be hired for a plant that runs 24 hours per day, to account for the 3 shifts per day and the 3 weeks of leave typically taken by each operator per year (Turton et al., 2013). The salary for a chemical plant operator varies by location, and the estimator should look up the average value for the area.<br />
<br />
===Maintenance Costs===<br />
These are the costs associated with labor and materials necessary to maintain plant production. An estimate of these are 6% of the fixed capital investment (Turton et al., 2013).<br />
<br />
===Research and Development===<br />
These are the costs of research done in developing the process and/or products. This includes salaries for researchers as well as funds for research related equipment and supplies. An estimate of these costs are 5% of the total manufacturing cost (Turton et al., 2013).<br />
<br />
===Taxes and Insurance===<br />
Taxes vary by location, but a first estimate of property taxes and liability insurance is 3% of the fixed capital investment (Turton et al., 2013).<br />
<br />
===Plant Overhead===<br />
Overhead costs are the miscellaneous but necessary costs of running a business, including payroll, employee benefits, and janitorial services. This may be estimated as 70% of the operating labor costs, added to 4% of the fixed capital costs (Turton et al., 2013).<br />
<br />
===Licensing and Royalties===<br />
The costs of paying for the use of intellectual property clearly varies, but an estimate that may be used is 3% of the total manufacturing cost (Turton et al., 2013).<br />
<br />
==Revenues==<br />
The revenues of a process are the income earned form sales of the main products and the by-products. Revenue can be impacted by market fluctuations and production rates.<br />
===By-Product Revenues===<br />
Besides selling the main product from a process, by-products from separations and reactions can also be valuable in the market. Often it is more difficult to decide which by-products to recover and purify than it is to make decisions on the main product. <br />
<br />
By-products made in stoichiometric ratios from reactions must be either sold off or managed through waste disposal. Other by-products are sometimes produced through feed impurities or by nonselective reactions. There are several potential valuable by-products from a process: <br />
# Materials produced in stoichiometric quantities by the reactions that create the main product. If they are not recovered then the waste disposal expenses will be large.<br />
# Components that are produced in high yield by side reactions. <br />
# Components formed in high yield from feed impurities. Many sulfurs are produced as a by-product of fuels manufacture.<br />
# Components that are produced in low yield but have high value. An example includes acetophenone which is recovered as a by-product of phenol manufacture.<br />
# Degraded consumables (e.g. solvents, etc.) that have reuse value.<br />
<br />
A rule of thumb that can be used for preliminary screening of by-products for large plants is that for by-product recovery to be economically feasible the net benefit must be greater than $200,000 a year. A net benefit can be calculated by adding the possible resale value of the by-product and the avoided waste disposal cost (Towler and Sinnott, 2013). <br />
<br />
===Margin===<br />
The gross margin of a process is defined as the sum of product and by-product revenues minus the raw material cost. <br />
<br />
Gross margin = Revenues - Raw materials costs<br />
<br />
Because raw materials are most often the most expensive variable cost of a process, the gross margin is a good gauge as to what the total profitability of a process will be. Raw materials and product pricing are often subject to high degrees of variability which can be difficult to forecast. The size of margins are highly versatile depending on the <br />
industry. For many petrochemical industries the margin may be only 10%; however, for industries such as food additives and pharmaceuticals the margins are generally much higher (Towler and Sinnott, 2013).<br />
<br />
===Profits===<br />
There are several standards for calculating company profits. The cash cost of production (CCOP) is the sum of the fixed and variable production costs. <br />
<br />
<math>CCOP = VCOP + FCOP</math><br />
<br />
where <math>VCOP</math> is the variable cost of production and <math>FCOP</math> is the fixed cost of production. <br />
<br />
Gross profit, which should not be confused with gross margin, is then calculated by the following equation,<br />
<br />
<math>Gross\ profit = Main\ product\ revenues - CCOP</math><br />
<br />
Finally profit can be calculated by subtracting the income taxes that the plant would be subject to depending on the tax code of the county the plant is located in. <br />
<br />
<math>Net\ profit = gross\ profit - taxes</math><br />
<br />
==Pricing Products and Raw Materials==<br />
The revenues and costs of a project are vital to determining its economic feasibility. To calculate these values one needs to multiply the respective product and feed streams by their respective prices. The major difficulty of this process is determining the prices that should be used in this formula. When analyzing a plant, not only do the current prices need to be acknowledged but also the stability of the market to forecast future fluctuations and deviations. <br />
===Pricing Fundamentals===<br />
The pricing of a substance is determined by the fundamental economic principles of supply and demand. A supply curve and demand curve can be graphed and added to determine the market equilibrium price and projected market size. There are many ways a company can combat if the market equilibrium pricing is not suitable for a process. One of these ways is changing the market that the company is selling to. Instead of selling industrial grade product there may be markets for pharmaceutical grade or food grade that would allow for a company to sell their product at higher margins. Another avenue to look into is changing the geographic market being sold to. Rarely is there a global synchronous market, but rather a variation depending on where in the world the product is being sold. It is possible that a company could make more money by dedicating their sales to the Asian market as opposed to the US or vise versa. <br />
===Price Data Sources===<br />
There are many resources when trying to determine the price of a chemical or utility. This are important for looking at current pricing information as well as historical data that can be used for forecasting purposes. <br />
====Internal Company Forecasts====<br />
Large companies will often have the marketing or development departments develop a forecasting database that can be used internally in the company. Forecasts of this magnitude will often have multiple scenarios and projects that are evaluated under the given parameters. Companies may even license these forecasts to other companies for high fees if they desire. <br />
<br />
[[File:Capture.JPG]]<br />
<br />
Table 1 provides common industry acronyms that are used to indicate certain key words when determining pricing information.<br />
<br />
====Trade Journals====<br />
There are also many publications that report pricing data weekly. ''ICIS Chemical Business Americas'' used to publish the prices for hundreds of chemicals but have more recently changed their data to an online database that requires a subscription. This service is very expensive, but necessary for many companies. ''Oil and Gas Journal'' publishes the market prices of many crude oils and other petrochemicals using data from several continents. This journal also provides margin data for many refineries and plants on a monthly basis. ''Chemical Week'' provides the spot and contract prices for 22 chemicals in the US and European markets.<br />
<br />
====Consultants====<br />
If trade journals are not adequate for the information needed, some companies will contract consultants to do deep research into the subject. Consultants are excellent resources for providing economic and marketing information but come at a large price. There are several companies that provide this type of service but some of the larger firms include: ''Purvin and Gertz'', ''Cambidge Energy Research Associates'', ''Chemical Markets Associates Inc.'', and ''SRI: The Chemical Economics Handbook''<br />
<br />
====Online Brokers and Suppliers====<br />
Often time price data can be supplied by the supplier themselves and using online directories. Restraint should be used when quoting these prices however because they are often spot prices that are much higher than what would be expected from bulk contract supplying.<br />
<br />
==Example Case: Estimating Cost of Production==<br />
<br />
Use the following information to estimate the manufacturing cost of a plant producing 120*10^6 lb/year with a product price of $0.20/lb. <br />
<br />
:Fixed Capital: $15,000,000<br />
:Working Capital: $3,000,000<br />
:'''Fixed and Working Capital = FC + WC = $18,000,000'''<br />
:Raw Material Cost: $9,600,000/yr<br />
:Utilities: $1,440,000/yr<br />
:Labor: $1,800,000/yr<br />
:Maintenance (6% yr f.c.): $900,000/yr<br />
:Supplies (2% yr f.c.): $300,000/yr<br />
:Depreciation (8%/yr): $1,200,000/yr<br />
:Taxes, insurance (3%/yr): $450,000/yr<br />
:'''Total Manufacturing Cost = RMC + U + L + M + S + D + T = $15,690,000/yr'''<br />
:'''Gross Sales = Production * Product price = $24,000,000/yr'''<br />
:'''Gross Profit = Gross Sales - Manufacturing Cost = $8,310,000/yr'''<br />
<br />
==Market Effects on Process Design==<br />
Process design, like most other things, is inherently dependent on global markets, and the economy as a whole. Process design can depend on locational markets. For example, if an expected long run exchange rate between two specific currencies makes production of a specific chemical more profitable in a colder climate such as Russia as opposed to a warmer climate such as Mexico, this may have an effect on how the process to produce this specific chemical should be designed. Relative inflation rates of different countries can have similar effects on process design. Additionally, markets for key production inputs can have an effect on process design. If a company was designing a large scale production plant which required massive amounts of steel, the global market for steel (or to a lesser extent, iron mines) would impact how/where this company would choose to design and build their process. Also worth noting is the fact that the state of the economy as a whole may impact process design as well. If the economy is in a recession, funds are likely to be more tightly managed within a company. Thusly, it may make sense for a process engineer to design a process that operates on a smaller scale. Not only will this decrease the cost of running the process (lower utilities costs, lower costs for process inputs), but since less product will be produced, this will also reduce the risk of having the company running an inventory. This is a positive, as running an inventory can lead to losing even more money during a recession. Conversely, a healthy economy may encourage the design of facilities with larger production capabilities. This section aims to look at several recent examples of macroeconomic markets affecting process design, similar to the hypothetical situations described above.<br />
<br />
Back in 2009, when the USA, UK, and many other first world countries were facing a harsh recession, both the profitability and scale of many production processes diminished. The Royal Society of Chemistry found that many chemical companies with plants located in England, when faced with the recession, elected to shut down production entirely rather than simply slow down production (RSC, 2009). Many of these plant closings were accompanied with the construction of new plants in areas of the world less affected by the recession, including the Middle East. Many notable international companies, such as Dow, were involved in this migration from countries entrenched in recession to countries where production would be more economical. While this may seem obvious, it is still worth noting that a process engineer needs to take into account the state of the economy in the location where a production facility is looking to be built.<br />
<br />
Building off of what the Royal Society of Chemistry found, a 2010 KPMG case study aimed to further analyze the effects of the recession on chemical production plants. Though the KPMG case study was based on United States production, the economic climate in the UK was similar to that of the United States, so similar conclusions can be drawn from both studies. What KPMG found in the United States in 2010 backed up what the Royal Society of Chemistry found in England in 2009. The United States was seeing a similar outsourcing of both old production facilities that were being shut down and new production facilities that, though initially proposed for construction in the United States, were being outsourced. However, KPMG went further in depth to analyze how specific markets in the United States were affecting chemical production plants. They found that the domestic auto industry and the construction sector heavily influenced the number and scale of chemical plants being proposed for construction in the USA. This makes sense, as these are two of the largest markets for chemicals in the USA. By 2010, the domestic auto industry was rebounding, and this was found to be largely correlated with an increase in demand for US chemicals (KPMG, 2010). This highlights that a process engineer must consider what sectors use the output of his process (in this scenario, various chemicals) as an input to their process. Analyzing these specific markets in several competitive locations could provide the final input into determining where to build a production facility.<br />
<br />
Another case study, conducted by CNN, analyzed the world market for rare earth minerals. Rare earth minerals are vital to the preparation of catalysts, which impacts a large portion of the chemical engineering industry. Additionally, rare earth minerals are used extensively in a wide variety of consumer products, including but not limited to hybrid cars and smartphone chips. Any process engineer looking to design a plant where production utilizes rare earth minerals should analyze this global market in order to influence his decisions that go into designing the process. The case study conducted by CNN highlights the fact that China is the dominant player in the global market for rare earth minerals (Yan, 2015). Per National Center for Policy Analysis, with whom CNN consulted during their case study, China controls about 95% of global rare earth mineral production, and holds half of the world’s resources of these metals. A specific subset of rare earth minerals, rare earth oxides, are vital components of many catalysts. Figure 1 below shows just how strong of a monopoly China has on these rare earth oxides in the global market. The supply crunch brought on by China forced the lone United States producer of rare earth metals, Molycorp, into bankruptcy. China having a near monopoly on the global market for rare earth metals means that they can exert their dominance on the market in several fashions. One such example came in 2010, when Beijing abruptly reducing their export quota for rare earth minerals lead to skyrocketing prices. A process engineer who’s proposed design includes the use of any catalyst using these rare earth metals must take all of these possibilities into account. In this example, does the influence China has on the global rare earth metals market make it more sensible to build a plant in China? Or maybe the volatility of the prices is too concerning, which could lead to the process engineer being forced to redesign his process without the use of a catalyst. Though this would certainly reduce product yield, it could be the case that the markets for the metals that make the necessary catalyst render the process without the catalyst more profitable on a per unit basis. This rare earth metal example is just one of many; the overall lesson is that a process engineer must evaluate the global markets for all important inputs to his process, as the profitability of different designs will be heavily influenced by these markets.<br />
<br />
[[File:reo.jpg|frame|center|border|<div align=center> Figure 1: Global rare earth oxide production trends from 1956-2010 <div>]]<br />
<div align=left><br />
<br />
<br />
A third case study conducted by the Economic Policy Institute analyzed broad world market effects in the form of trade agreements. A trade agreement is a tax, tariff and trade treaty between two or more nations that often includes investment guarantees. One prominent example of a trade agreement is the North American Free Trade Agreement (NAFTA), which was signed in 1993. NAFTA is a trilateral rules based trade bloc between the United States, Canada and Mexico. One of the biggest effects of NAFTA was the movement of chemical and manufacturing plants from the United States to Canada and Mexico. In the first decade of the act (1993-2002), approximately 880,000 U.S. jobs were lost to Canada and Mexico (Scott, 2003). As a result of the influx of jobs, real wages dropped in Mexico, causing the operation of plants and processing facilities in Mexico to be more profitable than in the United States. This in turn lead to more factories moving to Mexico, and the cycle perpetuated. NAFTA is just one example of many trade agreements which had this effect. Globally, trade agreements between developed and developing countries leads to a migration of jobs (and the accompanying lowering of wages) to the developing countries. A process engineer needs to analyze trade agreements between the country in which he works and any countries with which his country has trade agreements. Not only will he likely find cheaper labor in other countries, but depending on the trade agreement, there may be tax breaks, import deals, or a variety of other money saving clauses written in the trade agreement. Overall, regardless of whatever the process may be, a process engineer can save his company millions of dollars by simply analyzing trade agreements and optimizing plant location.<br />
<br />
====Example====<br />
<br />
As a final example to sum up some of these global market impacts on a process engineer’s decisions, imagine the following hypothetical process: the production of a new biofuel using ethanol as an input, a catalyzed packed bed reactor to produce the biofuel with carbon dioxide being one of the byproducts, and a distillation column required to purify the product. Let us say that the process engineer is deciding between China and the United States as a location for the plant.<br />
<br />
First of all, seeing as how ethanol is the main feed, if is obviously necessary to look into the global market for ethanol. As can be seen below in Figure 2, the United States and Brazil are the two dominant players in terms of production. This would mean that, despite the relative volatility of ethanol prices, it is reasonable to expect that ethanol would be the cheapest in either of these two countries, since acquiring ethanol would not include shipping costs and/or import tariffs. This favors the United States as the location for this plantAs a quick tangent, since a large amount of ethanol is derived from corn, a process engineer should look into future expected trends for corn globally.<br />
<br />
Next comes the catalyzed reactor. As highlighted previously, China dwarfs the United States in terms of control of the rare earth metals that go into producing many catalysts. Due to the dominance of China in the rare earth oxide catalysts market, this would favor China as a location for production. Based on the fact that the two important inputs for this process (ethanol and the catalyst) aren’t both cheaper in either the U.S. or China, a process engineer could alter the process to favor one location. For example, if plant production in the U.S. was desirable, perhaps a lesser quality catalyst without as many rare earth metals could be utilized, which would require a larger amount of ethanol in the feed to meet a desired product quantity. This would cut costs on the catalyst (which is much more expensive in the U.S.) while the increase in costs for ethanol (due to increased quantity) would not outweigh the savings on catalyst.<br />
<br />
The two main products exiting this hypothetical reactor are product biofuel and byproduct carbon dioxide. China recently announced that they will implement a national cap-and-trade system for greenhouse gas emissions in 2017, whereas the United States currently has no policy for taxing greenhouse gas emissions. However, it is highly likely that the United States will soon implement a carbon tax policy similar to Canada’s successful carbon tax policy introduced in 2008. Let us suppose for the sake of this example that a carbon tax will be implemented in the United States in 2017, the same time as China’s policy will come into effect. The cap-and-trade system in China and carbon tax system in the U.S. are very different policies. A carbon tax imposes a flat tax on each unit of carbon dioxide emitted, whereas a cap-and-trade system sets a maximum level of pollution and sells emissions permits to companies allowing them to emit up to the maximum level. Depending on the scale of the process and the quantity of carbon dioxide being released, one policy might be much more favorable, and thusly a process engineer must look into this further.<br />
<br />
A final aspect to consider is simply the costs associated with any plant. Though there are many costs associated with building and running a plant, two large costs will be analyzed here. The cost of steel required to build the plant, and the cost of labor required to operate the plant. Even though the price of steel is relatively volatile, the per unit costs in China and the U.S. have remained quite close to one another. As for labor, costs are generally lower in China overall, but a process engineer must look into specific salaries for each position at the production facility. Even though China as a whole has less expensive labor, a plant operator for biofuels production may be a much higher paying position in China than it is in the U.S. Overall, taking all of these factors into account, it may make sense for a process engineer to either favor production in one country over another, or alter the process in order to favor one country if he is not in control of where the production facility is being built.<br />
<br />
The above analyses cover only a fraction of what a process engineer must consider. The analyses conducted highlight some of the major components, but there are many others that must be considered as well. Global market effects are endless, and play a large part in helping a good process engineer determine how to design a process and where to build a production facility.<br />
<br />
[[File:ethanol.jpg|frame|center|border|<div align=center> Figure 2: Global ethanol production from 2007-2011 <div>]]<br />
<br />
[[File:steel.jpg|frame|center|border|<div align=center> Figure 1: Global steel prices from 2006-2012 <div>]]<br />
<div align=left><br />
<br />
==Conclusion==<br />
Thermodynamics and kinetics are essential to designing an operational plant, but at the end of the day profits and margins are what make plants go from the engineering paper pad to operating continuously. Before any ground is broken, estimation of production costs and revenues are absolutely necessary to assure CEO's and shareholders that this process is a profitable and worth while venture. There are many avenues to achieve these answers with some being more accurate than others. The best indicator of these answers will be in pilot plant design which will provide appropriate estimations for scaled up processes.<br />
<br />
==References==<br />
<br />
Biegler LT, Grossmann IE, Westerberg AW. Systematic Methods of Chemical Process Design. Upper Saddle River: Prentice Hall; 1997. <br />
<br />
Peters MS, Timmerhaus KD. Plant Design and Economics for Chemical Engineers. 5th ed. New York: McGraw Hill; 2003.<br />
<br />
Seider WD, Seader JD, Lewin DR. Process Design Principles: Synthesis, Analysis, and Evaluation. 3rd ed. New York: Wiley; 2004.<br />
<br />
Towler G, Sinnott R. Chemical Engineering Design: Principles, Practice and Economics of Plant and Process Design. 2nd ed. Boston: Elsevier; 2013.<br />
<br />
Turton R, Bailie RC, Whiting WB, Shaewitz JA, Bhattacharyya D. Analysis, Synthesis, and Design of Chemical Processes. 4th ed. Upper Saddle River: Prentice-Hall; 2012.<br />
<br />
Chemicals Sector Struggles in Recession. Royal Society of Chemistry, rsc.org. July 29, 2009<br />
<br />
The Outlook for the US Chemical Industry. KPMG, kpmg.com. 2010.<br />
<br />
Yan S. China is About to Tighten its Grip on Rare Earth Minerals. CNN, money.cnn.com. June 5, 2015<br />
<br />
Scott R.E. The High Price of “Free” Trade: NAFTA’s Failure has Cost the United States Jobs Across the Nation. Economic Policy Institute, www.epi.org. November 17, 2003</div>RJKolbehttps://processdesign.mccormick.northwestern.edu/index.php?title=File:Ethanol.JPG&diff=4600File:Ethanol.JPG2016-02-21T22:33:04Z<p>RJKolbe: </p>
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<div></div>RJKolbehttps://processdesign.mccormick.northwestern.edu/index.php?title=File:Steel.JPG&diff=4599File:Steel.JPG2016-02-21T22:32:44Z<p>RJKolbe: </p>
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<div></div>RJKolbehttps://processdesign.mccormick.northwestern.edu/index.php?title=Estimation_of_production_cost_and_revenue&diff=4596Estimation of production cost and revenue2016-02-21T22:28:33Z<p>RJKolbe: /* Market Effects on Process Design */</p>
<hr />
<div>Authors: Nick Pinkerton, Karen Schmidt, James Xamplas (ChE 352 in Winter 2014), Reed Kolbe (ChE 352, Winter 2016)<br />
<br />
Steward: David Chen, Fengqi You <br />
<br />
==Variable Cost of Production==<br />
Variable costs of production are dependent primarily on plant output and rate of production. There are many variables to consider when costing a plant. <br />
# Raw materials consumed<br />
# Utilities-steam, electricity, cooling water, fuel, etc.<br />
# Consumables - acids, bases, solvents, catalysts, etc.<br />
# Disposal<br />
# Shipping<br />
The majority of the variable costs for a production plant are the raw materials and utilities costs. Variable costs can be greatly cut through optimization techniques and intelligent plant design (Towler and Sinnott, 2013).<br />
===Raw Materials Cost===<br />
Calculating the annual cost of a raw material is calculated by simply multiplying the feed rate of the process by the appropriate price per volume or mass. These are the costs of chemical feed stocks required by the process. Feed stocks flow rates are obtained from PFD (Turton et al., 2013).There are several ways to optimize this cost to ensure that a process is not costing more than it should. First one should assess the actual consumption of a plant to see if it is significantly different from what should be expected based on process stoichiometry and selectivities (Towler and Sinnott, 2013). Finding may prove that a process is less efficient than it originally claimed.<br />
It is smart to benchmark a new plant design against an existing plant or pilot plant. Raw materials are typically the largest contributor to overall variable costs. For bulk chemicals and petrochemicals, raw materials represent 80-90% of the total cash cost of production (CCOP). <br />
===Utilities Cost===<br />
These are the costs of the various utilities streams required by the process. The flowrates for the utilities streams are located on the PFD (Turton et al., 2013). This includes:<br />
*Fuel gas, oil, or coal<br />
*Electric power<br />
*Steam<br />
*Cooling water<br />
*Process water<br />
*Boiler feed water<br />
*Air<br />
*Inert gas<br />
*Refrigeration<br />
<br />
Utility streams are excellent ways to streamline a process and are often indicative of how efficient of a process the project is. Process methods such as steam generation and pinch analysis can be used to greatly reduce utility costs across a plant. Further analysis of pinch analysis techniques and optimizing heat exchanger networks can be found in plant design texts such as first reference from Gavin Towler. The determination of process utility costs is often more difficult than the determination of raw material costs; however, the utilities are typically between 5-10% of CCOP (Towler and Sinnott, 2013). The cost of heating a process can be reduced by using process waste streams as fuel which consequently also reduces the need for waste disposal.<br />
<br />
===Waste Disposal Costs===<br />
These are defined as the cost of waste treatment to protect the environment (Turton et al., 2013). These are materials that cannot be recycled or sold off as by-products. Often times these streams require additives or additional treatment to meet governmental regulations. <br />
Hydrocarbon waste can often be incinerated directly to the atmosphere or used as process fuel to heat other streams in the system. Using the stream as process fuel allows the fuel value of the stream to be recovered into the system. The substituted value can be calculated by multiplying the conventional fuel price by the heat of combustion of the waste stream. <br />
<br />
<math>P_{WFV} = P_F * \Delta H_C^o</math><br />
<br />
where <br />
<math>P_{WFV}</math> = waste value of fuel ($/lb or $/kg)<br />
<br />
<math>P_F</math> = price of fuel ($/MMBtu or $/GJ)<br />
<br />
<math>\Delta H_C^o</math> = heat of combustion (MMBtu/lb or GJ/kg)<br />
<br />
Dilute aqueous streams must be sent to wastewater treatment typically prior to purging from the plant. Acidic or basic wastes are neutralized prior to treatment by salting out the acid or base. The cost of wastewater treatment is typically about $6 per 1000 gal but this is only an estimate that doesn't account for regional charges (Towler and Sinnott, 2013).<br />
<br />
Solid waste treatment can typically be sent to a landfill at a cost of approximately $50/ton (Towler and Sinnott, 2013). <br />
<br />
Hazardous wastes arise from the production of concentrated liquid streams that cannot be incinerated. Hazardous wastes should be avoided if possible, but that is not always feasible for some processes. The cost of hazardous waste disposal is strongly dependent on the location of the plant, the plants proximity to waste disposal plants and the degree of hazard of the waste.<br />
<br />
==Fixed Cost of Production==<br />
Fixed costs are those whose amounts are independent of production rates. Much of these costs are personnel salaries, taxes, insurance, and legal payments.<br />
===Labor Costs===<br />
These are the costs attributed to the personnel required to operate the process plant (Turton et al., 2013).<br />
<br />
The number of operators required per shift, <math>N_{OL}</math> can be estimated by<br />
<br />
<math>N_{OL}=(6.29+31.7P^2+0.23N_{np})^{0.5}</math><br />
<br />
where <math>P</math> is the number of processing steps involving particulate solids and <math>N_{np}</math> is the number of other processing steps (Turton et al., 2013). For each of the <math>N_{OL}</math> operators per 8-hour shift, approximately 4.5 operators must be hired for a plant that runs 24 hours per day, to account for the 3 shifts per day and the 3 weeks of leave typically taken by each operator per year (Turton et al., 2013). The salary for a chemical plant operator varies by location, and the estimator should look up the average value for the area.<br />
<br />
===Maintenance Costs===<br />
These are the costs associated with labor and materials necessary to maintain plant production. An estimate of these are 6% of the fixed capital investment (Turton et al., 2013).<br />
<br />
===Research and Development===<br />
These are the costs of research done in developing the process and/or products. This includes salaries for researchers as well as funds for research related equipment and supplies. An estimate of these costs are 5% of the total manufacturing cost (Turton et al., 2013).<br />
<br />
===Taxes and Insurance===<br />
Taxes vary by location, but a first estimate of property taxes and liability insurance is 3% of the fixed capital investment (Turton et al., 2013).<br />
<br />
===Plant Overhead===<br />
Overhead costs are the miscellaneous but necessary costs of running a business, including payroll, employee benefits, and janitorial services. This may be estimated as 70% of the operating labor costs, added to 4% of the fixed capital costs (Turton et al., 2013).<br />
<br />
===Licensing and Royalties===<br />
The costs of paying for the use of intellectual property clearly varies, but an estimate that may be used is 3% of the total manufacturing cost (Turton et al., 2013).<br />
<br />
==Revenues==<br />
The revenues of a process are the income earned form sales of the main products and the by-products. Revenue can be impacted by market fluctuations and production rates.<br />
===By-Product Revenues===<br />
Besides selling the main product from a process, by-products from separations and reactions can also be valuable in the market. Often it is more difficult to decide which by-products to recover and purify than it is to make decisions on the main product. <br />
<br />
By-products made in stoichiometric ratios from reactions must be either sold off or managed through waste disposal. Other by-products are sometimes produced through feed impurities or by nonselective reactions. There are several potential valuable by-products from a process: <br />
# Materials produced in stoichiometric quantities by the reactions that create the main product. If they are not recovered then the waste disposal expenses will be large.<br />
# Components that are produced in high yield by side reactions. <br />
# Components formed in high yield from feed impurities. Many sulfurs are produced as a by-product of fuels manufacture.<br />
# Components that are produced in low yield but have high value. An example includes acetophenone which is recovered as a by-product of phenol manufacture.<br />
# Degraded consumables (e.g. solvents, etc.) that have reuse value.<br />
<br />
A rule of thumb that can be used for preliminary screening of by-products for large plants is that for by-product recovery to be economically feasible the net benefit must be greater than $200,000 a year. A net benefit can be calculated by adding the possible resale value of the by-product and the avoided waste disposal cost (Towler and Sinnott, 2013). <br />
<br />
===Margin===<br />
The gross margin of a process is defined as the sum of product and by-product revenues minus the raw material cost. <br />
<br />
Gross margin = Revenues - Raw materials costs<br />
<br />
Because raw materials are most often the most expensive variable cost of a process, the gross margin is a good gauge as to what the total profitability of a process will be. Raw materials and product pricing are often subject to high degrees of variability which can be difficult to forecast. The size of margins are highly versatile depending on the <br />
industry. For many petrochemical industries the margin may be only 10%; however, for industries such as food additives and pharmaceuticals the margins are generally much higher (Towler and Sinnott, 2013).<br />
<br />
===Profits===<br />
There are several standards for calculating company profits. The cash cost of production (CCOP) is the sum of the fixed and variable production costs. <br />
<br />
<math>CCOP = VCOP + FCOP</math><br />
<br />
where <math>VCOP</math> is the variable cost of production and <math>FCOP</math> is the fixed cost of production. <br />
<br />
Gross profit, which should not be confused with gross margin, is then calculated by the following equation,<br />
<br />
<math>Gross\ profit = Main\ product\ revenues - CCOP</math><br />
<br />
Finally profit can be calculated by subtracting the income taxes that the plant would be subject to depending on the tax code of the county the plant is located in. <br />
<br />
<math>Net\ profit = gross\ profit - taxes</math><br />
<br />
==Pricing Products and Raw Materials==<br />
The revenues and costs of a project are vital to determining its economic feasibility. To calculate these values one needs to multiply the respective product and feed streams by their respective prices. The major difficulty of this process is determining the prices that should be used in this formula. When analyzing a plant, not only do the current prices need to be acknowledged but also the stability of the market to forecast future fluctuations and deviations. <br />
===Pricing Fundamentals===<br />
The pricing of a substance is determined by the fundamental economic principles of supply and demand. A supply curve and demand curve can be graphed and added to determine the market equilibrium price and projected market size. There are many ways a company can combat if the market equilibrium pricing is not suitable for a process. One of these ways is changing the market that the company is selling to. Instead of selling industrial grade product there may be markets for pharmaceutical grade or food grade that would allow for a company to sell their product at higher margins. Another avenue to look into is changing the geographic market being sold to. Rarely is there a global synchronous market, but rather a variation depending on where in the world the product is being sold. It is possible that a company could make more money by dedicating their sales to the Asian market as opposed to the US or vise versa. <br />
===Price Data Sources===<br />
There are many resources when trying to determine the price of a chemical or utility. This are important for looking at current pricing information as well as historical data that can be used for forecasting purposes. <br />
====Internal Company Forecasts====<br />
Large companies will often have the marketing or development departments develop a forecasting database that can be used internally in the company. Forecasts of this magnitude will often have multiple scenarios and projects that are evaluated under the given parameters. Companies may even license these forecasts to other companies for high fees if they desire. <br />
<br />
[[File:Capture.JPG]]<br />
<br />
Table 1 provides common industry acronyms that are used to indicate certain key words when determining pricing information.<br />
<br />
====Trade Journals====<br />
There are also many publications that report pricing data weekly. ''ICIS Chemical Business Americas'' used to publish the prices for hundreds of chemicals but have more recently changed their data to an online database that requires a subscription. This service is very expensive, but necessary for many companies. ''Oil and Gas Journal'' publishes the market prices of many crude oils and other petrochemicals using data from several continents. This journal also provides margin data for many refineries and plants on a monthly basis. ''Chemical Week'' provides the spot and contract prices for 22 chemicals in the US and European markets.<br />
<br />
====Consultants====<br />
If trade journals are not adequate for the information needed, some companies will contract consultants to do deep research into the subject. Consultants are excellent resources for providing economic and marketing information but come at a large price. There are several companies that provide this type of service but some of the larger firms include: ''Purvin and Gertz'', ''Cambidge Energy Research Associates'', ''Chemical Markets Associates Inc.'', and ''SRI: The Chemical Economics Handbook''<br />
<br />
====Online Brokers and Suppliers====<br />
Often time price data can be supplied by the supplier themselves and using online directories. Restraint should be used when quoting these prices however because they are often spot prices that are much higher than what would be expected from bulk contract supplying.<br />
<br />
==Example Case: Estimating Cost of Production==<br />
<br />
Use the following information to estimate the manufacturing cost of a plant producing 120*10^6 lb/year with a product price of $0.20/lb. <br />
<br />
:Fixed Capital: $15,000,000<br />
:Working Capital: $3,000,000<br />
:'''Fixed and Working Capital = FC + WC = $18,000,000'''<br />
:Raw Material Cost: $9,600,000/yr<br />
:Utilities: $1,440,000/yr<br />
:Labor: $1,800,000/yr<br />
:Maintenance (6% yr f.c.): $900,000/yr<br />
:Supplies (2% yr f.c.): $300,000/yr<br />
:Depreciation (8%/yr): $1,200,000/yr<br />
:Taxes, insurance (3%/yr): $450,000/yr<br />
:'''Total Manufacturing Cost = RMC + U + L + M + S + D + T = $15,690,000/yr'''<br />
:'''Gross Sales = Production * Product price = $24,000,000/yr'''<br />
:'''Gross Profit = Gross Sales - Manufacturing Cost = $8,310,000/yr'''<br />
<br />
==Market Effects on Process Design==<br />
Process design, like most other things, is inherently dependent on global markets, and the economy as a whole. Process design can depend on locational markets. For example, if an expected long run exchange rate between two specific currencies makes production of a specific chemical more profitable in a colder climate such as Russia as opposed to a warmer climate such as Mexico, this may have an effect on how the process to produce this specific chemical should be designed. Relative inflation rates of different countries can have similar effects on process design. Additionally, markets for key production inputs can have an effect on process design. If a company was designing a large scale production plant which required massive amounts of steel, the global market for steel (or to a lesser extent, iron mines) would impact how/where this company would choose to design and build their process. Also worth noting is the fact that the state of the economy as a whole may impact process design as well. If the economy is in a recession, funds are likely to be more tightly managed within a company. Thusly, it may make sense for a process engineer to design a process that operates on a smaller scale. Not only will this decrease the cost of running the process (lower utilities costs, lower costs for process inputs), but since less product will be produced, this will also reduce the risk of having the company running an inventory. This is a positive, as running an inventory can lead to losing even more money during a recession. Conversely, a healthy economy may encourage the design of facilities with larger production capabilities. This section aims to look at several recent examples of macroeconomic markets affecting process design, similar to the hypothetical situations described above.<br />
<br />
Back in 2009, when the USA, UK, and many other first world countries were facing a harsh recession, both the profitability and scale of many production processes diminished. The Royal Society of Chemistry found that many chemical companies with plants located in England, when faced with the recession, elected to shut down production entirely rather than simply slow down production (RSC, 2009). Many of these plant closings were accompanied with the construction of new plants in areas of the world less affected by the recession, including the Middle East. Many notable international companies, such as Dow, were involved in this migration from countries entrenched in recession to countries where production would be more economical. While this may seem obvious, it is still worth noting that a process engineer needs to take into account the state of the economy in the location where a production facility is looking to be built.<br />
<br />
Building off of what the Royal Society of Chemistry found, a 2010 KPMG case study aimed to further analyze the effects of the recession on chemical production plants. Though the KPMG case study was based on United States production, the economic climate in the UK was similar to that of the United States, so similar conclusions can be drawn from both studies. What KPMG found in the United States in 2010 backed up what the Royal Society of Chemistry found in England in 2009. The United States was seeing a similar outsourcing of both old production facilities that were being shut down and new production facilities that, though initially proposed for construction in the United States, were being outsourced. However, KPMG went further in depth to analyze how specific markets in the United States were affecting chemical production plants. They found that the domestic auto industry and the construction sector heavily influenced the number and scale of chemical plants being proposed for construction in the USA. This makes sense, as these are two of the largest markets for chemicals in the USA. By 2010, the domestic auto industry was rebounding, and this was found to be largely correlated with an increase in demand for US chemicals (KPMG, 2010). This highlights that a process engineer must consider what sectors use the output of his process (in this scenario, various chemicals) as an input to their process. Analyzing these specific markets in several competitive locations could provide the final input into determining where to build a production facility.<br />
<br />
Another case study, conducted by CNN, analyzed the world market for rare earth minerals. Rare earth minerals are vital to the preparation of catalysts, which impacts a large portion of the chemical engineering industry. Additionally, rare earth minerals are used extensively in a wide variety of consumer products, including but not limited to hybrid cars and smartphone chips. Any process engineer looking to design a plant where production utilizes rare earth minerals should analyze this global market in order to influence his decisions that go into designing the process. The case study conducted by CNN highlights the fact that China is the dominant player in the global market for rare earth minerals (Yan, 2015). Per National Center for Policy Analysis, with whom CNN consulted during their case study, China controls about 95% of global rare earth mineral production, and holds half of the world’s resources of these metals. A specific subset of rare earth minerals, rare earth oxides, are vital components of many catalysts. Figure 1 below shows just how strong of a monopoly China has on these rare earth oxides in the global market. The supply crunch brought on by China forced the lone United States producer of rare earth metals, Molycorp, into bankruptcy. China having a near monopoly on the global market for rare earth metals means that they can exert their dominance on the market in several fashions. One such example came in 2010, when Beijing abruptly reducing their export quota for rare earth minerals lead to skyrocketing prices. A process engineer who’s proposed design includes the use of any catalyst using these rare earth metals must take all of these possibilities into account. In this example, does the influence China has on the global rare earth metals market make it more sensible to build a plant in China? Or maybe the volatility of the prices is too concerning, which could lead to the process engineer being forced to redesign his process without the use of a catalyst. Though this would certainly reduce product yield, it could be the case that the markets for the metals that make the necessary catalyst render the process without the catalyst more profitable on a per unit basis. This rare earth metal example is just one of many; the overall lesson is that a process engineer must evaluate the global markets for all important inputs to his process, as the profitability of different designs will be heavily influenced by these markets.<br />
<br />
[[File:reo.jpg|frame|center|border|<div align=center> Figure 1: Global rare earth oxide production trends from 1956-2010 <div>]]<br />
<div align=left><br />
<br />
<br />
A third case study conducted by the Economic Policy Institute analyzed broad world market effects in the form of trade agreements. A trade agreement is a tax, tariff and trade treaty between two or more nations that often includes investment guarantees. One prominent example of a trade agreement is the North American Free Trade Agreement (NAFTA), which was signed in 1993. NAFTA is a trilateral rules based trade bloc between the United States, Canada and Mexico. One of the biggest effects of NAFTA was the movement of chemical and manufacturing plants from the United States to Canada and Mexico. In the first decade of the act (1993-2002), approximately 880,000 U.S. jobs were lost to Canada and Mexico (Scott, 2003). As a result of the influx of jobs, real wages dropped in Mexico, causing the operation of plants and processing facilities in Mexico to be more profitable than in the United States. This in turn lead to more factories moving to Mexico, and the cycle perpetuated. NAFTA is just one example of many trade agreements which had this effect. Globally, trade agreements between developed and developing countries leads to a migration of jobs (and the accompanying lowering of wages) to the developing countries. A process engineer needs to analyze trade agreements between the country in which he works and any countries with which his country has trade agreements. Not only will he likely find cheaper labor in other countries, but depending on the trade agreement, there may be tax breaks, import deals, or a variety of other money saving clauses written in the trade agreement. Overall, regardless of whatever the process may be, a process engineer can save his company millions of dollars by simply analyzing trade agreements and optimizing plant location.<br />
<br />
====Example====<br />
<br />
As a final example to sum up some of these global market impacts on a process engineer’s decisions, imagine the following hypothetical process: the production of a new biofuel using ethanol as an input, a catalyzed packed bed reactor to produce the biofuel with carbon dioxide being one of the byproducts, and a distillation column required to purify the product. Let us say that the process engineer is deciding between China and the United States as a location for the plant.<br />
<br />
First of all, seeing as how ethanol is the main feed, if is obviously necessary to look into the global market for ethanol. As can be seen below in Figure 2, the United States and Brazil are the two dominant players in terms of production. This would mean that, despite the relative volatility of ethanol prices, it is reasonable to expect that ethanol would be the cheapest in either of these two countries, since acquiring ethanol would not include shipping costs and/or import tariffs. This favors the United States as the location for this plantAs a quick tangent, since a large amount of ethanol is derived from corn, a process engineer should look into future expected trends for corn globally.<br />
<br />
Next comes the catalyzed reactor. As highlighted previously, China dwarfs the United States in terms of control of the rare earth metals that go into producing many catalysts. Due to the dominance of China in the rare earth oxide catalysts market, this would favor China as a location for production. Based on the fact that the two important inputs for this process (ethanol and the catalyst) aren’t both cheaper in either the U.S. or China, a process engineer could alter the process to favor one location. For example, if plant production in the U.S. was desirable, perhaps a lesser quality catalyst without as many rare earth metals could be utilized, which would require a larger amount of ethanol in the feed to meet a desired product quantity. This would cut costs on the catalyst (which is much more expensive in the U.S.) while the increase in costs for ethanol (due to increased quantity) would not outweigh the savings on catalyst.<br />
<br />
The two main products exiting this hypothetical reactor are product biofuel and byproduct carbon dioxide. China recently announced that they will implement a national cap-and-trade system for greenhouse gas emissions in 2017, whereas the United States currently has no policy for taxing greenhouse gas emissions. However, it is highly likely that the United States will soon implement a carbon tax policy similar to Canada’s successful carbon tax policy introduced in 2008. Let us suppose for the sake of this example that a carbon tax will be implemented in the United States in 2017, the same time as China’s policy will come into effect. The cap-and-trade system in China and carbon tax system in the U.S. are very different policies. A carbon tax imposes a flat tax on each unit of carbon dioxide emitted, whereas a cap-and-trade system sets a maximum level of pollution and sells emissions permits to companies allowing them to emit up to the maximum level. Depending on the scale of the process and the quantity of carbon dioxide being released, one policy might be much more favorable, and thusly a process engineer must look into this further.<br />
<br />
A final aspect to consider is simply the costs associated with any plant. Though there are many costs associated with building and running a plant, two large costs will be analyzed here. The cost of steel required to build the plant, and the cost of labor required to operate the plant. Even though the price of steel is relatively volatile, the per unit costs in China and the U.S. have remained quite close to one another. As for labor, costs are generally lower in China overall, but a process engineer must look into specific salaries for each position at the production facility. Even though China as a whole has less expensive labor, a plant operator for biofuels production may be a much higher paying position in China than it is in the U.S. Overall, taking all of these factors into account, it may make sense for a process engineer to either favor production in one country over another, or alter the process in order to favor one country if he is not in control of where the production facility is being built.<br />
<br />
The above analyses cover only a fraction of what a process engineer must consider. The analyses conducted highlight some of the major components, but there are many others that must be considered as well. Global market effects are endless, and play a large part in helping a good process engineer determine how to design a process and where to build a production facility.<br />
<br />
[[File:ethanol.jpg|frame|center|border|<div align=center> Figure 2: Global ethanol production from 2007-2011 <div>]]<br />
<br />
[[File:steel.jpg|frame|center|border|<div align=center> Figure 1: Global steel prices from 2006-2012 <div>]]<br />
<br />
==Conclusion==<br />
Thermodynamics and kinetics are essential to designing an operational plant, but at the end of the day profits and margins are what make plants go from the engineering paper pad to operating continuously. Before any ground is broken, estimation of production costs and revenues are absolutely necessary to assure CEO's and shareholders that this process is a profitable and worth while venture. There are many avenues to achieve these answers with some being more accurate than others. The best indicator of these answers will be in pilot plant design which will provide appropriate estimations for scaled up processes.<br />
<br />
==References==<br />
<br />
Biegler LT, Grossmann IE, Westerberg AW. Systematic Methods of Chemical Process Design. Upper Saddle River: Prentice Hall; 1997. <br />
<br />
Peters MS, Timmerhaus KD. Plant Design and Economics for Chemical Engineers. 5th ed. New York: McGraw Hill; 2003.<br />
<br />
Seider WD, Seader JD, Lewin DR. Process Design Principles: Synthesis, Analysis, and Evaluation. 3rd ed. New York: Wiley; 2004.<br />
<br />
Towler G, Sinnott R. Chemical Engineering Design: Principles, Practice and Economics of Plant and Process Design. 2nd ed. Boston: Elsevier; 2013.<br />
<br />
Turton R, Bailie RC, Whiting WB, Shaewitz JA, Bhattacharyya D. Analysis, Synthesis, and Design of Chemical Processes. 4th ed. Upper Saddle River: Prentice-Hall; 2012.<br />
<br />
Chemicals Sector Struggles in Recession. Royal Society of Chemistry, rsc.org. July 29, 2009<br />
<br />
The Outlook for the US Chemical Industry. KPMG, kpmg.com. 2010.<br />
<br />
Yan S. China is About to Tighten its Grip on Rare Earth Minerals. CNN, money.cnn.com. June 5, 2015<br />
<br />
Scott R.E. The High Price of “Free” Trade: NAFTA’s Failure has Cost the United States Jobs Across the Nation. Economic Policy Institute, www.epi.org. November 17, 2003</div>RJKolbehttps://processdesign.mccormick.northwestern.edu/index.php?title=Estimation_of_production_cost_and_revenue&diff=4595Estimation of production cost and revenue2016-02-21T22:25:45Z<p>RJKolbe: /* Market Effects on Process Design */</p>
<hr />
<div>Authors: Nick Pinkerton, Karen Schmidt, James Xamplas (ChE 352 in Winter 2014), Reed Kolbe (ChE 352, Winter 2016)<br />
<br />
Steward: David Chen, Fengqi You <br />
<br />
==Variable Cost of Production==<br />
Variable costs of production are dependent primarily on plant output and rate of production. There are many variables to consider when costing a plant. <br />
# Raw materials consumed<br />
# Utilities-steam, electricity, cooling water, fuel, etc.<br />
# Consumables - acids, bases, solvents, catalysts, etc.<br />
# Disposal<br />
# Shipping<br />
The majority of the variable costs for a production plant are the raw materials and utilities costs. Variable costs can be greatly cut through optimization techniques and intelligent plant design (Towler and Sinnott, 2013).<br />
===Raw Materials Cost===<br />
Calculating the annual cost of a raw material is calculated by simply multiplying the feed rate of the process by the appropriate price per volume or mass. These are the costs of chemical feed stocks required by the process. Feed stocks flow rates are obtained from PFD (Turton et al., 2013).There are several ways to optimize this cost to ensure that a process is not costing more than it should. First one should assess the actual consumption of a plant to see if it is significantly different from what should be expected based on process stoichiometry and selectivities (Towler and Sinnott, 2013). Finding may prove that a process is less efficient than it originally claimed.<br />
It is smart to benchmark a new plant design against an existing plant or pilot plant. Raw materials are typically the largest contributor to overall variable costs. For bulk chemicals and petrochemicals, raw materials represent 80-90% of the total cash cost of production (CCOP). <br />
===Utilities Cost===<br />
These are the costs of the various utilities streams required by the process. The flowrates for the utilities streams are located on the PFD (Turton et al., 2013). This includes:<br />
*Fuel gas, oil, or coal<br />
*Electric power<br />
*Steam<br />
*Cooling water<br />
*Process water<br />
*Boiler feed water<br />
*Air<br />
*Inert gas<br />
*Refrigeration<br />
<br />
Utility streams are excellent ways to streamline a process and are often indicative of how efficient of a process the project is. Process methods such as steam generation and pinch analysis can be used to greatly reduce utility costs across a plant. Further analysis of pinch analysis techniques and optimizing heat exchanger networks can be found in plant design texts such as first reference from Gavin Towler. The determination of process utility costs is often more difficult than the determination of raw material costs; however, the utilities are typically between 5-10% of CCOP (Towler and Sinnott, 2013). The cost of heating a process can be reduced by using process waste streams as fuel which consequently also reduces the need for waste disposal.<br />
<br />
===Waste Disposal Costs===<br />
These are defined as the cost of waste treatment to protect the environment (Turton et al., 2013). These are materials that cannot be recycled or sold off as by-products. Often times these streams require additives or additional treatment to meet governmental regulations. <br />
Hydrocarbon waste can often be incinerated directly to the atmosphere or used as process fuel to heat other streams in the system. Using the stream as process fuel allows the fuel value of the stream to be recovered into the system. The substituted value can be calculated by multiplying the conventional fuel price by the heat of combustion of the waste stream. <br />
<br />
<math>P_{WFV} = P_F * \Delta H_C^o</math><br />
<br />
where <br />
<math>P_{WFV}</math> = waste value of fuel ($/lb or $/kg)<br />
<br />
<math>P_F</math> = price of fuel ($/MMBtu or $/GJ)<br />
<br />
<math>\Delta H_C^o</math> = heat of combustion (MMBtu/lb or GJ/kg)<br />
<br />
Dilute aqueous streams must be sent to wastewater treatment typically prior to purging from the plant. Acidic or basic wastes are neutralized prior to treatment by salting out the acid or base. The cost of wastewater treatment is typically about $6 per 1000 gal but this is only an estimate that doesn't account for regional charges (Towler and Sinnott, 2013).<br />
<br />
Solid waste treatment can typically be sent to a landfill at a cost of approximately $50/ton (Towler and Sinnott, 2013). <br />
<br />
Hazardous wastes arise from the production of concentrated liquid streams that cannot be incinerated. Hazardous wastes should be avoided if possible, but that is not always feasible for some processes. The cost of hazardous waste disposal is strongly dependent on the location of the plant, the plants proximity to waste disposal plants and the degree of hazard of the waste.<br />
<br />
==Fixed Cost of Production==<br />
Fixed costs are those whose amounts are independent of production rates. Much of these costs are personnel salaries, taxes, insurance, and legal payments.<br />
===Labor Costs===<br />
These are the costs attributed to the personnel required to operate the process plant (Turton et al., 2013).<br />
<br />
The number of operators required per shift, <math>N_{OL}</math> can be estimated by<br />
<br />
<math>N_{OL}=(6.29+31.7P^2+0.23N_{np})^{0.5}</math><br />
<br />
where <math>P</math> is the number of processing steps involving particulate solids and <math>N_{np}</math> is the number of other processing steps (Turton et al., 2013). For each of the <math>N_{OL}</math> operators per 8-hour shift, approximately 4.5 operators must be hired for a plant that runs 24 hours per day, to account for the 3 shifts per day and the 3 weeks of leave typically taken by each operator per year (Turton et al., 2013). The salary for a chemical plant operator varies by location, and the estimator should look up the average value for the area.<br />
<br />
===Maintenance Costs===<br />
These are the costs associated with labor and materials necessary to maintain plant production. An estimate of these are 6% of the fixed capital investment (Turton et al., 2013).<br />
<br />
===Research and Development===<br />
These are the costs of research done in developing the process and/or products. This includes salaries for researchers as well as funds for research related equipment and supplies. An estimate of these costs are 5% of the total manufacturing cost (Turton et al., 2013).<br />
<br />
===Taxes and Insurance===<br />
Taxes vary by location, but a first estimate of property taxes and liability insurance is 3% of the fixed capital investment (Turton et al., 2013).<br />
<br />
===Plant Overhead===<br />
Overhead costs are the miscellaneous but necessary costs of running a business, including payroll, employee benefits, and janitorial services. This may be estimated as 70% of the operating labor costs, added to 4% of the fixed capital costs (Turton et al., 2013).<br />
<br />
===Licensing and Royalties===<br />
The costs of paying for the use of intellectual property clearly varies, but an estimate that may be used is 3% of the total manufacturing cost (Turton et al., 2013).<br />
<br />
==Revenues==<br />
The revenues of a process are the income earned form sales of the main products and the by-products. Revenue can be impacted by market fluctuations and production rates.<br />
===By-Product Revenues===<br />
Besides selling the main product from a process, by-products from separations and reactions can also be valuable in the market. Often it is more difficult to decide which by-products to recover and purify than it is to make decisions on the main product. <br />
<br />
By-products made in stoichiometric ratios from reactions must be either sold off or managed through waste disposal. Other by-products are sometimes produced through feed impurities or by nonselective reactions. There are several potential valuable by-products from a process: <br />
# Materials produced in stoichiometric quantities by the reactions that create the main product. If they are not recovered then the waste disposal expenses will be large.<br />
# Components that are produced in high yield by side reactions. <br />
# Components formed in high yield from feed impurities. Many sulfurs are produced as a by-product of fuels manufacture.<br />
# Components that are produced in low yield but have high value. An example includes acetophenone which is recovered as a by-product of phenol manufacture.<br />
# Degraded consumables (e.g. solvents, etc.) that have reuse value.<br />
<br />
A rule of thumb that can be used for preliminary screening of by-products for large plants is that for by-product recovery to be economically feasible the net benefit must be greater than $200,000 a year. A net benefit can be calculated by adding the possible resale value of the by-product and the avoided waste disposal cost (Towler and Sinnott, 2013). <br />
<br />
===Margin===<br />
The gross margin of a process is defined as the sum of product and by-product revenues minus the raw material cost. <br />
<br />
Gross margin = Revenues - Raw materials costs<br />
<br />
Because raw materials are most often the most expensive variable cost of a process, the gross margin is a good gauge as to what the total profitability of a process will be. Raw materials and product pricing are often subject to high degrees of variability which can be difficult to forecast. The size of margins are highly versatile depending on the <br />
industry. For many petrochemical industries the margin may be only 10%; however, for industries such as food additives and pharmaceuticals the margins are generally much higher (Towler and Sinnott, 2013).<br />
<br />
===Profits===<br />
There are several standards for calculating company profits. The cash cost of production (CCOP) is the sum of the fixed and variable production costs. <br />
<br />
<math>CCOP = VCOP + FCOP</math><br />
<br />
where <math>VCOP</math> is the variable cost of production and <math>FCOP</math> is the fixed cost of production. <br />
<br />
Gross profit, which should not be confused with gross margin, is then calculated by the following equation,<br />
<br />
<math>Gross\ profit = Main\ product\ revenues - CCOP</math><br />
<br />
Finally profit can be calculated by subtracting the income taxes that the plant would be subject to depending on the tax code of the county the plant is located in. <br />
<br />
<math>Net\ profit = gross\ profit - taxes</math><br />
<br />
==Pricing Products and Raw Materials==<br />
The revenues and costs of a project are vital to determining its economic feasibility. To calculate these values one needs to multiply the respective product and feed streams by their respective prices. The major difficulty of this process is determining the prices that should be used in this formula. When analyzing a plant, not only do the current prices need to be acknowledged but also the stability of the market to forecast future fluctuations and deviations. <br />
===Pricing Fundamentals===<br />
The pricing of a substance is determined by the fundamental economic principles of supply and demand. A supply curve and demand curve can be graphed and added to determine the market equilibrium price and projected market size. There are many ways a company can combat if the market equilibrium pricing is not suitable for a process. One of these ways is changing the market that the company is selling to. Instead of selling industrial grade product there may be markets for pharmaceutical grade or food grade that would allow for a company to sell their product at higher margins. Another avenue to look into is changing the geographic market being sold to. Rarely is there a global synchronous market, but rather a variation depending on where in the world the product is being sold. It is possible that a company could make more money by dedicating their sales to the Asian market as opposed to the US or vise versa. <br />
===Price Data Sources===<br />
There are many resources when trying to determine the price of a chemical or utility. This are important for looking at current pricing information as well as historical data that can be used for forecasting purposes. <br />
====Internal Company Forecasts====<br />
Large companies will often have the marketing or development departments develop a forecasting database that can be used internally in the company. Forecasts of this magnitude will often have multiple scenarios and projects that are evaluated under the given parameters. Companies may even license these forecasts to other companies for high fees if they desire. <br />
<br />
[[File:Capture.JPG]]<br />
<br />
Table 1 provides common industry acronyms that are used to indicate certain key words when determining pricing information.<br />
<br />
====Trade Journals====<br />
There are also many publications that report pricing data weekly. ''ICIS Chemical Business Americas'' used to publish the prices for hundreds of chemicals but have more recently changed their data to an online database that requires a subscription. This service is very expensive, but necessary for many companies. ''Oil and Gas Journal'' publishes the market prices of many crude oils and other petrochemicals using data from several continents. This journal also provides margin data for many refineries and plants on a monthly basis. ''Chemical Week'' provides the spot and contract prices for 22 chemicals in the US and European markets.<br />
<br />
====Consultants====<br />
If trade journals are not adequate for the information needed, some companies will contract consultants to do deep research into the subject. Consultants are excellent resources for providing economic and marketing information but come at a large price. There are several companies that provide this type of service but some of the larger firms include: ''Purvin and Gertz'', ''Cambidge Energy Research Associates'', ''Chemical Markets Associates Inc.'', and ''SRI: The Chemical Economics Handbook''<br />
<br />
====Online Brokers and Suppliers====<br />
Often time price data can be supplied by the supplier themselves and using online directories. Restraint should be used when quoting these prices however because they are often spot prices that are much higher than what would be expected from bulk contract supplying.<br />
<br />
==Example Case: Estimating Cost of Production==<br />
<br />
Use the following information to estimate the manufacturing cost of a plant producing 120*10^6 lb/year with a product price of $0.20/lb. <br />
<br />
:Fixed Capital: $15,000,000<br />
:Working Capital: $3,000,000<br />
:'''Fixed and Working Capital = FC + WC = $18,000,000'''<br />
:Raw Material Cost: $9,600,000/yr<br />
:Utilities: $1,440,000/yr<br />
:Labor: $1,800,000/yr<br />
:Maintenance (6% yr f.c.): $900,000/yr<br />
:Supplies (2% yr f.c.): $300,000/yr<br />
:Depreciation (8%/yr): $1,200,000/yr<br />
:Taxes, insurance (3%/yr): $450,000/yr<br />
:'''Total Manufacturing Cost = RMC + U + L + M + S + D + T = $15,690,000/yr'''<br />
:'''Gross Sales = Production * Product price = $24,000,000/yr'''<br />
:'''Gross Profit = Gross Sales - Manufacturing Cost = $8,310,000/yr'''<br />
<br />
==Market Effects on Process Design==<br />
Process design, like most other things, is inherently dependent on global markets, and the economy as a whole. Process design can depend on locational markets. For example, if an expected long run exchange rate between two specific currencies makes production of a specific chemical more profitable in a colder climate such as Russia as opposed to a warmer climate such as Mexico, this may have an effect on how the process to produce this specific chemical should be designed. Relative inflation rates of different countries can have similar effects on process design. Additionally, markets for key production inputs can have an effect on process design. If a company was designing a large scale production plant which required massive amounts of steel, the global market for steel (or to a lesser extent, iron mines) would impact how/where this company would choose to design and build their process. Also worth noting is the fact that the state of the economy as a whole may impact process design as well. If the economy is in a recession, funds are likely to be more tightly managed within a company. Thusly, it may make sense for a process engineer to design a process that operates on a smaller scale. Not only will this decrease the cost of running the process (lower utilities costs, lower costs for process inputs), but since less product will be produced, this will also reduce the risk of having the company running an inventory. This is a positive, as running an inventory can lead to losing even more money during a recession. Conversely, a healthy economy may encourage the design of facilities with larger production capabilities. This section aims to look at several recent examples of macroeconomic markets affecting process design, similar to the hypothetical situations described above.<br />
<br />
Back in 2009, when the USA, UK, and many other first world countries were facing a harsh recession, both the profitability and scale of many production processes diminished. The Royal Society of Chemistry found that many chemical companies with plants located in England, when faced with the recession, elected to shut down production entirely rather than simply slow down production (RSC, 2009). Many of these plant closings were accompanied with the construction of new plants in areas of the world less affected by the recession, including the Middle East. Many notable international companies, such as Dow, were involved in this migration from countries entrenched in recession to countries where production would be more economical. While this may seem obvious, it is still worth noting that a process engineer needs to take into account the state of the economy in the location where a production facility is looking to be built.<br />
<br />
Building off of what the Royal Society of Chemistry found, a 2010 KPMG case study aimed to further analyze the effects of the recession on chemical production plants. Though the KPMG case study was based on United States production, the economic climate in the UK was similar to that of the United States, so similar conclusions can be drawn from both studies. What KPMG found in the United States in 2010 backed up what the Royal Society of Chemistry found in England in 2009. The United States was seeing a similar outsourcing of both old production facilities that were being shut down and new production facilities that, though initially proposed for construction in the United States, were being outsourced. However, KPMG went further in depth to analyze how specific markets in the United States were affecting chemical production plants. They found that the domestic auto industry and the construction sector heavily influenced the number and scale of chemical plants being proposed for construction in the USA. This makes sense, as these are two of the largest markets for chemicals in the USA. By 2010, the domestic auto industry was rebounding, and this was found to be largely correlated with an increase in demand for US chemicals (KPMG, 2010). This highlights that a process engineer must consider what sectors use the output of his process (in this scenario, various chemicals) as an input to their process. Analyzing these specific markets in several competitive locations could provide the final input into determining where to build a production facility.<br />
<br />
Another case study, conducted by CNN, analyzed the world market for rare earth minerals. Rare earth minerals are vital to the preparation of catalysts, which impacts a large portion of the chemical engineering industry. Additionally, rare earth minerals are used extensively in a wide variety of consumer products, including but not limited to hybrid cars and smartphone chips. Any process engineer looking to design a plant where production utilizes rare earth minerals should analyze this global market in order to influence his decisions that go into designing the process. The case study conducted by CNN highlights the fact that China is the dominant player in the global market for rare earth minerals (Yan, 2015). Per National Center for Policy Analysis, with whom CNN consulted during their case study, China controls about 95% of global rare earth mineral production, and holds half of the world’s resources of these metals. A specific subset of rare earth minerals, rare earth oxides, are vital components of many catalysts. Figure 1 below shows just how strong of a monopoly China has on these rare earth oxides in the global market. The supply crunch brought on by China forced the lone United States producer of rare earth metals, Molycorp, into bankruptcy. China having a near monopoly on the global market for rare earth metals means that they can exert their dominance on the market in several fashions. One such example came in 2010, when Beijing abruptly reducing their export quota for rare earth minerals lead to skyrocketing prices. A process engineer who’s proposed design includes the use of any catalyst using these rare earth metals must take all of these possibilities into account. In this example, does the influence China has on the global rare earth metals market make it more sensible to build a plant in China? Or maybe the volatility of the prices is too concerning, which could lead to the process engineer being forced to redesign his process without the use of a catalyst. Though this would certainly reduce product yield, it could be the case that the markets for the metals that make the necessary catalyst render the process without the catalyst more profitable on a per unit basis. This rare earth metal example is just one of many; the overall lesson is that a process engineer must evaluate the global markets for all important inputs to his process, as the profitability of different designs will be heavily influenced by these markets.<br />
<br />
[[File:reo.jpg|frame|center|border|<div align=center> Figure 1: Global rare earth oxide production trends from 1956-2010 <div>]]<br />
<div align=left><br />
<br />
<br />
A third case study conducted by the Economic Policy Institute analyzed broad world market effects in the form of trade agreements. A trade agreement is a tax, tariff and trade treaty between two or more nations that often includes investment guarantees. One prominent example of a trade agreement is the North American Free Trade Agreement (NAFTA), which was signed in 1993. NAFTA is a trilateral rules based trade bloc between the United States, Canada and Mexico. One of the biggest effects of NAFTA was the movement of chemical and manufacturing plants from the United States to Canada and Mexico. In the first decade of the act (1993-2002), approximately 880,000 U.S. jobs were lost to Canada and Mexico (Scott, 2003). As a result of the influx of jobs, real wages dropped in Mexico, causing the operation of plants and processing facilities in Mexico to be more profitable than in the United States. This in turn lead to more factories moving to Mexico, and the cycle perpetuated. NAFTA is just one example of many trade agreements which had this effect. Globally, trade agreements between developed and developing countries leads to a migration of jobs (and the accompanying lowering of wages) to the developing countries. A process engineer needs to analyze trade agreements between the country in which he works and any countries with which his country has trade agreements. Not only will he likely find cheaper labor in other countries, but depending on the trade agreement, there may be tax breaks, import deals, or a variety of other money saving clauses written in the trade agreement. Overall, regardless of whatever the process may be, a process engineer can save his company millions of dollars by simply analyzing trade agreements and optimizing plant location.<br />
<br />
<br />
====Example====<br />
<br />
As a final example to sum up some of these global market impacts on a process engineer’s decisions, imagine the following hypothetical process: the production of a new biofuel using ethanol as an input, a catalyzed packed bed reactor to produce the biofuel with carbon dioxide being one of the byproducts, and a distillation column required to purify the product. Let us say that the process engineer is deciding between China and the United States as a location for the plant.<br />
<br />
First of all, seeing as how ethanol is the main feed, if is obviously necessary to look into the global market for ethanol. As can be seen below in Figure 2, the United States and Brazil are the two dominant players in terms of production. This would mean that, despite the relative volatility of ethanol prices, it is reasonable to expect that ethanol would be the cheapest in either of these two countries, since acquiring ethanol would not include shipping costs and/or import tariffs. This favors the United States as the location for this plantAs a quick tangent, since a large amount of ethanol is derived from corn, a process engineer should look into future expected trends for corn globally.<br />
<br />
Next comes the catalyzed reactor. As highlighted previously, China dwarfs the United States in terms of control of the rare earth metals that go into producing many catalysts. Due to the dominance of China in the rare earth oxide catalysts market, this would favor China as a location for production. Based on the fact that the two important inputs for this process (ethanol and the catalyst) aren’t both cheaper in either the U.S. or China, a process engineer could alter the process to favor one location. For example, if plant production in the U.S. was desirable, perhaps a lesser quality catalyst without as many rare earth metals could be utilized, which would require a larger amount of ethanol in the feed to meet a desired product quantity. This would cut costs on the catalyst (which is much more expensive in the U.S.) while the increase in costs for ethanol (due to increased quantity) would not outweigh the savings on catalyst.<br />
<br />
The two main products exiting this hypothetical reactor are product biofuel and byproduct carbon dioxide. China recently announced that they will implement a national cap-and-trade system for greenhouse gas emissions in 2017, whereas the United States currently has no policy for taxing greenhouse gas emissions. However, it is highly likely that the United States will soon implement a carbon tax policy similar to Canada’s successful carbon tax policy introduced in 2008. Let us suppose for the sake of this example that a carbon tax will be implemented in the United States in 2017, the same time as China’s policy will come into effect. The cap-and-trade system in China and carbon tax system in the U.S. are very different policies. A carbon tax imposes a flat tax on each unit of carbon dioxide emitted, whereas a cap-and-trade system sets a maximum level of pollution and sells emissions permits to companies allowing them to emit up to the maximum level. Depending on the scale of the process and the quantity of carbon dioxide being released, one policy might be much more favorable, and thusly a process engineer must look into this further.<br />
<br />
A final aspect to consider is simply the costs associated with any plant. Though there are many costs associated with building and running a plant, two large costs will be analyzed here. The cost of steel required to build the plant, and the cost of labor required to operate the plant. Even though the price of steel is relatively volatile, the per unit costs in China and the U.S. have remained quite close to one another. As for labor, costs are generally lower in China overall, but a process engineer must look into specific salaries for each position at the production facility. Even though China as a whole has less expensive labor, a plant operator for biofuels production may be a much higher paying position in China than it is in the U.S. Overall, taking all of these factors into account, it may make sense for a process engineer to either favor production in one country over another, or alter the process in order to favor one country if he is not in control of where the production facility is being built.<br />
<br />
The above analyses cover only a fraction of what a process engineer must consider. The analyses conducted highlight some of the major components, but there are many others that must be considered as well. Global market effects are endless, and play a large part in helping a good process engineer determine how to design a process and where to build a production facility.<br />
<br />
==Conclusion==<br />
Thermodynamics and kinetics are essential to designing an operational plant, but at the end of the day profits and margins are what make plants go from the engineering paper pad to operating continuously. Before any ground is broken, estimation of production costs and revenues are absolutely necessary to assure CEO's and shareholders that this process is a profitable and worth while venture. There are many avenues to achieve these answers with some being more accurate than others. The best indicator of these answers will be in pilot plant design which will provide appropriate estimations for scaled up processes.<br />
<br />
==References==<br />
<br />
Biegler LT, Grossmann IE, Westerberg AW. Systematic Methods of Chemical Process Design. Upper Saddle River: Prentice Hall; 1997. <br />
<br />
Peters MS, Timmerhaus KD. Plant Design and Economics for Chemical Engineers. 5th ed. New York: McGraw Hill; 2003.<br />
<br />
Seider WD, Seader JD, Lewin DR. Process Design Principles: Synthesis, Analysis, and Evaluation. 3rd ed. New York: Wiley; 2004.<br />
<br />
Towler G, Sinnott R. Chemical Engineering Design: Principles, Practice and Economics of Plant and Process Design. 2nd ed. Boston: Elsevier; 2013.<br />
<br />
Turton R, Bailie RC, Whiting WB, Shaewitz JA, Bhattacharyya D. Analysis, Synthesis, and Design of Chemical Processes. 4th ed. Upper Saddle River: Prentice-Hall; 2012.<br />
<br />
Chemicals Sector Struggles in Recession. Royal Society of Chemistry, rsc.org. July 29, 2009<br />
<br />
The Outlook for the US Chemical Industry. KPMG, kpmg.com. 2010.<br />
<br />
Yan S. China is About to Tighten its Grip on Rare Earth Minerals. CNN, money.cnn.com. June 5, 2015<br />
<br />
Scott R.E. The High Price of “Free” Trade: NAFTA’s Failure has Cost the United States Jobs Across the Nation. Economic Policy Institute, www.epi.org. November 17, 2003</div>RJKolbehttps://processdesign.mccormick.northwestern.edu/index.php?title=Estimation_of_production_cost_and_revenue&diff=4594Estimation of production cost and revenue2016-02-21T22:25:06Z<p>RJKolbe: /* Market Effects on Process Design */</p>
<hr />
<div>Authors: Nick Pinkerton, Karen Schmidt, James Xamplas (ChE 352 in Winter 2014), Reed Kolbe (ChE 352, Winter 2016)<br />
<br />
Steward: David Chen, Fengqi You <br />
<br />
==Variable Cost of Production==<br />
Variable costs of production are dependent primarily on plant output and rate of production. There are many variables to consider when costing a plant. <br />
# Raw materials consumed<br />
# Utilities-steam, electricity, cooling water, fuel, etc.<br />
# Consumables - acids, bases, solvents, catalysts, etc.<br />
# Disposal<br />
# Shipping<br />
The majority of the variable costs for a production plant are the raw materials and utilities costs. Variable costs can be greatly cut through optimization techniques and intelligent plant design (Towler and Sinnott, 2013).<br />
===Raw Materials Cost===<br />
Calculating the annual cost of a raw material is calculated by simply multiplying the feed rate of the process by the appropriate price per volume or mass. These are the costs of chemical feed stocks required by the process. Feed stocks flow rates are obtained from PFD (Turton et al., 2013).There are several ways to optimize this cost to ensure that a process is not costing more than it should. First one should assess the actual consumption of a plant to see if it is significantly different from what should be expected based on process stoichiometry and selectivities (Towler and Sinnott, 2013). Finding may prove that a process is less efficient than it originally claimed.<br />
It is smart to benchmark a new plant design against an existing plant or pilot plant. Raw materials are typically the largest contributor to overall variable costs. For bulk chemicals and petrochemicals, raw materials represent 80-90% of the total cash cost of production (CCOP). <br />
===Utilities Cost===<br />
These are the costs of the various utilities streams required by the process. The flowrates for the utilities streams are located on the PFD (Turton et al., 2013). This includes:<br />
*Fuel gas, oil, or coal<br />
*Electric power<br />
*Steam<br />
*Cooling water<br />
*Process water<br />
*Boiler feed water<br />
*Air<br />
*Inert gas<br />
*Refrigeration<br />
<br />
Utility streams are excellent ways to streamline a process and are often indicative of how efficient of a process the project is. Process methods such as steam generation and pinch analysis can be used to greatly reduce utility costs across a plant. Further analysis of pinch analysis techniques and optimizing heat exchanger networks can be found in plant design texts such as first reference from Gavin Towler. The determination of process utility costs is often more difficult than the determination of raw material costs; however, the utilities are typically between 5-10% of CCOP (Towler and Sinnott, 2013). The cost of heating a process can be reduced by using process waste streams as fuel which consequently also reduces the need for waste disposal.<br />
<br />
===Waste Disposal Costs===<br />
These are defined as the cost of waste treatment to protect the environment (Turton et al., 2013). These are materials that cannot be recycled or sold off as by-products. Often times these streams require additives or additional treatment to meet governmental regulations. <br />
Hydrocarbon waste can often be incinerated directly to the atmosphere or used as process fuel to heat other streams in the system. Using the stream as process fuel allows the fuel value of the stream to be recovered into the system. The substituted value can be calculated by multiplying the conventional fuel price by the heat of combustion of the waste stream. <br />
<br />
<math>P_{WFV} = P_F * \Delta H_C^o</math><br />
<br />
where <br />
<math>P_{WFV}</math> = waste value of fuel ($/lb or $/kg)<br />
<br />
<math>P_F</math> = price of fuel ($/MMBtu or $/GJ)<br />
<br />
<math>\Delta H_C^o</math> = heat of combustion (MMBtu/lb or GJ/kg)<br />
<br />
Dilute aqueous streams must be sent to wastewater treatment typically prior to purging from the plant. Acidic or basic wastes are neutralized prior to treatment by salting out the acid or base. The cost of wastewater treatment is typically about $6 per 1000 gal but this is only an estimate that doesn't account for regional charges (Towler and Sinnott, 2013).<br />
<br />
Solid waste treatment can typically be sent to a landfill at a cost of approximately $50/ton (Towler and Sinnott, 2013). <br />
<br />
Hazardous wastes arise from the production of concentrated liquid streams that cannot be incinerated. Hazardous wastes should be avoided if possible, but that is not always feasible for some processes. The cost of hazardous waste disposal is strongly dependent on the location of the plant, the plants proximity to waste disposal plants and the degree of hazard of the waste.<br />
<br />
==Fixed Cost of Production==<br />
Fixed costs are those whose amounts are independent of production rates. Much of these costs are personnel salaries, taxes, insurance, and legal payments.<br />
===Labor Costs===<br />
These are the costs attributed to the personnel required to operate the process plant (Turton et al., 2013).<br />
<br />
The number of operators required per shift, <math>N_{OL}</math> can be estimated by<br />
<br />
<math>N_{OL}=(6.29+31.7P^2+0.23N_{np})^{0.5}</math><br />
<br />
where <math>P</math> is the number of processing steps involving particulate solids and <math>N_{np}</math> is the number of other processing steps (Turton et al., 2013). For each of the <math>N_{OL}</math> operators per 8-hour shift, approximately 4.5 operators must be hired for a plant that runs 24 hours per day, to account for the 3 shifts per day and the 3 weeks of leave typically taken by each operator per year (Turton et al., 2013). The salary for a chemical plant operator varies by location, and the estimator should look up the average value for the area.<br />
<br />
===Maintenance Costs===<br />
These are the costs associated with labor and materials necessary to maintain plant production. An estimate of these are 6% of the fixed capital investment (Turton et al., 2013).<br />
<br />
===Research and Development===<br />
These are the costs of research done in developing the process and/or products. This includes salaries for researchers as well as funds for research related equipment and supplies. An estimate of these costs are 5% of the total manufacturing cost (Turton et al., 2013).<br />
<br />
===Taxes and Insurance===<br />
Taxes vary by location, but a first estimate of property taxes and liability insurance is 3% of the fixed capital investment (Turton et al., 2013).<br />
<br />
===Plant Overhead===<br />
Overhead costs are the miscellaneous but necessary costs of running a business, including payroll, employee benefits, and janitorial services. This may be estimated as 70% of the operating labor costs, added to 4% of the fixed capital costs (Turton et al., 2013).<br />
<br />
===Licensing and Royalties===<br />
The costs of paying for the use of intellectual property clearly varies, but an estimate that may be used is 3% of the total manufacturing cost (Turton et al., 2013).<br />
<br />
==Revenues==<br />
The revenues of a process are the income earned form sales of the main products and the by-products. Revenue can be impacted by market fluctuations and production rates.<br />
===By-Product Revenues===<br />
Besides selling the main product from a process, by-products from separations and reactions can also be valuable in the market. Often it is more difficult to decide which by-products to recover and purify than it is to make decisions on the main product. <br />
<br />
By-products made in stoichiometric ratios from reactions must be either sold off or managed through waste disposal. Other by-products are sometimes produced through feed impurities or by nonselective reactions. There are several potential valuable by-products from a process: <br />
# Materials produced in stoichiometric quantities by the reactions that create the main product. If they are not recovered then the waste disposal expenses will be large.<br />
# Components that are produced in high yield by side reactions. <br />
# Components formed in high yield from feed impurities. Many sulfurs are produced as a by-product of fuels manufacture.<br />
# Components that are produced in low yield but have high value. An example includes acetophenone which is recovered as a by-product of phenol manufacture.<br />
# Degraded consumables (e.g. solvents, etc.) that have reuse value.<br />
<br />
A rule of thumb that can be used for preliminary screening of by-products for large plants is that for by-product recovery to be economically feasible the net benefit must be greater than $200,000 a year. A net benefit can be calculated by adding the possible resale value of the by-product and the avoided waste disposal cost (Towler and Sinnott, 2013). <br />
<br />
===Margin===<br />
The gross margin of a process is defined as the sum of product and by-product revenues minus the raw material cost. <br />
<br />
Gross margin = Revenues - Raw materials costs<br />
<br />
Because raw materials are most often the most expensive variable cost of a process, the gross margin is a good gauge as to what the total profitability of a process will be. Raw materials and product pricing are often subject to high degrees of variability which can be difficult to forecast. The size of margins are highly versatile depending on the <br />
industry. For many petrochemical industries the margin may be only 10%; however, for industries such as food additives and pharmaceuticals the margins are generally much higher (Towler and Sinnott, 2013).<br />
<br />
===Profits===<br />
There are several standards for calculating company profits. The cash cost of production (CCOP) is the sum of the fixed and variable production costs. <br />
<br />
<math>CCOP = VCOP + FCOP</math><br />
<br />
where <math>VCOP</math> is the variable cost of production and <math>FCOP</math> is the fixed cost of production. <br />
<br />
Gross profit, which should not be confused with gross margin, is then calculated by the following equation,<br />
<br />
<math>Gross\ profit = Main\ product\ revenues - CCOP</math><br />
<br />
Finally profit can be calculated by subtracting the income taxes that the plant would be subject to depending on the tax code of the county the plant is located in. <br />
<br />
<math>Net\ profit = gross\ profit - taxes</math><br />
<br />
==Pricing Products and Raw Materials==<br />
The revenues and costs of a project are vital to determining its economic feasibility. To calculate these values one needs to multiply the respective product and feed streams by their respective prices. The major difficulty of this process is determining the prices that should be used in this formula. When analyzing a plant, not only do the current prices need to be acknowledged but also the stability of the market to forecast future fluctuations and deviations. <br />
===Pricing Fundamentals===<br />
The pricing of a substance is determined by the fundamental economic principles of supply and demand. A supply curve and demand curve can be graphed and added to determine the market equilibrium price and projected market size. There are many ways a company can combat if the market equilibrium pricing is not suitable for a process. One of these ways is changing the market that the company is selling to. Instead of selling industrial grade product there may be markets for pharmaceutical grade or food grade that would allow for a company to sell their product at higher margins. Another avenue to look into is changing the geographic market being sold to. Rarely is there a global synchronous market, but rather a variation depending on where in the world the product is being sold. It is possible that a company could make more money by dedicating their sales to the Asian market as opposed to the US or vise versa. <br />
===Price Data Sources===<br />
There are many resources when trying to determine the price of a chemical or utility. This are important for looking at current pricing information as well as historical data that can be used for forecasting purposes. <br />
====Internal Company Forecasts====<br />
Large companies will often have the marketing or development departments develop a forecasting database that can be used internally in the company. Forecasts of this magnitude will often have multiple scenarios and projects that are evaluated under the given parameters. Companies may even license these forecasts to other companies for high fees if they desire. <br />
<br />
[[File:Capture.JPG]]<br />
<br />
Table 1 provides common industry acronyms that are used to indicate certain key words when determining pricing information.<br />
<br />
====Trade Journals====<br />
There are also many publications that report pricing data weekly. ''ICIS Chemical Business Americas'' used to publish the prices for hundreds of chemicals but have more recently changed their data to an online database that requires a subscription. This service is very expensive, but necessary for many companies. ''Oil and Gas Journal'' publishes the market prices of many crude oils and other petrochemicals using data from several continents. This journal also provides margin data for many refineries and plants on a monthly basis. ''Chemical Week'' provides the spot and contract prices for 22 chemicals in the US and European markets.<br />
<br />
====Consultants====<br />
If trade journals are not adequate for the information needed, some companies will contract consultants to do deep research into the subject. Consultants are excellent resources for providing economic and marketing information but come at a large price. There are several companies that provide this type of service but some of the larger firms include: ''Purvin and Gertz'', ''Cambidge Energy Research Associates'', ''Chemical Markets Associates Inc.'', and ''SRI: The Chemical Economics Handbook''<br />
<br />
====Online Brokers and Suppliers====<br />
Often time price data can be supplied by the supplier themselves and using online directories. Restraint should be used when quoting these prices however because they are often spot prices that are much higher than what would be expected from bulk contract supplying.<br />
<br />
==Example Case: Estimating Cost of Production==<br />
<br />
Use the following information to estimate the manufacturing cost of a plant producing 120*10^6 lb/year with a product price of $0.20/lb. <br />
<br />
:Fixed Capital: $15,000,000<br />
:Working Capital: $3,000,000<br />
:'''Fixed and Working Capital = FC + WC = $18,000,000'''<br />
:Raw Material Cost: $9,600,000/yr<br />
:Utilities: $1,440,000/yr<br />
:Labor: $1,800,000/yr<br />
:Maintenance (6% yr f.c.): $900,000/yr<br />
:Supplies (2% yr f.c.): $300,000/yr<br />
:Depreciation (8%/yr): $1,200,000/yr<br />
:Taxes, insurance (3%/yr): $450,000/yr<br />
:'''Total Manufacturing Cost = RMC + U + L + M + S + D + T = $15,690,000/yr'''<br />
:'''Gross Sales = Production * Product price = $24,000,000/yr'''<br />
:'''Gross Profit = Gross Sales - Manufacturing Cost = $8,310,000/yr'''<br />
<br />
==Market Effects on Process Design==<br />
Process design, like most other things, is inherently dependent on global markets, and the economy as a whole. Process design can depend on locational markets. For example, if an expected long run exchange rate between two specific currencies makes production of a specific chemical more profitable in a colder climate such as Russia as opposed to a warmer climate such as Mexico, this may have an effect on how the process to produce this specific chemical should be designed. Relative inflation rates of different countries can have similar effects on process design. Additionally, markets for key production inputs can have an effect on process design. If a company was designing a large scale production plant which required massive amounts of steel, the global market for steel (or to a lesser extent, iron mines) would impact how/where this company would choose to design and build their process. Also worth noting is the fact that the state of the economy as a whole may impact process design as well. If the economy is in a recession, funds are likely to be more tightly managed within a company. Thusly, it may make sense for a process engineer to design a process that operates on a smaller scale. Not only will this decrease the cost of running the process (lower utilities costs, lower costs for process inputs), but since less product will be produced, this will also reduce the risk of having the company running an inventory. This is a positive, as running an inventory can lead to losing even more money during a recession. Conversely, a healthy economy may encourage the design of facilities with larger production capabilities. This section aims to look at several recent examples of macroeconomic markets affecting process design, similar to the hypothetical situations described above.<br />
<br />
Back in 2009, when the USA, UK, and many other first world countries were facing a harsh recession, both the profitability and scale of many production processes diminished. The Royal Society of Chemistry found that many chemical companies with plants located in England, when faced with the recession, elected to shut down production entirely rather than simply slow down production (RSC, 2009). Many of these plant closings were accompanied with the construction of new plants in areas of the world less affected by the recession, including the Middle East. Many notable international companies, such as Dow, were involved in this migration from countries entrenched in recession to countries where production would be more economical. While this may seem obvious, it is still worth noting that a process engineer needs to take into account the state of the economy in the location where a production facility is looking to be built.<br />
<br />
Building off of what the Royal Society of Chemistry found, a 2010 KPMG case study aimed to further analyze the effects of the recession on chemical production plants. Though the KPMG case study was based on United States production, the economic climate in the UK was similar to that of the United States, so similar conclusions can be drawn from both studies. What KPMG found in the United States in 2010 backed up what the Royal Society of Chemistry found in England in 2009. The United States was seeing a similar outsourcing of both old production facilities that were being shut down and new production facilities that, though initially proposed for construction in the United States, were being outsourced. However, KPMG went further in depth to analyze how specific markets in the United States were affecting chemical production plants. They found that the domestic auto industry and the construction sector heavily influenced the number and scale of chemical plants being proposed for construction in the USA. This makes sense, as these are two of the largest markets for chemicals in the USA. By 2010, the domestic auto industry was rebounding, and this was found to be largely correlated with an increase in demand for US chemicals (KPMG, 2010). This highlights that a process engineer must consider what sectors use the output of his process (in this scenario, various chemicals) as an input to their process. Analyzing these specific markets in several competitive locations could provide the final input into determining where to build a production facility.<br />
<br />
Another case study, conducted by CNN, analyzed the world market for rare earth minerals. Rare earth minerals are vital to the preparation of catalysts, which impacts a large portion of the chemical engineering industry. Additionally, rare earth minerals are used extensively in a wide variety of consumer products, including but not limited to hybrid cars and smartphone chips. Any process engineer looking to design a plant where production utilizes rare earth minerals should analyze this global market in order to influence his decisions that go into designing the process. The case study conducted by CNN highlights the fact that China is the dominant player in the global market for rare earth minerals (Yan, 2015). Per National Center for Policy Analysis, with whom CNN consulted during their case study, China controls about 95% of global rare earth mineral production, and holds half of the world’s resources of these metals. A specific subset of rare earth minerals, rare earth oxides, are vital components of many catalysts. Figure 1 below shows just how strong of a monopoly China has on these rare earth oxides in the global market. The supply crunch brought on by China forced the lone United States producer of rare earth metals, Molycorp, into bankruptcy. China having a near monopoly on the global market for rare earth metals means that they can exert their dominance on the market in several fashions. One such example came in 2010, when Beijing abruptly reducing their export quota for rare earth minerals lead to skyrocketing prices. A process engineer who’s proposed design includes the use of any catalyst using these rare earth metals must take all of these possibilities into account. In this example, does the influence China has on the global rare earth metals market make it more sensible to build a plant in China? Or maybe the volatility of the prices is too concerning, which could lead to the process engineer being forced to redesign his process without the use of a catalyst. Though this would certainly reduce product yield, it could be the case that the markets for the metals that make the necessary catalyst render the process without the catalyst more profitable on a per unit basis. This rare earth metal example is just one of many; the overall lesson is that a process engineer must evaluate the global markets for all important inputs to his process, as the profitability of different designs will be heavily influenced by these markets.<br />
<br />
[[File:reo.jpg|frame|center|border|<div align=center> Figure 1: Global rare earth oxide production trends from 1956-2010 <div>]]<br />
<div align=left><br />
<br />
<br />
A third case study conducted by the Economic Policy Institute analyzed broad world market effects in the form of trade agreements. A trade agreement is a tax, tariff and trade treaty between two or more nations that often includes investment guarantees. One prominent example of a trade agreement is the North American Free Trade Agreement (NAFTA), which was signed in 1993. NAFTA is a trilateral rules based trade bloc between the United States, Canada and Mexico. One of the biggest effects of NAFTA was the movement of chemical and manufacturing plants from the United States to Canada and Mexico. In the first decade of the act (1993-2002), approximately 880,000 U.S. jobs were lost to Canada and Mexico (Scott, 2003). As a result of the influx of jobs, real wages dropped in Mexico, causing the operation of plants and processing facilities in Mexico to be more profitable than in the United States. This in turn lead to more factories moving to Mexico, and the cycle perpetuated. NAFTA is just one example of many trade agreements which had this effect. Globally, trade agreements between developed and developing countries leads to a migration of jobs (and the accompanying lowering of wages) to the developing countries. A process engineer needs to analyze trade agreements between the country in which he works and any countries with which his country has trade agreements. Not only will he likely find cheaper labor in other countries, but depending on the trade agreement, there may be tax breaks, import deals, or a variety of other money saving clauses written in the trade agreement. Overall, regardless of whatever the process may be, a process engineer can save his company millions of dollars by simply analyzing trade agreements and optimizing plant location.<br />
<br />
<br />
Example<br />
<br />
As a final example to sum up some of these global market impacts on a process engineer’s decisions, imagine the following hypothetical process: the production of a new biofuel using ethanol as an input, a catalyzed packed bed reactor to produce the biofuel with carbon dioxide being one of the byproducts, and a distillation column required to purify the product. Let us say that the process engineer is deciding between China and the United States as a location for the plant.<br />
<br />
First of all, seeing as how ethanol is the main feed, if is obviously necessary to look into the global market for ethanol. As can be seen below in Figure 2, the United States and Brazil are the two dominant players in terms of production. This would mean that, despite the relative volatility of ethanol prices, it is reasonable to expect that ethanol would be the cheapest in either of these two countries, since acquiring ethanol would not include shipping costs and/or import tariffs. This favors the United States as the location for this plantAs a quick tangent, since a large amount of ethanol is derived from corn, a process engineer should look into future expected trends for corn globally.<br />
<br />
Next comes the catalyzed reactor. As highlighted previously, China dwarfs the United States in terms of control of the rare earth metals that go into producing many catalysts. Due to the dominance of China in the rare earth oxide catalysts market, this would favor China as a location for production. Based on the fact that the two important inputs for this process (ethanol and the catalyst) aren’t both cheaper in either the U.S. or China, a process engineer could alter the process to favor one location. For example, if plant production in the U.S. was desirable, perhaps a lesser quality catalyst without as many rare earth metals could be utilized, which would require a larger amount of ethanol in the feed to meet a desired product quantity. This would cut costs on the catalyst (which is much more expensive in the U.S.) while the increase in costs for ethanol (due to increased quantity) would not outweigh the savings on catalyst.<br />
<br />
The two main products exiting this hypothetical reactor are product biofuel and byproduct carbon dioxide. China recently announced that they will implement a national cap-and-trade system for greenhouse gas emissions in 2017, whereas the United States currently has no policy for taxing greenhouse gas emissions. However, it is highly likely that the United States will soon implement a carbon tax policy similar to Canada’s successful carbon tax policy introduced in 2008. Let us suppose for the sake of this example that a carbon tax will be implemented in the United States in 2017, the same time as China’s policy will come into effect. The cap-and-trade system in China and carbon tax system in the U.S. are very different policies. A carbon tax imposes a flat tax on each unit of carbon dioxide emitted, whereas a cap-and-trade system sets a maximum level of pollution and sells emissions permits to companies allowing them to emit up to the maximum level. Depending on the scale of the process and the quantity of carbon dioxide being released, one policy might be much more favorable, and thusly a process engineer must look into this further.<br />
<br />
A final aspect to consider is simply the costs associated with any plant. Though there are many costs associated with building and running a plant, two large costs will be analyzed here. The cost of steel required to build the plant, and the cost of labor required to operate the plant. Even though the price of steel is relatively volatile, the per unit costs in China and the U.S. have remained quite close to one another. As for labor, costs are generally lower in China overall, but a process engineer must look into specific salaries for each position at the production facility. Even though China as a whole has less expensive labor, a plant operator for biofuels production may be a much higher paying position in China than it is in the U.S. Overall, taking all of these factors into account, it may make sense for a process engineer to either favor production in one country over another, or alter the process in order to favor one country if he is not in control of where the production facility is being built.<br />
<br />
The above analyses cover only a fraction of what a process engineer must consider. The analyses conducted highlight some of the major components, but there are many others that must be considered as well. Global market effects are endless, and play a large part in helping a good process engineer determine how to design a process and where to build a production facility.<br />
<br />
==Conclusion==<br />
Thermodynamics and kinetics are essential to designing an operational plant, but at the end of the day profits and margins are what make plants go from the engineering paper pad to operating continuously. Before any ground is broken, estimation of production costs and revenues are absolutely necessary to assure CEO's and shareholders that this process is a profitable and worth while venture. There are many avenues to achieve these answers with some being more accurate than others. The best indicator of these answers will be in pilot plant design which will provide appropriate estimations for scaled up processes.<br />
<br />
==References==<br />
<br />
Biegler LT, Grossmann IE, Westerberg AW. Systematic Methods of Chemical Process Design. Upper Saddle River: Prentice Hall; 1997. <br />
<br />
Peters MS, Timmerhaus KD. Plant Design and Economics for Chemical Engineers. 5th ed. New York: McGraw Hill; 2003.<br />
<br />
Seider WD, Seader JD, Lewin DR. Process Design Principles: Synthesis, Analysis, and Evaluation. 3rd ed. New York: Wiley; 2004.<br />
<br />
Towler G, Sinnott R. Chemical Engineering Design: Principles, Practice and Economics of Plant and Process Design. 2nd ed. Boston: Elsevier; 2013.<br />
<br />
Turton R, Bailie RC, Whiting WB, Shaewitz JA, Bhattacharyya D. Analysis, Synthesis, and Design of Chemical Processes. 4th ed. Upper Saddle River: Prentice-Hall; 2012.<br />
<br />
Chemicals Sector Struggles in Recession. Royal Society of Chemistry, rsc.org. July 29, 2009<br />
<br />
The Outlook for the US Chemical Industry. KPMG, kpmg.com. 2010.<br />
<br />
Yan S. China is About to Tighten its Grip on Rare Earth Minerals. CNN, money.cnn.com. June 5, 2015<br />
<br />
Scott R.E. The High Price of “Free” Trade: NAFTA’s Failure has Cost the United States Jobs Across the Nation. Economic Policy Institute, www.epi.org. November 17, 2003</div>RJKolbehttps://processdesign.mccormick.northwestern.edu/index.php?title=Estimation_of_production_cost_and_revenue&diff=4554Estimation of production cost and revenue2016-02-21T19:48:31Z<p>RJKolbe: /* Market Effects on Process Design */</p>
<hr />
<div>Authors: Nick Pinkerton, Karen Schmidt, James Xamplas (ChE 352 in Winter 2014), Reed Kolbe (ChE 352, Winter 2016)<br />
<br />
Steward: David Chen, Fengqi You <br />
<br />
==Variable Cost of Production==<br />
Variable costs of production are dependent primarily on plant output and rate of production. There are many variables to consider when costing a plant. <br />
# Raw materials consumed<br />
# Utilities-steam, electricity, cooling water, fuel, etc.<br />
# Consumables - acids, bases, solvents, catalysts, etc.<br />
# Disposal<br />
# Shipping<br />
The majority of the variable costs for a production plant are the raw materials and utilities costs. Variable costs can be greatly cut through optimization techniques and intelligent plant design (Towler and Sinnott, 2013).<br />
===Raw Materials Cost===<br />
Calculating the annual cost of a raw material is calculated by simply multiplying the feed rate of the process by the appropriate price per volume or mass. These are the costs of chemical feed stocks required by the process. Feed stocks flow rates are obtained from PFD (Turton et al., 2013).There are several ways to optimize this cost to ensure that a process is not costing more than it should. First one should assess the actual consumption of a plant to see if it is significantly different from what should be expected based on process stoichiometry and selectivities (Towler and Sinnott, 2013). Finding may prove that a process is less efficient than it originally claimed.<br />
It is smart to benchmark a new plant design against an existing plant or pilot plant. Raw materials are typically the largest contributor to overall variable costs. For bulk chemicals and petrochemicals, raw materials represent 80-90% of the total cash cost of production (CCOP). <br />
===Utilities Cost===<br />
These are the costs of the various utilities streams required by the process. The flowrates for the utilities streams are located on the PFD (Turton et al., 2013). This includes:<br />
*Fuel gas, oil, or coal<br />
*Electric power<br />
*Steam<br />
*Cooling water<br />
*Process water<br />
*Boiler feed water<br />
*Air<br />
*Inert gas<br />
*Refrigeration<br />
<br />
Utility streams are excellent ways to streamline a process and are often indicative of how efficient of a process the project is. Process methods such as steam generation and pinch analysis can be used to greatly reduce utility costs across a plant. Further analysis of pinch analysis techniques and optimizing heat exchanger networks can be found in plant design texts such as first reference from Gavin Towler. The determination of process utility costs is often more difficult than the determination of raw material costs; however, the utilities are typically between 5-10% of CCOP (Towler and Sinnott, 2013). The cost of heating a process can be reduced by using process waste streams as fuel which consequently also reduces the need for waste disposal.<br />
<br />
===Waste Disposal Costs===<br />
These are defined as the cost of waste treatment to protect the environment (Turton et al., 2013). These are materials that cannot be recycled or sold off as by-products. Often times these streams require additives or additional treatment to meet governmental regulations. <br />
Hydrocarbon waste can often be incinerated directly to the atmosphere or used as process fuel to heat other streams in the system. Using the stream as process fuel allows the fuel value of the stream to be recovered into the system. The substituted value can be calculated by multiplying the conventional fuel price by the heat of combustion of the waste stream. <br />
<br />
<math>P_{WFV} = P_F * \Delta H_C^o</math><br />
<br />
where <br />
<math>P_{WFV}</math> = waste value of fuel ($/lb or $/kg)<br />
<br />
<math>P_F</math> = price of fuel ($/MMBtu or $/GJ)<br />
<br />
<math>\Delta H_C^o</math> = heat of combustion (MMBtu/lb or GJ/kg)<br />
<br />
Dilute aqueous streams must be sent to wastewater treatment typically prior to purging from the plant. Acidic or basic wastes are neutralized prior to treatment by salting out the acid or base. The cost of wastewater treatment is typically about $6 per 1000 gal but this is only an estimate that doesn't account for regional charges (Towler and Sinnott, 2013).<br />
<br />
Solid waste treatment can typically be sent to a landfill at a cost of approximately $50/ton (Towler and Sinnott, 2013). <br />
<br />
Hazardous wastes arise from the production of concentrated liquid streams that cannot be incinerated. Hazardous wastes should be avoided if possible, but that is not always feasible for some processes. The cost of hazardous waste disposal is strongly dependent on the location of the plant, the plants proximity to waste disposal plants and the degree of hazard of the waste.<br />
<br />
==Fixed Cost of Production==<br />
Fixed costs are those whose amounts are independent of production rates. Much of these costs are personnel salaries, taxes, insurance, and legal payments.<br />
===Labor Costs===<br />
These are the costs attributed to the personnel required to operate the process plant (Turton et al., 2013).<br />
<br />
The number of operators required per shift, <math>N_{OL}</math> can be estimated by<br />
<br />
<math>N_{OL}=(6.29+31.7P^2+0.23N_{np})^{0.5}</math><br />
<br />
where <math>P</math> is the number of processing steps involving particulate solids and <math>N_{np}</math> is the number of other processing steps (Turton et al., 2013). For each of the <math>N_{OL}</math> operators per 8-hour shift, approximately 4.5 operators must be hired for a plant that runs 24 hours per day, to account for the 3 shifts per day and the 3 weeks of leave typically taken by each operator per year (Turton et al., 2013). The salary for a chemical plant operator varies by location, and the estimator should look up the average value for the area.<br />
<br />
===Maintenance Costs===<br />
These are the costs associated with labor and materials necessary to maintain plant production. An estimate of these are 6% of the fixed capital investment (Turton et al., 2013).<br />
<br />
===Research and Development===<br />
These are the costs of research done in developing the process and/or products. This includes salaries for researchers as well as funds for research related equipment and supplies. An estimate of these costs are 5% of the total manufacturing cost (Turton et al., 2013).<br />
<br />
===Taxes and Insurance===<br />
Taxes vary by location, but a first estimate of property taxes and liability insurance is 3% of the fixed capital investment (Turton et al., 2013).<br />
<br />
===Plant Overhead===<br />
Overhead costs are the miscellaneous but necessary costs of running a business, including payroll, employee benefits, and janitorial services. This may be estimated as 70% of the operating labor costs, added to 4% of the fixed capital costs (Turton et al., 2013).<br />
<br />
===Licensing and Royalties===<br />
The costs of paying for the use of intellectual property clearly varies, but an estimate that may be used is 3% of the total manufacturing cost (Turton et al., 2013).<br />
<br />
==Revenues==<br />
The revenues of a process are the income earned form sales of the main products and the by-products. Revenue can be impacted by market fluctuations and production rates.<br />
===By-Product Revenues===<br />
Besides selling the main product from a process, by-products from separations and reactions can also be valuable in the market. Often it is more difficult to decide which by-products to recover and purify than it is to make decisions on the main product. <br />
<br />
By-products made in stoichiometric ratios from reactions must be either sold off or managed through waste disposal. Other by-products are sometimes produced through feed impurities or by nonselective reactions. There are several potential valuable by-products from a process: <br />
# Materials produced in stoichiometric quantities by the reactions that create the main product. If they are not recovered then the waste disposal expenses will be large.<br />
# Components that are produced in high yield by side reactions. <br />
# Components formed in high yield from feed impurities. Many sulfurs are produced as a by-product of fuels manufacture.<br />
# Components that are produced in low yield but have high value. An example includes acetophenone which is recovered as a by-product of phenol manufacture.<br />
# Degraded consumables (e.g. solvents, etc.) that have reuse value.<br />
<br />
A rule of thumb that can be used for preliminary screening of by-products for large plants is that for by-product recovery to be economically feasible the net benefit must be greater than $200,000 a year. A net benefit can be calculated by adding the possible resale value of the by-product and the avoided waste disposal cost (Towler and Sinnott, 2013). <br />
<br />
===Margin===<br />
The gross margin of a process is defined as the sum of product and by-product revenues minus the raw material cost. <br />
<br />
Gross margin = Revenues - Raw materials costs<br />
<br />
Because raw materials are most often the most expensive variable cost of a process, the gross margin is a good gauge as to what the total profitability of a process will be. Raw materials and product pricing are often subject to high degrees of variability which can be difficult to forecast. The size of margins are highly versatile depending on the <br />
industry. For many petrochemical industries the margin may be only 10%; however, for industries such as food additives and pharmaceuticals the margins are generally much higher (Towler and Sinnott, 2013).<br />
<br />
===Profits===<br />
There are several standards for calculating company profits. The cash cost of production (CCOP) is the sum of the fixed and variable production costs. <br />
<br />
<math>CCOP = VCOP + FCOP</math><br />
<br />
where <math>VCOP</math> is the variable cost of production and <math>FCOP</math> is the fixed cost of production. <br />
<br />
Gross profit, which should not be confused with gross margin, is then calculated by the following equation,<br />
<br />
<math>Gross\ profit = Main\ product\ revenues - CCOP</math><br />
<br />
Finally profit can be calculated by subtracting the income taxes that the plant would be subject to depending on the tax code of the county the plant is located in. <br />
<br />
<math>Net\ profit = gross\ profit - taxes</math><br />
<br />
==Pricing Products and Raw Materials==<br />
The revenues and costs of a project are vital to determining its economic feasibility. To calculate these values one needs to multiply the respective product and feed streams by their respective prices. The major difficulty of this process is determining the prices that should be used in this formula. When analyzing a plant, not only do the current prices need to be acknowledged but also the stability of the market to forecast future fluctuations and deviations. <br />
===Pricing Fundamentals===<br />
The pricing of a substance is determined by the fundamental economic principles of supply and demand. A supply curve and demand curve can be graphed and added to determine the market equilibrium price and projected market size. There are many ways a company can combat if the market equilibrium pricing is not suitable for a process. One of these ways is changing the market that the company is selling to. Instead of selling industrial grade product there may be markets for pharmaceutical grade or food grade that would allow for a company to sell their product at higher margins. Another avenue to look into is changing the geographic market being sold to. Rarely is there a global synchronous market, but rather a variation depending on where in the world the product is being sold. It is possible that a company could make more money by dedicating their sales to the Asian market as opposed to the US or vise versa. <br />
===Price Data Sources===<br />
There are many resources when trying to determine the price of a chemical or utility. This are important for looking at current pricing information as well as historical data that can be used for forecasting purposes. <br />
====Internal Company Forecasts====<br />
Large companies will often have the marketing or development departments develop a forecasting database that can be used internally in the company. Forecasts of this magnitude will often have multiple scenarios and projects that are evaluated under the given parameters. Companies may even license these forecasts to other companies for high fees if they desire. <br />
<br />
[[File:Capture.JPG]]<br />
<br />
Table 1 provides common industry acronyms that are used to indicate certain key words when determining pricing information.<br />
<br />
====Trade Journals====<br />
There are also many publications that report pricing data weekly. ''ICIS Chemical Business Americas'' used to publish the prices for hundreds of chemicals but have more recently changed their data to an online database that requires a subscription. This service is very expensive, but necessary for many companies. ''Oil and Gas Journal'' publishes the market prices of many crude oils and other petrochemicals using data from several continents. This journal also provides margin data for many refineries and plants on a monthly basis. ''Chemical Week'' provides the spot and contract prices for 22 chemicals in the US and European markets.<br />
<br />
====Consultants====<br />
If trade journals are not adequate for the information needed, some companies will contract consultants to do deep research into the subject. Consultants are excellent resources for providing economic and marketing information but come at a large price. There are several companies that provide this type of service but some of the larger firms include: ''Purvin and Gertz'', ''Cambidge Energy Research Associates'', ''Chemical Markets Associates Inc.'', and ''SRI: The Chemical Economics Handbook''<br />
<br />
====Online Brokers and Suppliers====<br />
Often time price data can be supplied by the supplier themselves and using online directories. Restraint should be used when quoting these prices however because they are often spot prices that are much higher than what would be expected from bulk contract supplying.<br />
<br />
==Example Case: Estimating Cost of Production==<br />
<br />
Use the following information to estimate the manufacturing cost of a plant producing 120*10^6 lb/year with a product price of $0.20/lb. <br />
<br />
:Fixed Capital: $15,000,000<br />
:Working Capital: $3,000,000<br />
:'''Fixed and Working Capital = FC + WC = $18,000,000'''<br />
:Raw Material Cost: $9,600,000/yr<br />
:Utilities: $1,440,000/yr<br />
:Labor: $1,800,000/yr<br />
:Maintenance (6% yr f.c.): $900,000/yr<br />
:Supplies (2% yr f.c.): $300,000/yr<br />
:Depreciation (8%/yr): $1,200,000/yr<br />
:Taxes, insurance (3%/yr): $450,000/yr<br />
:'''Total Manufacturing Cost = RMC + U + L + M + S + D + T = $15,690,000/yr'''<br />
:'''Gross Sales = Production * Product price = $24,000,000/yr'''<br />
:'''Gross Profit = Gross Sales - Manufacturing Cost = $8,310,000/yr'''<br />
<br />
==Market Effects on Process Design==<br />
Process design, like most other things, is inherently dependent on global markets, and the economy as a whole. Process design can depend on locational markets. For example, if an expected long run exchange rate between two specific currencies makes production of a specific chemical more profitable in a colder climate such as Russia as opposed to a warmer climate such as Mexico, this may have an effect on how the process to produce this specific chemical should be designed. Relative inflation rates of different countries can have similar effects on process design. Additionally, markets for key production inputs can have an effect on process design. If a company was designing a large scale production plant which required massive amounts of steel, the global market for steel (or to a lesser extent, iron mines) would impact how/where this company would choose to design and build their process. Also worth noting is the fact that the state of the economy as a whole may impact process design as well. If the economy is in a recession, funds are likely to be more tightly managed within a company. Thusly, it may make sense for a process engineer to design a process that operates on a smaller scale. Not only will this decrease the cost of running the process (lower utilities costs, lower costs for process inputs), but since less product will be produced, this will also reduce the risk of having the company running an inventory. This is a positive, as running an inventory can lead to losing even more money during a recession. Conversely, a healthy economy may encourage the design of facilities with larger production capabilities. This section aims to look at several recent examples of macroeconomic markets affecting process design, similar to the hypothetical situations described above.<br />
<br />
Back in 2009, when the USA, UK, and many other first world countries were facing a harsh recession, both the profitability and scale of many production processes diminished. The Royal Society of Chemistry found that many chemical companies with plants located in England, when faced with the recession, elected to shut down production entirely rather than simply slow down production (RSC, 2009). Many of these plant closings were accompanied with the construction of new plants in areas of the world less affected by the recession, including the Middle East. Many notable international companies, such as Dow, were involved in this migration from countries entrenched in recession to countries where production would be more economical. While this may seem obvious, it is still worth noting that a process engineer needs to take into account the state of the economy in the location where a production facility is looking to be built.<br />
<br />
Building off of what the Royal Society of Chemistry found, a 2010 KPMG case study aimed to further analyze the effects of the recession on chemical production plants. Though the KPMG case study was based on United States production, the economic climate in the UK was similar to that of the United States, so similar conclusions can be drawn from both studies. What KPMG found in the United States in 2010 backed up what the Royal Society of Chemistry found in England in 2009. The United States was seeing a similar outsourcing of both old production facilities that were being shut down and new production facilities that, though initially proposed for construction in the United States, were being outsourced. However, KPMG went further in depth to analyze how specific markets in the United States were affecting chemical production plants. They found that the domestic auto industry and the construction sector heavily influenced the number and scale of chemical plants being proposed for construction in the USA. This makes sense, as these are two of the largest markets for chemicals in the USA. By 2010, the domestic auto industry was rebounding, and this was found to be largely correlated with an increase in demand for US chemicals (KPMG, 2010). This highlights that a process engineer must consider what sectors use the output of his process (in this scenario, various chemicals) as an input to their process. Analyzing these specific markets in several competitive locations could provide the final input into determining where to build a production facility.<br />
<br />
Another case study, conducted by CNN, analyzed the world market for rare earth minerals. Rare earth minerals are vital to the preparation of catalysts, which impacts a large portion of the chemical engineering industry. Additionally, rare earth minerals are used extensively in a wide variety of consumer products, including but not limited to hybrid cars and smartphone chips. Any process engineer looking to design a plant where production utilizes rare earth minerals should analyze this global market in order to influence his decisions that go into designing the process. The case study conducted by CNN highlights the fact that China is the dominant player in the global market for rare earth minerals (Yan, 2015). Per National Center for Policy Analysis, with whom CNN consulted during their case study, China controls about 95% of global rare earth mineral production, and holds half of the world’s resources of these metals. A specific subset of rare earth minerals, rare earth oxides, are vital components of many catalysts. Figure 1 below shows just how strong of a monopoly China has on these rare earth oxides in the global market. The supply crunch brought on by China forced the lone United States producer of rare earth metals, Molycorp, into bankruptcy. China having a near monopoly on the global market for rare earth metals means that they can exert their dominance on the market in several fashions. One such example came in 2010, when Beijing abruptly reducing their export quota for rare earth minerals lead to skyrocketing prices. A process engineer who’s proposed design includes the use of any catalyst using these rare earth metals must take all of these possibilities into account. In this example, does the influence China has on the global rare earth metals market make it more sensible to build a plant in China? Or maybe the volatility of the prices is too concerning, which could lead to the process engineer being forced to redesign his process without the use of a catalyst. Though this would certainly reduce product yield, it could be the case that the markets for the metals that make the necessary catalyst render the process without the catalyst more profitable on a per unit basis. This rare earth metal example is just one of many; the overall lesson is that a process engineer must evaluate the global markets for all important inputs to his process, as the profitability of different designs will be heavily influenced by these markets.<br />
<br />
[[File:reo.jpg|frame|center|border|<div align=center> Figure 1: Global rare earth oxide production trends from 1956-2010 <div>]]<br />
<div align=left><br />
<br />
<br />
A third case study conducted by the Economic Policy Institute analyzed broad world market effects in the form of trade agreements. A trade agreement is a tax, tariff and trade treaty between two or more nations that often includes investment guarantees. One prominent example of a trade agreement is the North American Free Trade Agreement (NAFTA), which was signed in 1993. NAFTA is a trilateral rules based trade bloc between the United States, Canada and Mexico. One of the biggest effects of NAFTA was the movement of chemical and manufacturing plants from the United States to Canada and Mexico. In the first decade of the act (1993-2002), approximately 880,000 U.S. jobs were lost to Canada and Mexico (Scott, 2003). As a result of the influx of jobs, real wages dropped in Mexico, causing the operation of plants and processing facilities in Mexico to be more profitable than in the United States. This in turn lead to more factories moving to Mexico, and the cycle perpetuated. NAFTA is just one example of many trade agreements which had this effect. Globally, trade agreements between developed and developing countries leads to a migration of jobs (and the accompanying lowering of wages) to the developing countries. A process engineer needs to analyze trade agreements between the country in which he works and any countries with which his country has trade agreements. Not only will he likely find cheaper labor in other countries, but depending on the trade agreement, there may be tax breaks, import deals, or a variety of other money saving clauses written in the trade agreement. Overall, regardless of whatever the process may be, a process engineer can save his company millions of dollars by simply analyzing trade agreements and optimizing plant location.<br />
<br />
==Conclusion==<br />
Thermodynamics and kinetics are essential to designing an operational plant, but at the end of the day profits and margins are what make plants go from the engineering paper pad to operating continuously. Before any ground is broken, estimation of production costs and revenues are absolutely necessary to assure CEO's and shareholders that this process is a profitable and worth while venture. There are many avenues to achieve these answers with some being more accurate than others. The best indicator of these answers will be in pilot plant design which will provide appropriate estimations for scaled up processes.<br />
<br />
==References==<br />
<br />
Biegler LT, Grossmann IE, Westerberg AW. Systematic Methods of Chemical Process Design. Upper Saddle River: Prentice Hall; 1997. <br />
<br />
Peters MS, Timmerhaus KD. Plant Design and Economics for Chemical Engineers. 5th ed. New York: McGraw Hill; 2003.<br />
<br />
Seider WD, Seader JD, Lewin DR. Process Design Principles: Synthesis, Analysis, and Evaluation. 3rd ed. New York: Wiley; 2004.<br />
<br />
Towler G, Sinnott R. Chemical Engineering Design: Principles, Practice and Economics of Plant and Process Design. 2nd ed. Boston: Elsevier; 2013.<br />
<br />
Turton R, Bailie RC, Whiting WB, Shaewitz JA, Bhattacharyya D. Analysis, Synthesis, and Design of Chemical Processes. 4th ed. Upper Saddle River: Prentice-Hall; 2012.<br />
<br />
Chemicals Sector Struggles in Recession. Royal Society of Chemistry, rsc.org. July 29, 2009<br />
<br />
The Outlook for the US Chemical Industry. KPMG, kpmg.com. 2010.<br />
<br />
Yan S. China is About to Tighten its Grip on Rare Earth Minerals. CNN, money.cnn.com. June 5, 2015<br />
<br />
Scott R.E. The High Price of “Free” Trade: NAFTA’s Failure has Cost the United States Jobs Across the Nation. Economic Policy Institute, www.epi.org. November 17, 2003</div>RJKolbehttps://processdesign.mccormick.northwestern.edu/index.php?title=Estimation_of_production_cost_and_revenue&diff=4553Estimation of production cost and revenue2016-02-21T19:47:21Z<p>RJKolbe: /* References */</p>
<hr />
<div>Authors: Nick Pinkerton, Karen Schmidt, James Xamplas (ChE 352 in Winter 2014), Reed Kolbe (ChE 352, Winter 2016)<br />
<br />
Steward: David Chen, Fengqi You <br />
<br />
==Variable Cost of Production==<br />
Variable costs of production are dependent primarily on plant output and rate of production. There are many variables to consider when costing a plant. <br />
# Raw materials consumed<br />
# Utilities-steam, electricity, cooling water, fuel, etc.<br />
# Consumables - acids, bases, solvents, catalysts, etc.<br />
# Disposal<br />
# Shipping<br />
The majority of the variable costs for a production plant are the raw materials and utilities costs. Variable costs can be greatly cut through optimization techniques and intelligent plant design (Towler and Sinnott, 2013).<br />
===Raw Materials Cost===<br />
Calculating the annual cost of a raw material is calculated by simply multiplying the feed rate of the process by the appropriate price per volume or mass. These are the costs of chemical feed stocks required by the process. Feed stocks flow rates are obtained from PFD (Turton et al., 2013).There are several ways to optimize this cost to ensure that a process is not costing more than it should. First one should assess the actual consumption of a plant to see if it is significantly different from what should be expected based on process stoichiometry and selectivities (Towler and Sinnott, 2013). Finding may prove that a process is less efficient than it originally claimed.<br />
It is smart to benchmark a new plant design against an existing plant or pilot plant. Raw materials are typically the largest contributor to overall variable costs. For bulk chemicals and petrochemicals, raw materials represent 80-90% of the total cash cost of production (CCOP). <br />
===Utilities Cost===<br />
These are the costs of the various utilities streams required by the process. The flowrates for the utilities streams are located on the PFD (Turton et al., 2013). This includes:<br />
*Fuel gas, oil, or coal<br />
*Electric power<br />
*Steam<br />
*Cooling water<br />
*Process water<br />
*Boiler feed water<br />
*Air<br />
*Inert gas<br />
*Refrigeration<br />
<br />
Utility streams are excellent ways to streamline a process and are often indicative of how efficient of a process the project is. Process methods such as steam generation and pinch analysis can be used to greatly reduce utility costs across a plant. Further analysis of pinch analysis techniques and optimizing heat exchanger networks can be found in plant design texts such as first reference from Gavin Towler. The determination of process utility costs is often more difficult than the determination of raw material costs; however, the utilities are typically between 5-10% of CCOP (Towler and Sinnott, 2013). The cost of heating a process can be reduced by using process waste streams as fuel which consequently also reduces the need for waste disposal.<br />
<br />
===Waste Disposal Costs===<br />
These are defined as the cost of waste treatment to protect the environment (Turton et al., 2013). These are materials that cannot be recycled or sold off as by-products. Often times these streams require additives or additional treatment to meet governmental regulations. <br />
Hydrocarbon waste can often be incinerated directly to the atmosphere or used as process fuel to heat other streams in the system. Using the stream as process fuel allows the fuel value of the stream to be recovered into the system. The substituted value can be calculated by multiplying the conventional fuel price by the heat of combustion of the waste stream. <br />
<br />
<math>P_{WFV} = P_F * \Delta H_C^o</math><br />
<br />
where <br />
<math>P_{WFV}</math> = waste value of fuel ($/lb or $/kg)<br />
<br />
<math>P_F</math> = price of fuel ($/MMBtu or $/GJ)<br />
<br />
<math>\Delta H_C^o</math> = heat of combustion (MMBtu/lb or GJ/kg)<br />
<br />
Dilute aqueous streams must be sent to wastewater treatment typically prior to purging from the plant. Acidic or basic wastes are neutralized prior to treatment by salting out the acid or base. The cost of wastewater treatment is typically about $6 per 1000 gal but this is only an estimate that doesn't account for regional charges (Towler and Sinnott, 2013).<br />
<br />
Solid waste treatment can typically be sent to a landfill at a cost of approximately $50/ton (Towler and Sinnott, 2013). <br />
<br />
Hazardous wastes arise from the production of concentrated liquid streams that cannot be incinerated. Hazardous wastes should be avoided if possible, but that is not always feasible for some processes. The cost of hazardous waste disposal is strongly dependent on the location of the plant, the plants proximity to waste disposal plants and the degree of hazard of the waste.<br />
<br />
==Fixed Cost of Production==<br />
Fixed costs are those whose amounts are independent of production rates. Much of these costs are personnel salaries, taxes, insurance, and legal payments.<br />
===Labor Costs===<br />
These are the costs attributed to the personnel required to operate the process plant (Turton et al., 2013).<br />
<br />
The number of operators required per shift, <math>N_{OL}</math> can be estimated by<br />
<br />
<math>N_{OL}=(6.29+31.7P^2+0.23N_{np})^{0.5}</math><br />
<br />
where <math>P</math> is the number of processing steps involving particulate solids and <math>N_{np}</math> is the number of other processing steps (Turton et al., 2013). For each of the <math>N_{OL}</math> operators per 8-hour shift, approximately 4.5 operators must be hired for a plant that runs 24 hours per day, to account for the 3 shifts per day and the 3 weeks of leave typically taken by each operator per year (Turton et al., 2013). The salary for a chemical plant operator varies by location, and the estimator should look up the average value for the area.<br />
<br />
===Maintenance Costs===<br />
These are the costs associated with labor and materials necessary to maintain plant production. An estimate of these are 6% of the fixed capital investment (Turton et al., 2013).<br />
<br />
===Research and Development===<br />
These are the costs of research done in developing the process and/or products. This includes salaries for researchers as well as funds for research related equipment and supplies. An estimate of these costs are 5% of the total manufacturing cost (Turton et al., 2013).<br />
<br />
===Taxes and Insurance===<br />
Taxes vary by location, but a first estimate of property taxes and liability insurance is 3% of the fixed capital investment (Turton et al., 2013).<br />
<br />
===Plant Overhead===<br />
Overhead costs are the miscellaneous but necessary costs of running a business, including payroll, employee benefits, and janitorial services. This may be estimated as 70% of the operating labor costs, added to 4% of the fixed capital costs (Turton et al., 2013).<br />
<br />
===Licensing and Royalties===<br />
The costs of paying for the use of intellectual property clearly varies, but an estimate that may be used is 3% of the total manufacturing cost (Turton et al., 2013).<br />
<br />
==Revenues==<br />
The revenues of a process are the income earned form sales of the main products and the by-products. Revenue can be impacted by market fluctuations and production rates.<br />
===By-Product Revenues===<br />
Besides selling the main product from a process, by-products from separations and reactions can also be valuable in the market. Often it is more difficult to decide which by-products to recover and purify than it is to make decisions on the main product. <br />
<br />
By-products made in stoichiometric ratios from reactions must be either sold off or managed through waste disposal. Other by-products are sometimes produced through feed impurities or by nonselective reactions. There are several potential valuable by-products from a process: <br />
# Materials produced in stoichiometric quantities by the reactions that create the main product. If they are not recovered then the waste disposal expenses will be large.<br />
# Components that are produced in high yield by side reactions. <br />
# Components formed in high yield from feed impurities. Many sulfurs are produced as a by-product of fuels manufacture.<br />
# Components that are produced in low yield but have high value. An example includes acetophenone which is recovered as a by-product of phenol manufacture.<br />
# Degraded consumables (e.g. solvents, etc.) that have reuse value.<br />
<br />
A rule of thumb that can be used for preliminary screening of by-products for large plants is that for by-product recovery to be economically feasible the net benefit must be greater than $200,000 a year. A net benefit can be calculated by adding the possible resale value of the by-product and the avoided waste disposal cost (Towler and Sinnott, 2013). <br />
<br />
===Margin===<br />
The gross margin of a process is defined as the sum of product and by-product revenues minus the raw material cost. <br />
<br />
Gross margin = Revenues - Raw materials costs<br />
<br />
Because raw materials are most often the most expensive variable cost of a process, the gross margin is a good gauge as to what the total profitability of a process will be. Raw materials and product pricing are often subject to high degrees of variability which can be difficult to forecast. The size of margins are highly versatile depending on the <br />
industry. For many petrochemical industries the margin may be only 10%; however, for industries such as food additives and pharmaceuticals the margins are generally much higher (Towler and Sinnott, 2013).<br />
<br />
===Profits===<br />
There are several standards for calculating company profits. The cash cost of production (CCOP) is the sum of the fixed and variable production costs. <br />
<br />
<math>CCOP = VCOP + FCOP</math><br />
<br />
where <math>VCOP</math> is the variable cost of production and <math>FCOP</math> is the fixed cost of production. <br />
<br />
Gross profit, which should not be confused with gross margin, is then calculated by the following equation,<br />
<br />
<math>Gross\ profit = Main\ product\ revenues - CCOP</math><br />
<br />
Finally profit can be calculated by subtracting the income taxes that the plant would be subject to depending on the tax code of the county the plant is located in. <br />
<br />
<math>Net\ profit = gross\ profit - taxes</math><br />
<br />
==Pricing Products and Raw Materials==<br />
The revenues and costs of a project are vital to determining its economic feasibility. To calculate these values one needs to multiply the respective product and feed streams by their respective prices. The major difficulty of this process is determining the prices that should be used in this formula. When analyzing a plant, not only do the current prices need to be acknowledged but also the stability of the market to forecast future fluctuations and deviations. <br />
===Pricing Fundamentals===<br />
The pricing of a substance is determined by the fundamental economic principles of supply and demand. A supply curve and demand curve can be graphed and added to determine the market equilibrium price and projected market size. There are many ways a company can combat if the market equilibrium pricing is not suitable for a process. One of these ways is changing the market that the company is selling to. Instead of selling industrial grade product there may be markets for pharmaceutical grade or food grade that would allow for a company to sell their product at higher margins. Another avenue to look into is changing the geographic market being sold to. Rarely is there a global synchronous market, but rather a variation depending on where in the world the product is being sold. It is possible that a company could make more money by dedicating their sales to the Asian market as opposed to the US or vise versa. <br />
===Price Data Sources===<br />
There are many resources when trying to determine the price of a chemical or utility. This are important for looking at current pricing information as well as historical data that can be used for forecasting purposes. <br />
====Internal Company Forecasts====<br />
Large companies will often have the marketing or development departments develop a forecasting database that can be used internally in the company. Forecasts of this magnitude will often have multiple scenarios and projects that are evaluated under the given parameters. Companies may even license these forecasts to other companies for high fees if they desire. <br />
<br />
[[File:Capture.JPG]]<br />
<br />
Table 1 provides common industry acronyms that are used to indicate certain key words when determining pricing information.<br />
<br />
====Trade Journals====<br />
There are also many publications that report pricing data weekly. ''ICIS Chemical Business Americas'' used to publish the prices for hundreds of chemicals but have more recently changed their data to an online database that requires a subscription. This service is very expensive, but necessary for many companies. ''Oil and Gas Journal'' publishes the market prices of many crude oils and other petrochemicals using data from several continents. This journal also provides margin data for many refineries and plants on a monthly basis. ''Chemical Week'' provides the spot and contract prices for 22 chemicals in the US and European markets.<br />
<br />
====Consultants====<br />
If trade journals are not adequate for the information needed, some companies will contract consultants to do deep research into the subject. Consultants are excellent resources for providing economic and marketing information but come at a large price. There are several companies that provide this type of service but some of the larger firms include: ''Purvin and Gertz'', ''Cambidge Energy Research Associates'', ''Chemical Markets Associates Inc.'', and ''SRI: The Chemical Economics Handbook''<br />
<br />
====Online Brokers and Suppliers====<br />
Often time price data can be supplied by the supplier themselves and using online directories. Restraint should be used when quoting these prices however because they are often spot prices that are much higher than what would be expected from bulk contract supplying.<br />
<br />
==Example Case: Estimating Cost of Production==<br />
<br />
Use the following information to estimate the manufacturing cost of a plant producing 120*10^6 lb/year with a product price of $0.20/lb. <br />
<br />
:Fixed Capital: $15,000,000<br />
:Working Capital: $3,000,000<br />
:'''Fixed and Working Capital = FC + WC = $18,000,000'''<br />
:Raw Material Cost: $9,600,000/yr<br />
:Utilities: $1,440,000/yr<br />
:Labor: $1,800,000/yr<br />
:Maintenance (6% yr f.c.): $900,000/yr<br />
:Supplies (2% yr f.c.): $300,000/yr<br />
:Depreciation (8%/yr): $1,200,000/yr<br />
:Taxes, insurance (3%/yr): $450,000/yr<br />
:'''Total Manufacturing Cost = RMC + U + L + M + S + D + T = $15,690,000/yr'''<br />
:'''Gross Sales = Production * Product price = $24,000,000/yr'''<br />
:'''Gross Profit = Gross Sales - Manufacturing Cost = $8,310,000/yr'''<br />
<br />
==Market Effects on Process Design==<br />
Process design, like most other things, is inherently dependent on global markets, and the economy as a whole. Process design can depend on locational markets. For example, if an expected long run exchange rate between two specific currencies makes production of a specific chemical more profitable in a colder climate such as Russia as opposed to a warmer climate such as Mexico, this may have an effect on how the process to produce this specific chemical should be designed. Relative inflation rates of different countries can have similar effects on process design. Additionally, markets for key production inputs can have an effect on process design. If a company was designing a large scale production plant which required massive amounts of steel, the global market for steel (or to a lesser extent, iron mines) would impact how/where this company would choose to design and build their process. Also worth noting is the fact that the state of the economy as a whole may impact process design as well. If the economy is in a recession, funds are likely to be more tightly managed within a company. Thusly, it may make sense for a process engineer to design a process that operates on a smaller scale. Not only will this decrease the cost of running the process (lower utilities costs, lower costs for process inputs), but since less product will be produced, this will also reduce the risk of having the company running an inventory. This is a positive, as running an inventory can lead to losing even more money during a recession. Conversely, a healthy economy may encourage the design of facilities with larger production capabilities. This section aims to look at several recent examples of macroeconomic markets affecting process design, similar to the hypothetical situations described above.<br />
<br />
Back in 2009, when the USA, UK, and many other first world countries were facing a harsh recession, both the profitability and scale of many production processes diminished. The Royal Society of Chemistry found that many chemical companies with plants located in England, when faced with the recession, elected to shut down production entirely rather than simply slow down production (RSC, 2009). Many of these plant closings were accompanied with the construction of new plants in areas of the world less affected by the recession, including the Middle East. Many notable international companies, such as Dow, were involved in this migration from countries entrenched in recession to countries where production would be more economical. While this may seem obvious, it is still worth noting that a process engineer needs to take into account the state of the economy in the location where a production facility is looking to be built.<br />
<br />
Building off of what the Royal Society of Chemistry found, a 2010 KPMG case study aimed to further analyze the effects of the recession on chemical production plants. Though the KPMG case study was based on United States production, the economic climate in the UK was similar to that of the United States, so similar conclusions can be drawn from both studies. What KPMG found in the United States in 2010 backed up what the Royal Society of Chemistry found in England in 2009. The United States was seeing a similar outsourcing of both old production facilities that were being shut down and new production facilities that, though initially proposed for construction in the United States, were being outsourced. However, KPMG went further in depth to analyze how specific markets in the United States were affecting chemical production plants. They found that the domestic auto industry and the construction sector heavily influenced the number and scale of chemical plants being proposed for construction in the USA. This makes sense, as these are two of the largest markets for chemicals in the USA. By 2010, the domestic auto industry was rebounding, and this was found to be largely correlated with an increase in demand for US chemicals (KPMG, 2010). This highlights that a process engineer must consider what sectors use the output of his process (in this scenario, various chemicals) as an input to their process. Analyzing these specific markets in several competitive locations could provide the final input into determining where to build a production facility.<br />
<br />
Another case study, conducted by CNN, analyzed the world market for rare earth minerals. Rare earth minerals are vital to the preparation of catalysts, which impacts a large portion of the chemical engineering industry. Additionally, rare earth minerals are used extensively in a wide variety of consumer products, including but not limited to hybrid cars and smartphone chips. Any process engineer looking to design a plant where production utilizes rare earth minerals should analyze this global market in order to influence his decisions that go into designing the process. The case study conducted by CNN highlights the fact that China is the dominant player in the global market for rare earth minerals (Yan, 2015). Per National Center for Policy Analysis, with whom CNN consulted during their case study, China controls about 95% of global rare earth mineral production, and holds half of the world’s resources of these metals. A specific subset of rare earth minerals, rare earth oxides, are vital components of many catalysts. Figure 1 below shows just how strong of a monopoly China has on these rare earth oxides in the global market. The supply crunch brought on by China forced the lone United States producer of rare earth metals, Molycorp, into bankruptcy. China having a near monopoly on the global market for rare earth metals means that they can exert their dominance on the market in several fashions. One such example came in 2010, when Beijing abruptly reducing their export quota for rare earth minerals lead to skyrocketing prices. A process engineer who’s proposed design includes the use of any catalyst using these rare earth metals must take all of these possibilities into account. In this example, does the influence China has on the global rare earth metals market make it more sensible to build a plant in China? Or maybe the volatility of the prices is too concerning, which could lead to the process engineer being forced to redesign his process without the use of a catalyst. Though this would certainly reduce product yield, it could be the case that the markets for the metals that make the necessary catalyst render the process without the catalyst more profitable on a per unit basis. This rare earth metal example is just one of many; the overall lesson is that a process engineer must evaluate the global markets for all important inputs to his process, as the profitability of different designs will be heavily influenced by these markets.<br />
<br />
[[File:reo.jpg|frame|center|border|<div align=center> Figure 1: Global rare earth oxide production trends from 1956-2010 <div>]]<br />
<div align=left><br />
<br />
stuff<br />
<br />
==Conclusion==<br />
Thermodynamics and kinetics are essential to designing an operational plant, but at the end of the day profits and margins are what make plants go from the engineering paper pad to operating continuously. Before any ground is broken, estimation of production costs and revenues are absolutely necessary to assure CEO's and shareholders that this process is a profitable and worth while venture. There are many avenues to achieve these answers with some being more accurate than others. The best indicator of these answers will be in pilot plant design which will provide appropriate estimations for scaled up processes.<br />
<br />
==References==<br />
<br />
Biegler LT, Grossmann IE, Westerberg AW. Systematic Methods of Chemical Process Design. Upper Saddle River: Prentice Hall; 1997. <br />
<br />
Peters MS, Timmerhaus KD. Plant Design and Economics for Chemical Engineers. 5th ed. New York: McGraw Hill; 2003.<br />
<br />
Seider WD, Seader JD, Lewin DR. Process Design Principles: Synthesis, Analysis, and Evaluation. 3rd ed. New York: Wiley; 2004.<br />
<br />
Towler G, Sinnott R. Chemical Engineering Design: Principles, Practice and Economics of Plant and Process Design. 2nd ed. Boston: Elsevier; 2013.<br />
<br />
Turton R, Bailie RC, Whiting WB, Shaewitz JA, Bhattacharyya D. Analysis, Synthesis, and Design of Chemical Processes. 4th ed. Upper Saddle River: Prentice-Hall; 2012.<br />
<br />
Chemicals Sector Struggles in Recession. Royal Society of Chemistry, rsc.org. July 29, 2009<br />
<br />
The Outlook for the US Chemical Industry. KPMG, kpmg.com. 2010.<br />
<br />
Yan S. China is About to Tighten its Grip on Rare Earth Minerals. CNN, money.cnn.com. June 5, 2015<br />
<br />
Scott R.E. The High Price of “Free” Trade: NAFTA’s Failure has Cost the United States Jobs Across the Nation. Economic Policy Institute, www.epi.org. November 17, 2003</div>RJKolbehttps://processdesign.mccormick.northwestern.edu/index.php?title=Estimation_of_production_cost_and_revenue&diff=4551Estimation of production cost and revenue2016-02-21T19:30:48Z<p>RJKolbe: /* Market Effects on Process Design */</p>
<hr />
<div>Authors: Nick Pinkerton, Karen Schmidt, James Xamplas (ChE 352 in Winter 2014), Reed Kolbe (ChE 352, Winter 2016)<br />
<br />
Steward: David Chen, Fengqi You <br />
<br />
==Variable Cost of Production==<br />
Variable costs of production are dependent primarily on plant output and rate of production. There are many variables to consider when costing a plant. <br />
# Raw materials consumed<br />
# Utilities-steam, electricity, cooling water, fuel, etc.<br />
# Consumables - acids, bases, solvents, catalysts, etc.<br />
# Disposal<br />
# Shipping<br />
The majority of the variable costs for a production plant are the raw materials and utilities costs. Variable costs can be greatly cut through optimization techniques and intelligent plant design (Towler and Sinnott, 2013).<br />
===Raw Materials Cost===<br />
Calculating the annual cost of a raw material is calculated by simply multiplying the feed rate of the process by the appropriate price per volume or mass. These are the costs of chemical feed stocks required by the process. Feed stocks flow rates are obtained from PFD (Turton et al., 2013).There are several ways to optimize this cost to ensure that a process is not costing more than it should. First one should assess the actual consumption of a plant to see if it is significantly different from what should be expected based on process stoichiometry and selectivities (Towler and Sinnott, 2013). Finding may prove that a process is less efficient than it originally claimed.<br />
It is smart to benchmark a new plant design against an existing plant or pilot plant. Raw materials are typically the largest contributor to overall variable costs. For bulk chemicals and petrochemicals, raw materials represent 80-90% of the total cash cost of production (CCOP). <br />
===Utilities Cost===<br />
These are the costs of the various utilities streams required by the process. The flowrates for the utilities streams are located on the PFD (Turton et al., 2013). This includes:<br />
*Fuel gas, oil, or coal<br />
*Electric power<br />
*Steam<br />
*Cooling water<br />
*Process water<br />
*Boiler feed water<br />
*Air<br />
*Inert gas<br />
*Refrigeration<br />
<br />
Utility streams are excellent ways to streamline a process and are often indicative of how efficient of a process the project is. Process methods such as steam generation and pinch analysis can be used to greatly reduce utility costs across a plant. Further analysis of pinch analysis techniques and optimizing heat exchanger networks can be found in plant design texts such as first reference from Gavin Towler. The determination of process utility costs is often more difficult than the determination of raw material costs; however, the utilities are typically between 5-10% of CCOP (Towler and Sinnott, 2013). The cost of heating a process can be reduced by using process waste streams as fuel which consequently also reduces the need for waste disposal.<br />
<br />
===Waste Disposal Costs===<br />
These are defined as the cost of waste treatment to protect the environment (Turton et al., 2013). These are materials that cannot be recycled or sold off as by-products. Often times these streams require additives or additional treatment to meet governmental regulations. <br />
Hydrocarbon waste can often be incinerated directly to the atmosphere or used as process fuel to heat other streams in the system. Using the stream as process fuel allows the fuel value of the stream to be recovered into the system. The substituted value can be calculated by multiplying the conventional fuel price by the heat of combustion of the waste stream. <br />
<br />
<math>P_{WFV} = P_F * \Delta H_C^o</math><br />
<br />
where <br />
<math>P_{WFV}</math> = waste value of fuel ($/lb or $/kg)<br />
<br />
<math>P_F</math> = price of fuel ($/MMBtu or $/GJ)<br />
<br />
<math>\Delta H_C^o</math> = heat of combustion (MMBtu/lb or GJ/kg)<br />
<br />
Dilute aqueous streams must be sent to wastewater treatment typically prior to purging from the plant. Acidic or basic wastes are neutralized prior to treatment by salting out the acid or base. The cost of wastewater treatment is typically about $6 per 1000 gal but this is only an estimate that doesn't account for regional charges (Towler and Sinnott, 2013).<br />
<br />
Solid waste treatment can typically be sent to a landfill at a cost of approximately $50/ton (Towler and Sinnott, 2013). <br />
<br />
Hazardous wastes arise from the production of concentrated liquid streams that cannot be incinerated. Hazardous wastes should be avoided if possible, but that is not always feasible for some processes. The cost of hazardous waste disposal is strongly dependent on the location of the plant, the plants proximity to waste disposal plants and the degree of hazard of the waste.<br />
<br />
==Fixed Cost of Production==<br />
Fixed costs are those whose amounts are independent of production rates. Much of these costs are personnel salaries, taxes, insurance, and legal payments.<br />
===Labor Costs===<br />
These are the costs attributed to the personnel required to operate the process plant (Turton et al., 2013).<br />
<br />
The number of operators required per shift, <math>N_{OL}</math> can be estimated by<br />
<br />
<math>N_{OL}=(6.29+31.7P^2+0.23N_{np})^{0.5}</math><br />
<br />
where <math>P</math> is the number of processing steps involving particulate solids and <math>N_{np}</math> is the number of other processing steps (Turton et al., 2013). For each of the <math>N_{OL}</math> operators per 8-hour shift, approximately 4.5 operators must be hired for a plant that runs 24 hours per day, to account for the 3 shifts per day and the 3 weeks of leave typically taken by each operator per year (Turton et al., 2013). The salary for a chemical plant operator varies by location, and the estimator should look up the average value for the area.<br />
<br />
===Maintenance Costs===<br />
These are the costs associated with labor and materials necessary to maintain plant production. An estimate of these are 6% of the fixed capital investment (Turton et al., 2013).<br />
<br />
===Research and Development===<br />
These are the costs of research done in developing the process and/or products. This includes salaries for researchers as well as funds for research related equipment and supplies. An estimate of these costs are 5% of the total manufacturing cost (Turton et al., 2013).<br />
<br />
===Taxes and Insurance===<br />
Taxes vary by location, but a first estimate of property taxes and liability insurance is 3% of the fixed capital investment (Turton et al., 2013).<br />
<br />
===Plant Overhead===<br />
Overhead costs are the miscellaneous but necessary costs of running a business, including payroll, employee benefits, and janitorial services. This may be estimated as 70% of the operating labor costs, added to 4% of the fixed capital costs (Turton et al., 2013).<br />
<br />
===Licensing and Royalties===<br />
The costs of paying for the use of intellectual property clearly varies, but an estimate that may be used is 3% of the total manufacturing cost (Turton et al., 2013).<br />
<br />
==Revenues==<br />
The revenues of a process are the income earned form sales of the main products and the by-products. Revenue can be impacted by market fluctuations and production rates.<br />
===By-Product Revenues===<br />
Besides selling the main product from a process, by-products from separations and reactions can also be valuable in the market. Often it is more difficult to decide which by-products to recover and purify than it is to make decisions on the main product. <br />
<br />
By-products made in stoichiometric ratios from reactions must be either sold off or managed through waste disposal. Other by-products are sometimes produced through feed impurities or by nonselective reactions. There are several potential valuable by-products from a process: <br />
# Materials produced in stoichiometric quantities by the reactions that create the main product. If they are not recovered then the waste disposal expenses will be large.<br />
# Components that are produced in high yield by side reactions. <br />
# Components formed in high yield from feed impurities. Many sulfurs are produced as a by-product of fuels manufacture.<br />
# Components that are produced in low yield but have high value. An example includes acetophenone which is recovered as a by-product of phenol manufacture.<br />
# Degraded consumables (e.g. solvents, etc.) that have reuse value.<br />
<br />
A rule of thumb that can be used for preliminary screening of by-products for large plants is that for by-product recovery to be economically feasible the net benefit must be greater than $200,000 a year. A net benefit can be calculated by adding the possible resale value of the by-product and the avoided waste disposal cost (Towler and Sinnott, 2013). <br />
<br />
===Margin===<br />
The gross margin of a process is defined as the sum of product and by-product revenues minus the raw material cost. <br />
<br />
Gross margin = Revenues - Raw materials costs<br />
<br />
Because raw materials are most often the most expensive variable cost of a process, the gross margin is a good gauge as to what the total profitability of a process will be. Raw materials and product pricing are often subject to high degrees of variability which can be difficult to forecast. The size of margins are highly versatile depending on the <br />
industry. For many petrochemical industries the margin may be only 10%; however, for industries such as food additives and pharmaceuticals the margins are generally much higher (Towler and Sinnott, 2013).<br />
<br />
===Profits===<br />
There are several standards for calculating company profits. The cash cost of production (CCOP) is the sum of the fixed and variable production costs. <br />
<br />
<math>CCOP = VCOP + FCOP</math><br />
<br />
where <math>VCOP</math> is the variable cost of production and <math>FCOP</math> is the fixed cost of production. <br />
<br />
Gross profit, which should not be confused with gross margin, is then calculated by the following equation,<br />
<br />
<math>Gross\ profit = Main\ product\ revenues - CCOP</math><br />
<br />
Finally profit can be calculated by subtracting the income taxes that the plant would be subject to depending on the tax code of the county the plant is located in. <br />
<br />
<math>Net\ profit = gross\ profit - taxes</math><br />
<br />
==Pricing Products and Raw Materials==<br />
The revenues and costs of a project are vital to determining its economic feasibility. To calculate these values one needs to multiply the respective product and feed streams by their respective prices. The major difficulty of this process is determining the prices that should be used in this formula. When analyzing a plant, not only do the current prices need to be acknowledged but also the stability of the market to forecast future fluctuations and deviations. <br />
===Pricing Fundamentals===<br />
The pricing of a substance is determined by the fundamental economic principles of supply and demand. A supply curve and demand curve can be graphed and added to determine the market equilibrium price and projected market size. There are many ways a company can combat if the market equilibrium pricing is not suitable for a process. One of these ways is changing the market that the company is selling to. Instead of selling industrial grade product there may be markets for pharmaceutical grade or food grade that would allow for a company to sell their product at higher margins. Another avenue to look into is changing the geographic market being sold to. Rarely is there a global synchronous market, but rather a variation depending on where in the world the product is being sold. It is possible that a company could make more money by dedicating their sales to the Asian market as opposed to the US or vise versa. <br />
===Price Data Sources===<br />
There are many resources when trying to determine the price of a chemical or utility. This are important for looking at current pricing information as well as historical data that can be used for forecasting purposes. <br />
====Internal Company Forecasts====<br />
Large companies will often have the marketing or development departments develop a forecasting database that can be used internally in the company. Forecasts of this magnitude will often have multiple scenarios and projects that are evaluated under the given parameters. Companies may even license these forecasts to other companies for high fees if they desire. <br />
<br />
[[File:Capture.JPG]]<br />
<br />
Table 1 provides common industry acronyms that are used to indicate certain key words when determining pricing information.<br />
<br />
====Trade Journals====<br />
There are also many publications that report pricing data weekly. ''ICIS Chemical Business Americas'' used to publish the prices for hundreds of chemicals but have more recently changed their data to an online database that requires a subscription. This service is very expensive, but necessary for many companies. ''Oil and Gas Journal'' publishes the market prices of many crude oils and other petrochemicals using data from several continents. This journal also provides margin data for many refineries and plants on a monthly basis. ''Chemical Week'' provides the spot and contract prices for 22 chemicals in the US and European markets.<br />
<br />
====Consultants====<br />
If trade journals are not adequate for the information needed, some companies will contract consultants to do deep research into the subject. Consultants are excellent resources for providing economic and marketing information but come at a large price. There are several companies that provide this type of service but some of the larger firms include: ''Purvin and Gertz'', ''Cambidge Energy Research Associates'', ''Chemical Markets Associates Inc.'', and ''SRI: The Chemical Economics Handbook''<br />
<br />
====Online Brokers and Suppliers====<br />
Often time price data can be supplied by the supplier themselves and using online directories. Restraint should be used when quoting these prices however because they are often spot prices that are much higher than what would be expected from bulk contract supplying.<br />
<br />
==Example Case: Estimating Cost of Production==<br />
<br />
Use the following information to estimate the manufacturing cost of a plant producing 120*10^6 lb/year with a product price of $0.20/lb. <br />
<br />
:Fixed Capital: $15,000,000<br />
:Working Capital: $3,000,000<br />
:'''Fixed and Working Capital = FC + WC = $18,000,000'''<br />
:Raw Material Cost: $9,600,000/yr<br />
:Utilities: $1,440,000/yr<br />
:Labor: $1,800,000/yr<br />
:Maintenance (6% yr f.c.): $900,000/yr<br />
:Supplies (2% yr f.c.): $300,000/yr<br />
:Depreciation (8%/yr): $1,200,000/yr<br />
:Taxes, insurance (3%/yr): $450,000/yr<br />
:'''Total Manufacturing Cost = RMC + U + L + M + S + D + T = $15,690,000/yr'''<br />
:'''Gross Sales = Production * Product price = $24,000,000/yr'''<br />
:'''Gross Profit = Gross Sales - Manufacturing Cost = $8,310,000/yr'''<br />
<br />
==Market Effects on Process Design==<br />
Process design, like most other things, is inherently dependent on global markets, and the economy as a whole. Process design can depend on locational markets. For example, if an expected long run exchange rate between two specific currencies makes production of a specific chemical more profitable in a colder climate such as Russia as opposed to a warmer climate such as Mexico, this may have an effect on how the process to produce this specific chemical should be designed. Relative inflation rates of different countries can have similar effects on process design. Additionally, markets for key production inputs can have an effect on process design. If a company was designing a large scale production plant which required massive amounts of steel, the global market for steel (or to a lesser extent, iron mines) would impact how/where this company would choose to design and build their process. Also worth noting is the fact that the state of the economy as a whole may impact process design as well. If the economy is in a recession, funds are likely to be more tightly managed within a company. Thusly, it may make sense for a process engineer to design a process that operates on a smaller scale. Not only will this decrease the cost of running the process (lower utilities costs, lower costs for process inputs), but since less product will be produced, this will also reduce the risk of having the company running an inventory. This is a positive, as running an inventory can lead to losing even more money during a recession. Conversely, a healthy economy may encourage the design of facilities with larger production capabilities. This section aims to look at several recent examples of macroeconomic markets affecting process design, similar to the hypothetical situations described above.<br />
<br />
Back in 2009, when the USA, UK, and many other first world countries were facing a harsh recession, both the profitability and scale of many production processes diminished. The Royal Society of Chemistry found that many chemical companies with plants located in England, when faced with the recession, elected to shut down production entirely rather than simply slow down production (RSC, 2009). Many of these plant closings were accompanied with the construction of new plants in areas of the world less affected by the recession, including the Middle East. Many notable international companies, such as Dow, were involved in this migration from countries entrenched in recession to countries where production would be more economical. While this may seem obvious, it is still worth noting that a process engineer needs to take into account the state of the economy in the location where a production facility is looking to be built.<br />
<br />
Building off of what the Royal Society of Chemistry found, a 2010 KPMG case study aimed to further analyze the effects of the recession on chemical production plants. Though the KPMG case study was based on United States production, the economic climate in the UK was similar to that of the United States, so similar conclusions can be drawn from both studies. What KPMG found in the United States in 2010 backed up what the Royal Society of Chemistry found in England in 2009. The United States was seeing a similar outsourcing of both old production facilities that were being shut down and new production facilities that, though initially proposed for construction in the United States, were being outsourced. However, KPMG went further in depth to analyze how specific markets in the United States were affecting chemical production plants. They found that the domestic auto industry and the construction sector heavily influenced the number and scale of chemical plants being proposed for construction in the USA. This makes sense, as these are two of the largest markets for chemicals in the USA. By 2010, the domestic auto industry was rebounding, and this was found to be largely correlated with an increase in demand for US chemicals (KPMG, 2010). This highlights that a process engineer must consider what sectors use the output of his process (in this scenario, various chemicals) as an input to their process. Analyzing these specific markets in several competitive locations could provide the final input into determining where to build a production facility.<br />
<br />
Another case study, conducted by CNN, analyzed the world market for rare earth minerals. Rare earth minerals are vital to the preparation of catalysts, which impacts a large portion of the chemical engineering industry. Additionally, rare earth minerals are used extensively in a wide variety of consumer products, including but not limited to hybrid cars and smartphone chips. Any process engineer looking to design a plant where production utilizes rare earth minerals should analyze this global market in order to influence his decisions that go into designing the process. The case study conducted by CNN highlights the fact that China is the dominant player in the global market for rare earth minerals (Yan, 2015). Per National Center for Policy Analysis, with whom CNN consulted during their case study, China controls about 95% of global rare earth mineral production, and holds half of the world’s resources of these metals. A specific subset of rare earth minerals, rare earth oxides, are vital components of many catalysts. Figure 1 below shows just how strong of a monopoly China has on these rare earth oxides in the global market. The supply crunch brought on by China forced the lone United States producer of rare earth metals, Molycorp, into bankruptcy. China having a near monopoly on the global market for rare earth metals means that they can exert their dominance on the market in several fashions. One such example came in 2010, when Beijing abruptly reducing their export quota for rare earth minerals lead to skyrocketing prices. A process engineer who’s proposed design includes the use of any catalyst using these rare earth metals must take all of these possibilities into account. In this example, does the influence China has on the global rare earth metals market make it more sensible to build a plant in China? Or maybe the volatility of the prices is too concerning, which could lead to the process engineer being forced to redesign his process without the use of a catalyst. Though this would certainly reduce product yield, it could be the case that the markets for the metals that make the necessary catalyst render the process without the catalyst more profitable on a per unit basis. This rare earth metal example is just one of many; the overall lesson is that a process engineer must evaluate the global markets for all important inputs to his process, as the profitability of different designs will be heavily influenced by these markets.<br />
<br />
[[File:reo.jpg|frame|center|border|<div align=center> Figure 1: Global rare earth oxide production trends from 1956-2010 <div>]]<br />
<div align=left><br />
<br />
stuff<br />
<br />
==Conclusion==<br />
Thermodynamics and kinetics are essential to designing an operational plant, but at the end of the day profits and margins are what make plants go from the engineering paper pad to operating continuously. Before any ground is broken, estimation of production costs and revenues are absolutely necessary to assure CEO's and shareholders that this process is a profitable and worth while venture. There are many avenues to achieve these answers with some being more accurate than others. The best indicator of these answers will be in pilot plant design which will provide appropriate estimations for scaled up processes.<br />
<br />
==References==<br />
<br />
Biegler LT, Grossmann IE, Westerberg AW. Systematic Methods of Chemical Process Design. Upper Saddle River: Prentice Hall; 1997. <br />
<br />
Peters MS, Timmerhaus KD. Plant Design and Economics for Chemical Engineers. 5th ed. New York: McGraw Hill; 2003.<br />
<br />
Seider WD, Seader JD, Lewin DR. Process Design Principles: Synthesis, Analysis, and Evaluation. 3rd ed. New York: Wiley; 2004.<br />
<br />
Towler G, Sinnott R. Chemical Engineering Design: Principles, Practice and Economics of Plant and Process Design. 2nd ed. Boston: Elsevier; 2013.<br />
<br />
Turton R, Bailie RC, Whiting WB, Shaewitz JA, Bhattacharyya D. Analysis, Synthesis, and Design of Chemical Processes. 4th ed. Upper Saddle River: Prentice-Hall; 2012.<br />
<br />
Chemicals Sector Struggles in Recession. Royal Society of Chemistry, rsc.org. July 29, 2009<br />
<br />
The Outlook for the US Chemical Industry. KPMG, kpmg.com. 2010.<br />
<br />
Yan S. China is About to Tighten its Grip on Rare Earth Minerals. CNN, money.cnn.com. June 5, 2015</div>RJKolbehttps://processdesign.mccormick.northwestern.edu/index.php?title=File:Reo.jpg&diff=4543File:Reo.jpg2016-02-21T19:25:11Z<p>RJKolbe: </p>
<hr />
<div></div>RJKolbehttps://processdesign.mccormick.northwestern.edu/index.php?title=Estimation_of_production_cost_and_revenue&diff=4542Estimation of production cost and revenue2016-02-21T19:24:38Z<p>RJKolbe: /* Market Effects on Process Design */</p>
<hr />
<div>Authors: Nick Pinkerton, Karen Schmidt, James Xamplas (ChE 352 in Winter 2014), Reed Kolbe (ChE 352, Winter 2016)<br />
<br />
Steward: David Chen, Fengqi You <br />
<br />
==Variable Cost of Production==<br />
Variable costs of production are dependent primarily on plant output and rate of production. There are many variables to consider when costing a plant. <br />
# Raw materials consumed<br />
# Utilities-steam, electricity, cooling water, fuel, etc.<br />
# Consumables - acids, bases, solvents, catalysts, etc.<br />
# Disposal<br />
# Shipping<br />
The majority of the variable costs for a production plant are the raw materials and utilities costs. Variable costs can be greatly cut through optimization techniques and intelligent plant design (Towler and Sinnott, 2013).<br />
===Raw Materials Cost===<br />
Calculating the annual cost of a raw material is calculated by simply multiplying the feed rate of the process by the appropriate price per volume or mass. These are the costs of chemical feed stocks required by the process. Feed stocks flow rates are obtained from PFD (Turton et al., 2013).There are several ways to optimize this cost to ensure that a process is not costing more than it should. First one should assess the actual consumption of a plant to see if it is significantly different from what should be expected based on process stoichiometry and selectivities (Towler and Sinnott, 2013). Finding may prove that a process is less efficient than it originally claimed.<br />
It is smart to benchmark a new plant design against an existing plant or pilot plant. Raw materials are typically the largest contributor to overall variable costs. For bulk chemicals and petrochemicals, raw materials represent 80-90% of the total cash cost of production (CCOP). <br />
===Utilities Cost===<br />
These are the costs of the various utilities streams required by the process. The flowrates for the utilities streams are located on the PFD (Turton et al., 2013). This includes:<br />
*Fuel gas, oil, or coal<br />
*Electric power<br />
*Steam<br />
*Cooling water<br />
*Process water<br />
*Boiler feed water<br />
*Air<br />
*Inert gas<br />
*Refrigeration<br />
<br />
Utility streams are excellent ways to streamline a process and are often indicative of how efficient of a process the project is. Process methods such as steam generation and pinch analysis can be used to greatly reduce utility costs across a plant. Further analysis of pinch analysis techniques and optimizing heat exchanger networks can be found in plant design texts such as first reference from Gavin Towler. The determination of process utility costs is often more difficult than the determination of raw material costs; however, the utilities are typically between 5-10% of CCOP (Towler and Sinnott, 2013). The cost of heating a process can be reduced by using process waste streams as fuel which consequently also reduces the need for waste disposal.<br />
<br />
===Waste Disposal Costs===<br />
These are defined as the cost of waste treatment to protect the environment (Turton et al., 2013). These are materials that cannot be recycled or sold off as by-products. Often times these streams require additives or additional treatment to meet governmental regulations. <br />
Hydrocarbon waste can often be incinerated directly to the atmosphere or used as process fuel to heat other streams in the system. Using the stream as process fuel allows the fuel value of the stream to be recovered into the system. The substituted value can be calculated by multiplying the conventional fuel price by the heat of combustion of the waste stream. <br />
<br />
<math>P_{WFV} = P_F * \Delta H_C^o</math><br />
<br />
where <br />
<math>P_{WFV}</math> = waste value of fuel ($/lb or $/kg)<br />
<br />
<math>P_F</math> = price of fuel ($/MMBtu or $/GJ)<br />
<br />
<math>\Delta H_C^o</math> = heat of combustion (MMBtu/lb or GJ/kg)<br />
<br />
Dilute aqueous streams must be sent to wastewater treatment typically prior to purging from the plant. Acidic or basic wastes are neutralized prior to treatment by salting out the acid or base. The cost of wastewater treatment is typically about $6 per 1000 gal but this is only an estimate that doesn't account for regional charges (Towler and Sinnott, 2013).<br />
<br />
Solid waste treatment can typically be sent to a landfill at a cost of approximately $50/ton (Towler and Sinnott, 2013). <br />
<br />
Hazardous wastes arise from the production of concentrated liquid streams that cannot be incinerated. Hazardous wastes should be avoided if possible, but that is not always feasible for some processes. The cost of hazardous waste disposal is strongly dependent on the location of the plant, the plants proximity to waste disposal plants and the degree of hazard of the waste.<br />
<br />
==Fixed Cost of Production==<br />
Fixed costs are those whose amounts are independent of production rates. Much of these costs are personnel salaries, taxes, insurance, and legal payments.<br />
===Labor Costs===<br />
These are the costs attributed to the personnel required to operate the process plant (Turton et al., 2013).<br />
<br />
The number of operators required per shift, <math>N_{OL}</math> can be estimated by<br />
<br />
<math>N_{OL}=(6.29+31.7P^2+0.23N_{np})^{0.5}</math><br />
<br />
where <math>P</math> is the number of processing steps involving particulate solids and <math>N_{np}</math> is the number of other processing steps (Turton et al., 2013). For each of the <math>N_{OL}</math> operators per 8-hour shift, approximately 4.5 operators must be hired for a plant that runs 24 hours per day, to account for the 3 shifts per day and the 3 weeks of leave typically taken by each operator per year (Turton et al., 2013). The salary for a chemical plant operator varies by location, and the estimator should look up the average value for the area.<br />
<br />
===Maintenance Costs===<br />
These are the costs associated with labor and materials necessary to maintain plant production. An estimate of these are 6% of the fixed capital investment (Turton et al., 2013).<br />
<br />
===Research and Development===<br />
These are the costs of research done in developing the process and/or products. This includes salaries for researchers as well as funds for research related equipment and supplies. An estimate of these costs are 5% of the total manufacturing cost (Turton et al., 2013).<br />
<br />
===Taxes and Insurance===<br />
Taxes vary by location, but a first estimate of property taxes and liability insurance is 3% of the fixed capital investment (Turton et al., 2013).<br />
<br />
===Plant Overhead===<br />
Overhead costs are the miscellaneous but necessary costs of running a business, including payroll, employee benefits, and janitorial services. This may be estimated as 70% of the operating labor costs, added to 4% of the fixed capital costs (Turton et al., 2013).<br />
<br />
===Licensing and Royalties===<br />
The costs of paying for the use of intellectual property clearly varies, but an estimate that may be used is 3% of the total manufacturing cost (Turton et al., 2013).<br />
<br />
==Revenues==<br />
The revenues of a process are the income earned form sales of the main products and the by-products. Revenue can be impacted by market fluctuations and production rates.<br />
===By-Product Revenues===<br />
Besides selling the main product from a process, by-products from separations and reactions can also be valuable in the market. Often it is more difficult to decide which by-products to recover and purify than it is to make decisions on the main product. <br />
<br />
By-products made in stoichiometric ratios from reactions must be either sold off or managed through waste disposal. Other by-products are sometimes produced through feed impurities or by nonselective reactions. There are several potential valuable by-products from a process: <br />
# Materials produced in stoichiometric quantities by the reactions that create the main product. If they are not recovered then the waste disposal expenses will be large.<br />
# Components that are produced in high yield by side reactions. <br />
# Components formed in high yield from feed impurities. Many sulfurs are produced as a by-product of fuels manufacture.<br />
# Components that are produced in low yield but have high value. An example includes acetophenone which is recovered as a by-product of phenol manufacture.<br />
# Degraded consumables (e.g. solvents, etc.) that have reuse value.<br />
<br />
A rule of thumb that can be used for preliminary screening of by-products for large plants is that for by-product recovery to be economically feasible the net benefit must be greater than $200,000 a year. A net benefit can be calculated by adding the possible resale value of the by-product and the avoided waste disposal cost (Towler and Sinnott, 2013). <br />
<br />
===Margin===<br />
The gross margin of a process is defined as the sum of product and by-product revenues minus the raw material cost. <br />
<br />
Gross margin = Revenues - Raw materials costs<br />
<br />
Because raw materials are most often the most expensive variable cost of a process, the gross margin is a good gauge as to what the total profitability of a process will be. Raw materials and product pricing are often subject to high degrees of variability which can be difficult to forecast. The size of margins are highly versatile depending on the <br />
industry. For many petrochemical industries the margin may be only 10%; however, for industries such as food additives and pharmaceuticals the margins are generally much higher (Towler and Sinnott, 2013).<br />
<br />
===Profits===<br />
There are several standards for calculating company profits. The cash cost of production (CCOP) is the sum of the fixed and variable production costs. <br />
<br />
<math>CCOP = VCOP + FCOP</math><br />
<br />
where <math>VCOP</math> is the variable cost of production and <math>FCOP</math> is the fixed cost of production. <br />
<br />
Gross profit, which should not be confused with gross margin, is then calculated by the following equation,<br />
<br />
<math>Gross\ profit = Main\ product\ revenues - CCOP</math><br />
<br />
Finally profit can be calculated by subtracting the income taxes that the plant would be subject to depending on the tax code of the county the plant is located in. <br />
<br />
<math>Net\ profit = gross\ profit - taxes</math><br />
<br />
==Pricing Products and Raw Materials==<br />
The revenues and costs of a project are vital to determining its economic feasibility. To calculate these values one needs to multiply the respective product and feed streams by their respective prices. The major difficulty of this process is determining the prices that should be used in this formula. When analyzing a plant, not only do the current prices need to be acknowledged but also the stability of the market to forecast future fluctuations and deviations. <br />
===Pricing Fundamentals===<br />
The pricing of a substance is determined by the fundamental economic principles of supply and demand. A supply curve and demand curve can be graphed and added to determine the market equilibrium price and projected market size. There are many ways a company can combat if the market equilibrium pricing is not suitable for a process. One of these ways is changing the market that the company is selling to. Instead of selling industrial grade product there may be markets for pharmaceutical grade or food grade that would allow for a company to sell their product at higher margins. Another avenue to look into is changing the geographic market being sold to. Rarely is there a global synchronous market, but rather a variation depending on where in the world the product is being sold. It is possible that a company could make more money by dedicating their sales to the Asian market as opposed to the US or vise versa. <br />
===Price Data Sources===<br />
There are many resources when trying to determine the price of a chemical or utility. This are important for looking at current pricing information as well as historical data that can be used for forecasting purposes. <br />
====Internal Company Forecasts====<br />
Large companies will often have the marketing or development departments develop a forecasting database that can be used internally in the company. Forecasts of this magnitude will often have multiple scenarios and projects that are evaluated under the given parameters. Companies may even license these forecasts to other companies for high fees if they desire. <br />
<br />
[[File:Capture.JPG]]<br />
<br />
Table 1 provides common industry acronyms that are used to indicate certain key words when determining pricing information.<br />
<br />
====Trade Journals====<br />
There are also many publications that report pricing data weekly. ''ICIS Chemical Business Americas'' used to publish the prices for hundreds of chemicals but have more recently changed their data to an online database that requires a subscription. This service is very expensive, but necessary for many companies. ''Oil and Gas Journal'' publishes the market prices of many crude oils and other petrochemicals using data from several continents. This journal also provides margin data for many refineries and plants on a monthly basis. ''Chemical Week'' provides the spot and contract prices for 22 chemicals in the US and European markets.<br />
<br />
====Consultants====<br />
If trade journals are not adequate for the information needed, some companies will contract consultants to do deep research into the subject. Consultants are excellent resources for providing economic and marketing information but come at a large price. There are several companies that provide this type of service but some of the larger firms include: ''Purvin and Gertz'', ''Cambidge Energy Research Associates'', ''Chemical Markets Associates Inc.'', and ''SRI: The Chemical Economics Handbook''<br />
<br />
====Online Brokers and Suppliers====<br />
Often time price data can be supplied by the supplier themselves and using online directories. Restraint should be used when quoting these prices however because they are often spot prices that are much higher than what would be expected from bulk contract supplying.<br />
<br />
==Example Case: Estimating Cost of Production==<br />
<br />
Use the following information to estimate the manufacturing cost of a plant producing 120*10^6 lb/year with a product price of $0.20/lb. <br />
<br />
:Fixed Capital: $15,000,000<br />
:Working Capital: $3,000,000<br />
:'''Fixed and Working Capital = FC + WC = $18,000,000'''<br />
:Raw Material Cost: $9,600,000/yr<br />
:Utilities: $1,440,000/yr<br />
:Labor: $1,800,000/yr<br />
:Maintenance (6% yr f.c.): $900,000/yr<br />
:Supplies (2% yr f.c.): $300,000/yr<br />
:Depreciation (8%/yr): $1,200,000/yr<br />
:Taxes, insurance (3%/yr): $450,000/yr<br />
:'''Total Manufacturing Cost = RMC + U + L + M + S + D + T = $15,690,000/yr'''<br />
:'''Gross Sales = Production * Product price = $24,000,000/yr'''<br />
:'''Gross Profit = Gross Sales - Manufacturing Cost = $8,310,000/yr'''<br />
<br />
==Market Effects on Process Design==<br />
Process design, like most other things, is inherently dependent on global markets, and the economy as a whole. Process design can depend on locational markets. For example, if an expected long run exchange rate between two specific currencies makes production of a specific chemical more profitable in a colder climate such as Russia as opposed to a warmer climate such as Mexico, this may have an effect on how the process to produce this specific chemical should be designed. Relative inflation rates of different countries can have similar effects on process design. Additionally, markets for key production inputs can have an effect on process design. If a company was designing a large scale production plant which required massive amounts of steel, the global market for steel (or to a lesser extent, iron mines) would impact how/where this company would choose to design and build their process. Also worth noting is the fact that the state of the economy as a whole may impact process design as well. If the economy is in a recession, funds are likely to be more tightly managed within a company. Thusly, it may make sense for a process engineer to design a process that operates on a smaller scale. Not only will this decrease the cost of running the process (lower utilities costs, lower costs for process inputs), but since less product will be produced, this will also reduce the risk of having the company running an inventory. This is a positive, as running an inventory can lead to losing even more money during a recession. Conversely, a healthy economy may encourage the design of facilities with larger production capabilities. This section aims to look at several recent examples of macroeconomic markets affecting process design, similar to the hypothetical situations described above.<br />
<br />
Back in 2009, when the USA, UK, and many other first world countries were facing a harsh recession, both the profitability and scale of many production processes diminished. The Royal Society of Chemistry found that many chemical companies with plants located in England, when faced with the recession, elected to shut down production entirely rather than simply slow down production (RSC, 2009). Many of these plant closings were accompanied with the construction of new plants in areas of the world less affected by the recession, including the Middle East. Many notable international companies, such as Dow, were involved in this migration from countries entrenched in recession to countries where production would be more economical. While this may seem obvious, it is still worth noting that a process engineer needs to take into account the state of the economy in the location where a production facility is looking to be built.<br />
<br />
Building off of what the Royal Society of Chemistry found, a 2010 KPMG case study aimed to further analyze the effects of the recession on chemical production plants. Though the KPMG case study was based on United States production, the economic climate in the UK was similar to that of the United States, so similar conclusions can be drawn from both studies. What KPMG found in the United States in 2010 backed up what the Royal Society of Chemistry found in England in 2009. The United States was seeing a similar outsourcing of both old production facilities that were being shut down and new production facilities that, though initially proposed for construction in the United States, were being outsourced. However, KPMG went further in depth to analyze how specific markets in the United States were affecting chemical production plants. They found that the domestic auto industry and the construction sector heavily influenced the number and scale of chemical plants being proposed for construction in the USA. This makes sense, as these are two of the largest markets for chemicals in the USA. By 2010, the domestic auto industry was rebounding, and this was found to be largely correlated with an increase in demand for US chemicals (KPMG, 2010). This highlights that a process engineer must consider what sectors use the output of his process (in this scenario, various chemicals) as an input to their process. Analyzing these specific markets in several competitive locations could provide the final input into determining where to build a production facility.<br />
<br />
Another case study, conducted by CNN, analyzed the world market for rare earth minerals. Rare earth minerals are vital to the preparation of catalysts, which impacts a large portion of the chemical engineering industry. Additionally, rare earth minerals are used extensively in a wide variety of consumer products, including but not limited to hybrid cars and smartphone chips. Any process engineer looking to design a plant where production utilizes rare earth minerals should analyze this global market in order to influence his decisions that go into designing the process. The case study conducted by CNN highlights the fact that China is the dominant player in the global market for rare earth minerals (Yan, 2015). Per National Center for Policy Analysis, with whom CNN consulted during their case study, China controls about 95% of global rare earth mineral production, and holds half of the world’s resources of these metals. In fact, the supply crunch brought on by China forced the lone United States producer of rare earth metals, Molycorp, into bankruptcy. China having a near monopoly on the global market for rare earth metals means that they can exert their dominance on the market in several fashions. One such example came in 2010, when Beijing abruptly reducing their export quota for rare earth minerals lead to skyrocketing prices. A process engineer who’s proposed design includes the use of any catalyst using these rare earth metals must take all of these possibilities into account. In this example, does the influence China has on the global rare earth metals market make it more sensible to build a plant in China? Or maybe the volatility of the prices is too concerning, which could lead to the process engineer being forced to redesign his process without the use of a catalyst. Though this would certainly reduce product yield, it could be the case that the markets for the metals that make the necessary catalyst render the process without the catalyst more profitable on a per unit basis. This rare earth metal example is just one of many; the overall lesson is that a process engineer must evaluate the global markets for all important inputs to his process, as the profitability of different designs will be heavily influenced by these markets.<br />
<br />
[[File:reo.jpg|frame|center|border|<div align=center> Figure 1: alsdnf <div>]]<br />
<div align=left><br />
<br />
stuff<br />
<br />
==Conclusion==<br />
Thermodynamics and kinetics are essential to designing an operational plant, but at the end of the day profits and margins are what make plants go from the engineering paper pad to operating continuously. Before any ground is broken, estimation of production costs and revenues are absolutely necessary to assure CEO's and shareholders that this process is a profitable and worth while venture. There are many avenues to achieve these answers with some being more accurate than others. The best indicator of these answers will be in pilot plant design which will provide appropriate estimations for scaled up processes.<br />
<br />
==References==<br />
<br />
Biegler LT, Grossmann IE, Westerberg AW. Systematic Methods of Chemical Process Design. Upper Saddle River: Prentice Hall; 1997. <br />
<br />
Peters MS, Timmerhaus KD. Plant Design and Economics for Chemical Engineers. 5th ed. New York: McGraw Hill; 2003.<br />
<br />
Seider WD, Seader JD, Lewin DR. Process Design Principles: Synthesis, Analysis, and Evaluation. 3rd ed. New York: Wiley; 2004.<br />
<br />
Towler G, Sinnott R. Chemical Engineering Design: Principles, Practice and Economics of Plant and Process Design. 2nd ed. Boston: Elsevier; 2013.<br />
<br />
Turton R, Bailie RC, Whiting WB, Shaewitz JA, Bhattacharyya D. Analysis, Synthesis, and Design of Chemical Processes. 4th ed. Upper Saddle River: Prentice-Hall; 2012.<br />
<br />
Chemicals Sector Struggles in Recession. Royal Society of Chemistry, rsc.org. July 29, 2009<br />
<br />
The Outlook for the US Chemical Industry. KPMG, kpmg.com. 2010.<br />
<br />
Yan S. China is About to Tighten its Grip on Rare Earth Minerals. CNN, money.cnn.com. June 5, 2015</div>RJKolbehttps://processdesign.mccormick.northwestern.edu/index.php?title=Estimation_of_production_cost_and_revenue&diff=4323Estimation of production cost and revenue2016-02-20T20:29:36Z<p>RJKolbe: </p>
<hr />
<div>Authors: Nick Pinkerton, Karen Schmidt, James Xamplas (ChE 352 in Winter 2014), Reed Kolbe (ChE 352, Winter 2016)<br />
<br />
Steward: David Chen, Fengqi You <br />
<br />
==Variable Cost of Production==<br />
Variable costs of production are dependent primarily on plant output and rate of production. There are many variables to consider when costing a plant. <br />
# Raw materials consumed<br />
# Utilities-steam, electricity, cooling water, fuel, etc.<br />
# Consumables - acids, bases, solvents, catalysts, etc.<br />
# Disposal<br />
# Shipping<br />
The majority of the variable costs for a production plant are the raw materials and utilities costs. Variable costs can be greatly cut through optimization techniques and intelligent plant design (Towler and Sinnott, 2013).<br />
===Raw Materials Cost===<br />
Calculating the annual cost of a raw material is calculated by simply multiplying the feed rate of the process by the appropriate price per volume or mass. These are the costs of chemical feed stocks required by the process. Feed stocks flow rates are obtained from PFD (Turton et al., 2013).There are several ways to optimize this cost to ensure that a process is not costing more than it should. First one should assess the actual consumption of a plant to see if it is significantly different from what should be expected based on process stoichiometry and selectivities (Towler and Sinnott, 2013). Finding may prove that a process is less efficient than it originally claimed.<br />
It is smart to benchmark a new plant design against an existing plant or pilot plant. Raw materials are typically the largest contributor to overall variable costs. For bulk chemicals and petrochemicals, raw materials represent 80-90% of the total cash cost of production (CCOP). <br />
===Utilities Cost===<br />
These are the costs of the various utilities streams required by the process. The flowrates for the utilities streams are located on the PFD (Turton et al., 2013). This includes:<br />
*Fuel gas, oil, or coal<br />
*Electric power<br />
*Steam<br />
*Cooling water<br />
*Process water<br />
*Boiler feed water<br />
*Air<br />
*Inert gas<br />
*Refrigeration<br />
<br />
Utility streams are excellent ways to streamline a process and are often indicative of how efficient of a process the project is. Process methods such as steam generation and pinch analysis can be used to greatly reduce utility costs across a plant. Further analysis of pinch analysis techniques and optimizing heat exchanger networks can be found in plant design texts such as first reference from Gavin Towler. The determination of process utility costs is often more difficult than the determination of raw material costs; however, the utilities are typically between 5-10% of CCOP (Towler and Sinnott, 2013). The cost of heating a process can be reduced by using process waste streams as fuel which consequently also reduces the need for waste disposal.<br />
<br />
===Waste Disposal Costs===<br />
These are defined as the cost of waste treatment to protect the environment (Turton et al., 2013). These are materials that cannot be recycled or sold off as by-products. Often times these streams require additives or additional treatment to meet governmental regulations. <br />
Hydrocarbon waste can often be incinerated directly to the atmosphere or used as process fuel to heat other streams in the system. Using the stream as process fuel allows the fuel value of the stream to be recovered into the system. The substituted value can be calculated by multiplying the conventional fuel price by the heat of combustion of the waste stream. <br />
<br />
<math>P_{WFV} = P_F * \Delta H_C^o</math><br />
<br />
where <br />
<math>P_{WFV}</math> = waste value of fuel ($/lb or $/kg)<br />
<br />
<math>P_F</math> = price of fuel ($/MMBtu or $/GJ)<br />
<br />
<math>\Delta H_C^o</math> = heat of combustion (MMBtu/lb or GJ/kg)<br />
<br />
Dilute aqueous streams must be sent to wastewater treatment typically prior to purging from the plant. Acidic or basic wastes are neutralized prior to treatment by salting out the acid or base. The cost of wastewater treatment is typically about $6 per 1000 gal but this is only an estimate that doesn't account for regional charges (Towler and Sinnott, 2013).<br />
<br />
Solid waste treatment can typically be sent to a landfill at a cost of approximately $50/ton (Towler and Sinnott, 2013). <br />
<br />
Hazardous wastes arise from the production of concentrated liquid streams that cannot be incinerated. Hazardous wastes should be avoided if possible, but that is not always feasible for some processes. The cost of hazardous waste disposal is strongly dependent on the location of the plant, the plants proximity to waste disposal plants and the degree of hazard of the waste.<br />
<br />
==Fixed Cost of Production==<br />
Fixed costs are those whose amounts are independent of production rates. Much of these costs are personnel salaries, taxes, insurance, and legal payments.<br />
===Labor Costs===<br />
These are the costs attributed to the personnel required to operate the process plant (Turton et al., 2013).<br />
<br />
The number of operators required per shift, <math>N_{OL}</math> can be estimated by<br />
<br />
<math>N_{OL}=(6.29+31.7P^2+0.23N_{np})^{0.5}</math><br />
<br />
where <math>P</math> is the number of processing steps involving particulate solids and <math>N_{np}</math> is the number of other processing steps (Turton et al., 2013). For each of the <math>N_{OL}</math> operators per 8-hour shift, approximately 4.5 operators must be hired for a plant that runs 24 hours per day, to account for the 3 shifts per day and the 3 weeks of leave typically taken by each operator per year (Turton et al., 2013). The salary for a chemical plant operator varies by location, and the estimator should look up the average value for the area.<br />
<br />
===Maintenance Costs===<br />
These are the costs associated with labor and materials necessary to maintain plant production. An estimate of these are 6% of the fixed capital investment (Turton et al., 2013).<br />
<br />
===Research and Development===<br />
These are the costs of research done in developing the process and/or products. This includes salaries for researchers as well as funds for research related equipment and supplies. An estimate of these costs are 5% of the total manufacturing cost (Turton et al., 2013).<br />
<br />
===Taxes and Insurance===<br />
Taxes vary by location, but a first estimate of property taxes and liability insurance is 3% of the fixed capital investment (Turton et al., 2013).<br />
<br />
===Plant Overhead===<br />
Overhead costs are the miscellaneous but necessary costs of running a business, including payroll, employee benefits, and janitorial services. This may be estimated as 70% of the operating labor costs, added to 4% of the fixed capital costs (Turton et al., 2013).<br />
<br />
===Licensing and Royalties===<br />
The costs of paying for the use of intellectual property clearly varies, but an estimate that may be used is 3% of the total manufacturing cost (Turton et al., 2013).<br />
<br />
==Revenues==<br />
The revenues of a process are the income earned form sales of the main products and the by-products. Revenue can be impacted by market fluctuations and production rates.<br />
===By-Product Revenues===<br />
Besides selling the main product from a process, by-products from separations and reactions can also be valuable in the market. Often it is more difficult to decide which by-products to recover and purify than it is to make decisions on the main product. <br />
<br />
By-products made in stoichiometric ratios from reactions must be either sold off or managed through waste disposal. Other by-products are sometimes produced through feed impurities or by nonselective reactions. There are several potential valuable by-products from a process: <br />
# Materials produced in stoichiometric quantities by the reactions that create the main product. If they are not recovered then the waste disposal expenses will be large.<br />
# Components that are produced in high yield by side reactions. <br />
# Components formed in high yield from feed impurities. Many sulfurs are produced as a by-product of fuels manufacture.<br />
# Components that are produced in low yield but have high value. An example includes acetophenone which is recovered as a by-product of phenol manufacture.<br />
# Degraded consumables (e.g. solvents, etc.) that have reuse value.<br />
<br />
A rule of thumb that can be used for preliminary screening of by-products for large plants is that for by-product recovery to be economically feasible the net benefit must be greater than $200,000 a year. A net benefit can be calculated by adding the possible resale value of the by-product and the avoided waste disposal cost (Towler and Sinnott, 2013). <br />
<br />
===Margin===<br />
The gross margin of a process is defined as the sum of product and by-product revenues minus the raw material cost. <br />
<br />
Gross margin = Revenues - Raw materials costs<br />
<br />
Because raw materials are most often the most expensive variable cost of a process, the gross margin is a good gauge as to what the total profitability of a process will be. Raw materials and product pricing are often subject to high degrees of variability which can be difficult to forecast. The size of margins are highly versatile depending on the <br />
industry. For many petrochemical industries the margin may be only 10%; however, for industries such as food additives and pharmaceuticals the margins are generally much higher (Towler and Sinnott, 2013).<br />
<br />
===Profits===<br />
There are several standards for calculating company profits. The cash cost of production (CCOP) is the sum of the fixed and variable production costs. <br />
<br />
<math>CCOP = VCOP + FCOP</math><br />
<br />
where <math>VCOP</math> is the variable cost of production and <math>FCOP</math> is the fixed cost of production. <br />
<br />
Gross profit, which should not be confused with gross margin, is then calculated by the following equation,<br />
<br />
<math>Gross\ profit = Main\ product\ revenues - CCOP</math><br />
<br />
Finally profit can be calculated by subtracting the income taxes that the plant would be subject to depending on the tax code of the county the plant is located in. <br />
<br />
<math>Net\ profit = gross\ profit - taxes</math><br />
<br />
==Pricing Products and Raw Materials==<br />
The revenues and costs of a project are vital to determining its economic feasibility. To calculate these values one needs to multiply the respective product and feed streams by their respective prices. The major difficulty of this process is determining the prices that should be used in this formula. When analyzing a plant, not only do the current prices need to be acknowledged but also the stability of the market to forecast future fluctuations and deviations. <br />
===Pricing Fundamentals===<br />
The pricing of a substance is determined by the fundamental economic principles of supply and demand. A supply curve and demand curve can be graphed and added to determine the market equilibrium price and projected market size. There are many ways a company can combat if the market equilibrium pricing is not suitable for a process. One of these ways is changing the market that the company is selling to. Instead of selling industrial grade product there may be markets for pharmaceutical grade or food grade that would allow for a company to sell their product at higher margins. Another avenue to look into is changing the geographic market being sold to. Rarely is there a global synchronous market, but rather a variation depending on where in the world the product is being sold. It is possible that a company could make more money by dedicating their sales to the Asian market as opposed to the US or vise versa. <br />
===Price Data Sources===<br />
There are many resources when trying to determine the price of a chemical or utility. This are important for looking at current pricing information as well as historical data that can be used for forecasting purposes. <br />
====Internal Company Forecasts====<br />
Large companies will often have the marketing or development departments develop a forecasting database that can be used internally in the company. Forecasts of this magnitude will often have multiple scenarios and projects that are evaluated under the given parameters. Companies may even license these forecasts to other companies for high fees if they desire. <br />
<br />
[[File:Capture.JPG]]<br />
<br />
Table 1 provides common industry acronyms that are used to indicate certain key words when determining pricing information.<br />
<br />
====Trade Journals====<br />
There are also many publications that report pricing data weekly. ''ICIS Chemical Business Americas'' used to publish the prices for hundreds of chemicals but have more recently changed their data to an online database that requires a subscription. This service is very expensive, but necessary for many companies. ''Oil and Gas Journal'' publishes the market prices of many crude oils and other petrochemicals using data from several continents. This journal also provides margin data for many refineries and plants on a monthly basis. ''Chemical Week'' provides the spot and contract prices for 22 chemicals in the US and European markets.<br />
<br />
====Consultants====<br />
If trade journals are not adequate for the information needed, some companies will contract consultants to do deep research into the subject. Consultants are excellent resources for providing economic and marketing information but come at a large price. There are several companies that provide this type of service but some of the larger firms include: ''Purvin and Gertz'', ''Cambidge Energy Research Associates'', ''Chemical Markets Associates Inc.'', and ''SRI: The Chemical Economics Handbook''<br />
<br />
====Online Brokers and Suppliers====<br />
Often time price data can be supplied by the supplier themselves and using online directories. Restraint should be used when quoting these prices however because they are often spot prices that are much higher than what would be expected from bulk contract supplying.<br />
<br />
==Example Case: Estimating Cost of Production==<br />
<br />
Use the following information to estimate the manufacturing cost of a plant producing 120*10^6 lb/year with a product price of $0.20/lb. <br />
<br />
:Fixed Capital: $15,000,000<br />
:Working Capital: $3,000,000<br />
:'''Fixed and Working Capital = FC + WC = $18,000,000'''<br />
:Raw Material Cost: $9,600,000/yr<br />
:Utilities: $1,440,000/yr<br />
:Labor: $1,800,000/yr<br />
:Maintenance (6% yr f.c.): $900,000/yr<br />
:Supplies (2% yr f.c.): $300,000/yr<br />
:Depreciation (8%/yr): $1,200,000/yr<br />
:Taxes, insurance (3%/yr): $450,000/yr<br />
:'''Total Manufacturing Cost = RMC + U + L + M + S + D + T = $15,690,000/yr'''<br />
:'''Gross Sales = Production * Product price = $24,000,000/yr'''<br />
:'''Gross Profit = Gross Sales - Manufacturing Cost = $8,310,000/yr'''<br />
<br />
==Market Effects on Process Design==<br />
Process design, like most other things, is inherently dependent on global markets, and the economy as a whole. Process design can depend on locational markets. For example, if an expected long run exchange rate between two specific currencies makes production of a specific chemical more profitable in a colder climate such as Russia as opposed to a warmer climate such as Mexico, this may have an effect on how the process to produce this specific chemical should be designed. Relative inflation rates of different countries can have similar effects on process design. Additionally, markets for key production inputs can have an effect on process design. If a company was designing a large scale production plant which required massive amounts of steel, the global market for steel (or to a lesser extent, iron mines) would impact how/where this company would choose to design and build their process. Also worth noting is the fact that the state of the economy as a whole may impact process design as well. If the economy is in a recession, funds are likely to be more tightly managed within a company. Thusly, it may make sense for a process engineer to design a process that operates on a smaller scale. Not only will this decrease the cost of running the process (lower utilities costs, lower costs for process inputs), but since less product will be produced, this will also reduce the risk of having the company running an inventory. This is a positive, as running an inventory can lead to losing even more money during a recession. Conversely, a healthy economy may encourage the design of facilities with larger production capabilities. This section aims to look at several recent examples of macroeconomic markets affecting process design, similar to the hypothetical situations described above.<br />
<br />
Back in 2009, when the USA, UK, and many other first world countries were facing a harsh recession, both the profitability and scale of many production processes diminished. The Royal Society of Chemistry found that many chemical companies with plants located in England, when faced with the recession, elected to shut down production entirely rather than simply slow down production (RSC, 2009). Many of these plant closings were accompanied with the construction of new plants in areas of the world less affected by the recession, including the Middle East. Many notable international companies, such as Dow, were involved in this migration from countries entrenched in recession to countries where production would be more economical. While this may seem obvious, it is still worth noting that a process engineer needs to take into account the state of the economy in the location where a production facility is looking to be built.<br />
<br />
Building off of what the Royal Society of Chemistry found, a 2010 KPMG case study aimed to further analyze the effects of the recession on chemical production plants. Though the KPMG case study was based on United States production, the economic climate in the UK was similar to that of the United States, so similar conclusions can be drawn from both studies. What KPMG found in the United States in 2010 backed up what the Royal Society of Chemistry found in England in 2009. The United States was seeing a similar outsourcing of both old production facilities that were being shut down and new production facilities that, though initially proposed for construction in the United States, were being outsourced. However, KPMG went further in depth to analyze how specific markets in the United States were affecting chemical production plants. They found that the domestic auto industry and the construction sector heavily influenced the number and scale of chemical plants being proposed for construction in the USA. This makes sense, as these are two of the largest markets for chemicals in the USA. By 2010, the domestic auto industry was rebounding, and this was found to be largely correlated with an increase in demand for US chemicals (KPMG, 2010). This highlights that a process engineer must consider what sectors use the output of his process (in this scenario, various chemicals) as an input to their process. Analyzing these specific markets in several competitive locations could provide the final input into determining where to build a production facility.<br />
<br />
Another case study, conducted by CNN, analyzed the world market for rare earth minerals. Rare earth minerals are vital to the preparation of catalysts, which impacts a large portion of the chemical engineering industry. Additionally, rare earth minerals are used extensively in a wide variety of consumer products, including but not limited to hybrid cars and smartphone chips. Any process engineer looking to design a plant where production utilizes rare earth minerals should analyze this global market in order to influence his decisions that go into designing the process. The case study conducted by CNN highlights the fact that China is the dominant player in the global market for rare earth minerals (Yan, 2015). Per National Center for Policy Analysis, with whom CNN consulted during their case study, China controls about 95% of global rare earth mineral production, and holds half of the world’s resources of these metals. In fact, the supply crunch brought on by China forced the lone United States producer of rare earth metals, Molycorp, into bankruptcy. China having a near monopoly on the global market for rare earth metals means that they can exert their dominance on the market in several fashions. One such example came in 2010, when Beijing abruptly reducing their export quota for rare earth minerals lead to skyrocketing prices. A process engineer who’s proposed design includes the use of any catalyst using these rare earth metals must take all of these possibilities into account. In this example, does the influence China has on the global rare earth metals market make it more sensible to build a plant in China? Or maybe the volatility of the prices is too concerning, which could lead to the process engineer being forced to redesign his process without the use of a catalyst. Though this would certainly reduce product yield, it could be the case that the markets for the metals that make the necessary catalyst render the process without the catalyst more profitable on a per unit basis. This rare earth metal example is just one of many; the overall lesson is that a process engineer must evaluate the global markets for all important inputs to his process, as the profitability of different designs will be heavily influenced by these markets.<br />
<br />
==Conclusion==<br />
Thermodynamics and kinetics are essential to designing an operational plant, but at the end of the day profits and margins are what make plants go from the engineering paper pad to operating continuously. Before any ground is broken, estimation of production costs and revenues are absolutely necessary to assure CEO's and shareholders that this process is a profitable and worth while venture. There are many avenues to achieve these answers with some being more accurate than others. The best indicator of these answers will be in pilot plant design which will provide appropriate estimations for scaled up processes.<br />
<br />
==References==<br />
<br />
Biegler LT, Grossmann IE, Westerberg AW. Systematic Methods of Chemical Process Design. Upper Saddle River: Prentice Hall; 1997. <br />
<br />
Peters MS, Timmerhaus KD. Plant Design and Economics for Chemical Engineers. 5th ed. New York: McGraw Hill; 2003.<br />
<br />
Seider WD, Seader JD, Lewin DR. Process Design Principles: Synthesis, Analysis, and Evaluation. 3rd ed. New York: Wiley; 2004.<br />
<br />
Towler G, Sinnott R. Chemical Engineering Design: Principles, Practice and Economics of Plant and Process Design. 2nd ed. Boston: Elsevier; 2013.<br />
<br />
Turton R, Bailie RC, Whiting WB, Shaewitz JA, Bhattacharyya D. Analysis, Synthesis, and Design of Chemical Processes. 4th ed. Upper Saddle River: Prentice-Hall; 2012.<br />
<br />
Chemicals Sector Struggles in Recession. Royal Society of Chemistry, rsc.org. July 29, 2009<br />
<br />
The Outlook for the US Chemical Industry. KPMG, kpmg.com. 2010.<br />
<br />
Yan S. China is About to Tighten its Grip on Rare Earth Minerals. CNN, money.cnn.com. June 5, 2015</div>RJKolbehttps://processdesign.mccormick.northwestern.edu/index.php?title=Estimation_of_production_cost_and_revenue&diff=4322Estimation of production cost and revenue2016-02-20T20:28:49Z<p>RJKolbe: /* Market Effects on Process Design */</p>
<hr />
<div>Authors: Nick Pinkerton, Karen Schmidt, and James Xamplas (ChE 352 in Winter 2014)<br />
<br />
Steward: David Chen, Fengqi You <br />
<br />
==Variable Cost of Production==<br />
Variable costs of production are dependent primarily on plant output and rate of production. There are many variables to consider when costing a plant. <br />
# Raw materials consumed<br />
# Utilities-steam, electricity, cooling water, fuel, etc.<br />
# Consumables - acids, bases, solvents, catalysts, etc.<br />
# Disposal<br />
# Shipping<br />
The majority of the variable costs for a production plant are the raw materials and utilities costs. Variable costs can be greatly cut through optimization techniques and intelligent plant design (Towler and Sinnott, 2013).<br />
===Raw Materials Cost===<br />
Calculating the annual cost of a raw material is calculated by simply multiplying the feed rate of the process by the appropriate price per volume or mass. These are the costs of chemical feed stocks required by the process. Feed stocks flow rates are obtained from PFD (Turton et al., 2013).There are several ways to optimize this cost to ensure that a process is not costing more than it should. First one should assess the actual consumption of a plant to see if it is significantly different from what should be expected based on process stoichiometry and selectivities (Towler and Sinnott, 2013). Finding may prove that a process is less efficient than it originally claimed.<br />
It is smart to benchmark a new plant design against an existing plant or pilot plant. Raw materials are typically the largest contributor to overall variable costs. For bulk chemicals and petrochemicals, raw materials represent 80-90% of the total cash cost of production (CCOP). <br />
===Utilities Cost===<br />
These are the costs of the various utilities streams required by the process. The flowrates for the utilities streams are located on the PFD (Turton et al., 2013). This includes:<br />
*Fuel gas, oil, or coal<br />
*Electric power<br />
*Steam<br />
*Cooling water<br />
*Process water<br />
*Boiler feed water<br />
*Air<br />
*Inert gas<br />
*Refrigeration<br />
<br />
Utility streams are excellent ways to streamline a process and are often indicative of how efficient of a process the project is. Process methods such as steam generation and pinch analysis can be used to greatly reduce utility costs across a plant. Further analysis of pinch analysis techniques and optimizing heat exchanger networks can be found in plant design texts such as first reference from Gavin Towler. The determination of process utility costs is often more difficult than the determination of raw material costs; however, the utilities are typically between 5-10% of CCOP (Towler and Sinnott, 2013). The cost of heating a process can be reduced by using process waste streams as fuel which consequently also reduces the need for waste disposal.<br />
<br />
===Waste Disposal Costs===<br />
These are defined as the cost of waste treatment to protect the environment (Turton et al., 2013). These are materials that cannot be recycled or sold off as by-products. Often times these streams require additives or additional treatment to meet governmental regulations. <br />
Hydrocarbon waste can often be incinerated directly to the atmosphere or used as process fuel to heat other streams in the system. Using the stream as process fuel allows the fuel value of the stream to be recovered into the system. The substituted value can be calculated by multiplying the conventional fuel price by the heat of combustion of the waste stream. <br />
<br />
<math>P_{WFV} = P_F * \Delta H_C^o</math><br />
<br />
where <br />
<math>P_{WFV}</math> = waste value of fuel ($/lb or $/kg)<br />
<br />
<math>P_F</math> = price of fuel ($/MMBtu or $/GJ)<br />
<br />
<math>\Delta H_C^o</math> = heat of combustion (MMBtu/lb or GJ/kg)<br />
<br />
Dilute aqueous streams must be sent to wastewater treatment typically prior to purging from the plant. Acidic or basic wastes are neutralized prior to treatment by salting out the acid or base. The cost of wastewater treatment is typically about $6 per 1000 gal but this is only an estimate that doesn't account for regional charges (Towler and Sinnott, 2013).<br />
<br />
Solid waste treatment can typically be sent to a landfill at a cost of approximately $50/ton (Towler and Sinnott, 2013). <br />
<br />
Hazardous wastes arise from the production of concentrated liquid streams that cannot be incinerated. Hazardous wastes should be avoided if possible, but that is not always feasible for some processes. The cost of hazardous waste disposal is strongly dependent on the location of the plant, the plants proximity to waste disposal plants and the degree of hazard of the waste.<br />
<br />
==Fixed Cost of Production==<br />
Fixed costs are those whose amounts are independent of production rates. Much of these costs are personnel salaries, taxes, insurance, and legal payments.<br />
===Labor Costs===<br />
These are the costs attributed to the personnel required to operate the process plant (Turton et al., 2013).<br />
<br />
The number of operators required per shift, <math>N_{OL}</math> can be estimated by<br />
<br />
<math>N_{OL}=(6.29+31.7P^2+0.23N_{np})^{0.5}</math><br />
<br />
where <math>P</math> is the number of processing steps involving particulate solids and <math>N_{np}</math> is the number of other processing steps (Turton et al., 2013). For each of the <math>N_{OL}</math> operators per 8-hour shift, approximately 4.5 operators must be hired for a plant that runs 24 hours per day, to account for the 3 shifts per day and the 3 weeks of leave typically taken by each operator per year (Turton et al., 2013). The salary for a chemical plant operator varies by location, and the estimator should look up the average value for the area.<br />
<br />
===Maintenance Costs===<br />
These are the costs associated with labor and materials necessary to maintain plant production. An estimate of these are 6% of the fixed capital investment (Turton et al., 2013).<br />
<br />
===Research and Development===<br />
These are the costs of research done in developing the process and/or products. This includes salaries for researchers as well as funds for research related equipment and supplies. An estimate of these costs are 5% of the total manufacturing cost (Turton et al., 2013).<br />
<br />
===Taxes and Insurance===<br />
Taxes vary by location, but a first estimate of property taxes and liability insurance is 3% of the fixed capital investment (Turton et al., 2013).<br />
<br />
===Plant Overhead===<br />
Overhead costs are the miscellaneous but necessary costs of running a business, including payroll, employee benefits, and janitorial services. This may be estimated as 70% of the operating labor costs, added to 4% of the fixed capital costs (Turton et al., 2013).<br />
<br />
===Licensing and Royalties===<br />
The costs of paying for the use of intellectual property clearly varies, but an estimate that may be used is 3% of the total manufacturing cost (Turton et al., 2013).<br />
<br />
==Revenues==<br />
The revenues of a process are the income earned form sales of the main products and the by-products. Revenue can be impacted by market fluctuations and production rates.<br />
===By-Product Revenues===<br />
Besides selling the main product from a process, by-products from separations and reactions can also be valuable in the market. Often it is more difficult to decide which by-products to recover and purify than it is to make decisions on the main product. <br />
<br />
By-products made in stoichiometric ratios from reactions must be either sold off or managed through waste disposal. Other by-products are sometimes produced through feed impurities or by nonselective reactions. There are several potential valuable by-products from a process: <br />
# Materials produced in stoichiometric quantities by the reactions that create the main product. If they are not recovered then the waste disposal expenses will be large.<br />
# Components that are produced in high yield by side reactions. <br />
# Components formed in high yield from feed impurities. Many sulfurs are produced as a by-product of fuels manufacture.<br />
# Components that are produced in low yield but have high value. An example includes acetophenone which is recovered as a by-product of phenol manufacture.<br />
# Degraded consumables (e.g. solvents, etc.) that have reuse value.<br />
<br />
A rule of thumb that can be used for preliminary screening of by-products for large plants is that for by-product recovery to be economically feasible the net benefit must be greater than $200,000 a year. A net benefit can be calculated by adding the possible resale value of the by-product and the avoided waste disposal cost (Towler and Sinnott, 2013). <br />
<br />
===Margin===<br />
The gross margin of a process is defined as the sum of product and by-product revenues minus the raw material cost. <br />
<br />
Gross margin = Revenues - Raw materials costs<br />
<br />
Because raw materials are most often the most expensive variable cost of a process, the gross margin is a good gauge as to what the total profitability of a process will be. Raw materials and product pricing are often subject to high degrees of variability which can be difficult to forecast. The size of margins are highly versatile depending on the <br />
industry. For many petrochemical industries the margin may be only 10%; however, for industries such as food additives and pharmaceuticals the margins are generally much higher (Towler and Sinnott, 2013).<br />
<br />
===Profits===<br />
There are several standards for calculating company profits. The cash cost of production (CCOP) is the sum of the fixed and variable production costs. <br />
<br />
<math>CCOP = VCOP + FCOP</math><br />
<br />
where <math>VCOP</math> is the variable cost of production and <math>FCOP</math> is the fixed cost of production. <br />
<br />
Gross profit, which should not be confused with gross margin, is then calculated by the following equation,<br />
<br />
<math>Gross\ profit = Main\ product\ revenues - CCOP</math><br />
<br />
Finally profit can be calculated by subtracting the income taxes that the plant would be subject to depending on the tax code of the county the plant is located in. <br />
<br />
<math>Net\ profit = gross\ profit - taxes</math><br />
<br />
==Pricing Products and Raw Materials==<br />
The revenues and costs of a project are vital to determining its economic feasibility. To calculate these values one needs to multiply the respective product and feed streams by their respective prices. The major difficulty of this process is determining the prices that should be used in this formula. When analyzing a plant, not only do the current prices need to be acknowledged but also the stability of the market to forecast future fluctuations and deviations. <br />
===Pricing Fundamentals===<br />
The pricing of a substance is determined by the fundamental economic principles of supply and demand. A supply curve and demand curve can be graphed and added to determine the market equilibrium price and projected market size. There are many ways a company can combat if the market equilibrium pricing is not suitable for a process. One of these ways is changing the market that the company is selling to. Instead of selling industrial grade product there may be markets for pharmaceutical grade or food grade that would allow for a company to sell their product at higher margins. Another avenue to look into is changing the geographic market being sold to. Rarely is there a global synchronous market, but rather a variation depending on where in the world the product is being sold. It is possible that a company could make more money by dedicating their sales to the Asian market as opposed to the US or vise versa. <br />
===Price Data Sources===<br />
There are many resources when trying to determine the price of a chemical or utility. This are important for looking at current pricing information as well as historical data that can be used for forecasting purposes. <br />
====Internal Company Forecasts====<br />
Large companies will often have the marketing or development departments develop a forecasting database that can be used internally in the company. Forecasts of this magnitude will often have multiple scenarios and projects that are evaluated under the given parameters. Companies may even license these forecasts to other companies for high fees if they desire. <br />
<br />
[[File:Capture.JPG]]<br />
<br />
Table 1 provides common industry acronyms that are used to indicate certain key words when determining pricing information.<br />
<br />
====Trade Journals====<br />
There are also many publications that report pricing data weekly. ''ICIS Chemical Business Americas'' used to publish the prices for hundreds of chemicals but have more recently changed their data to an online database that requires a subscription. This service is very expensive, but necessary for many companies. ''Oil and Gas Journal'' publishes the market prices of many crude oils and other petrochemicals using data from several continents. This journal also provides margin data for many refineries and plants on a monthly basis. ''Chemical Week'' provides the spot and contract prices for 22 chemicals in the US and European markets.<br />
<br />
====Consultants====<br />
If trade journals are not adequate for the information needed, some companies will contract consultants to do deep research into the subject. Consultants are excellent resources for providing economic and marketing information but come at a large price. There are several companies that provide this type of service but some of the larger firms include: ''Purvin and Gertz'', ''Cambidge Energy Research Associates'', ''Chemical Markets Associates Inc.'', and ''SRI: The Chemical Economics Handbook''<br />
<br />
====Online Brokers and Suppliers====<br />
Often time price data can be supplied by the supplier themselves and using online directories. Restraint should be used when quoting these prices however because they are often spot prices that are much higher than what would be expected from bulk contract supplying.<br />
<br />
==Example Case: Estimating Cost of Production==<br />
<br />
Use the following information to estimate the manufacturing cost of a plant producing 120*10^6 lb/year with a product price of $0.20/lb. <br />
<br />
:Fixed Capital: $15,000,000<br />
:Working Capital: $3,000,000<br />
:'''Fixed and Working Capital = FC + WC = $18,000,000'''<br />
:Raw Material Cost: $9,600,000/yr<br />
:Utilities: $1,440,000/yr<br />
:Labor: $1,800,000/yr<br />
:Maintenance (6% yr f.c.): $900,000/yr<br />
:Supplies (2% yr f.c.): $300,000/yr<br />
:Depreciation (8%/yr): $1,200,000/yr<br />
:Taxes, insurance (3%/yr): $450,000/yr<br />
:'''Total Manufacturing Cost = RMC + U + L + M + S + D + T = $15,690,000/yr'''<br />
:'''Gross Sales = Production * Product price = $24,000,000/yr'''<br />
:'''Gross Profit = Gross Sales - Manufacturing Cost = $8,310,000/yr'''<br />
<br />
==Market Effects on Process Design==<br />
Process design, like most other things, is inherently dependent on global markets, and the economy as a whole. Process design can depend on locational markets. For example, if an expected long run exchange rate between two specific currencies makes production of a specific chemical more profitable in a colder climate such as Russia as opposed to a warmer climate such as Mexico, this may have an effect on how the process to produce this specific chemical should be designed. Relative inflation rates of different countries can have similar effects on process design. Additionally, markets for key production inputs can have an effect on process design. If a company was designing a large scale production plant which required massive amounts of steel, the global market for steel (or to a lesser extent, iron mines) would impact how/where this company would choose to design and build their process. Also worth noting is the fact that the state of the economy as a whole may impact process design as well. If the economy is in a recession, funds are likely to be more tightly managed within a company. Thusly, it may make sense for a process engineer to design a process that operates on a smaller scale. Not only will this decrease the cost of running the process (lower utilities costs, lower costs for process inputs), but since less product will be produced, this will also reduce the risk of having the company running an inventory. This is a positive, as running an inventory can lead to losing even more money during a recession. Conversely, a healthy economy may encourage the design of facilities with larger production capabilities. This section aims to look at several recent examples of macroeconomic markets affecting process design, similar to the hypothetical situations described above.<br />
<br />
Back in 2009, when the USA, UK, and many other first world countries were facing a harsh recession, both the profitability and scale of many production processes diminished. The Royal Society of Chemistry found that many chemical companies with plants located in England, when faced with the recession, elected to shut down production entirely rather than simply slow down production (RSC, 2009). Many of these plant closings were accompanied with the construction of new plants in areas of the world less affected by the recession, including the Middle East. Many notable international companies, such as Dow, were involved in this migration from countries entrenched in recession to countries where production would be more economical. While this may seem obvious, it is still worth noting that a process engineer needs to take into account the state of the economy in the location where a production facility is looking to be built.<br />
<br />
Building off of what the Royal Society of Chemistry found, a 2010 KPMG case study aimed to further analyze the effects of the recession on chemical production plants. Though the KPMG case study was based on United States production, the economic climate in the UK was similar to that of the United States, so similar conclusions can be drawn from both studies. What KPMG found in the United States in 2010 backed up what the Royal Society of Chemistry found in England in 2009. The United States was seeing a similar outsourcing of both old production facilities that were being shut down and new production facilities that, though initially proposed for construction in the United States, were being outsourced. However, KPMG went further in depth to analyze how specific markets in the United States were affecting chemical production plants. They found that the domestic auto industry and the construction sector heavily influenced the number and scale of chemical plants being proposed for construction in the USA. This makes sense, as these are two of the largest markets for chemicals in the USA. By 2010, the domestic auto industry was rebounding, and this was found to be largely correlated with an increase in demand for US chemicals (KPMG, 2010). This highlights that a process engineer must consider what sectors use the output of his process (in this scenario, various chemicals) as an input to their process. Analyzing these specific markets in several competitive locations could provide the final input into determining where to build a production facility.<br />
<br />
Another case study, conducted by CNN, analyzed the world market for rare earth minerals. Rare earth minerals are vital to the preparation of catalysts, which impacts a large portion of the chemical engineering industry. Additionally, rare earth minerals are used extensively in a wide variety of consumer products, including but not limited to hybrid cars and smartphone chips. Any process engineer looking to design a plant where production utilizes rare earth minerals should analyze this global market in order to influence his decisions that go into designing the process. The case study conducted by CNN highlights the fact that China is the dominant player in the global market for rare earth minerals (Yan, 2015). Per National Center for Policy Analysis, with whom CNN consulted during their case study, China controls about 95% of global rare earth mineral production, and holds half of the world’s resources of these metals. In fact, the supply crunch brought on by China forced the lone United States producer of rare earth metals, Molycorp, into bankruptcy. China having a near monopoly on the global market for rare earth metals means that they can exert their dominance on the market in several fashions. One such example came in 2010, when Beijing abruptly reducing their export quota for rare earth minerals lead to skyrocketing prices. A process engineer who’s proposed design includes the use of any catalyst using these rare earth metals must take all of these possibilities into account. In this example, does the influence China has on the global rare earth metals market make it more sensible to build a plant in China? Or maybe the volatility of the prices is too concerning, which could lead to the process engineer being forced to redesign his process without the use of a catalyst. Though this would certainly reduce product yield, it could be the case that the markets for the metals that make the necessary catalyst render the process without the catalyst more profitable on a per unit basis. This rare earth metal example is just one of many; the overall lesson is that a process engineer must evaluate the global markets for all important inputs to his process, as the profitability of different designs will be heavily influenced by these markets.<br />
<br />
==Conclusion==<br />
Thermodynamics and kinetics are essential to designing an operational plant, but at the end of the day profits and margins are what make plants go from the engineering paper pad to operating continuously. Before any ground is broken, estimation of production costs and revenues are absolutely necessary to assure CEO's and shareholders that this process is a profitable and worth while venture. There are many avenues to achieve these answers with some being more accurate than others. The best indicator of these answers will be in pilot plant design which will provide appropriate estimations for scaled up processes.<br />
<br />
==References==<br />
<br />
Biegler LT, Grossmann IE, Westerberg AW. Systematic Methods of Chemical Process Design. Upper Saddle River: Prentice Hall; 1997. <br />
<br />
Peters MS, Timmerhaus KD. Plant Design and Economics for Chemical Engineers. 5th ed. New York: McGraw Hill; 2003.<br />
<br />
Seider WD, Seader JD, Lewin DR. Process Design Principles: Synthesis, Analysis, and Evaluation. 3rd ed. New York: Wiley; 2004.<br />
<br />
Towler G, Sinnott R. Chemical Engineering Design: Principles, Practice and Economics of Plant and Process Design. 2nd ed. Boston: Elsevier; 2013.<br />
<br />
Turton R, Bailie RC, Whiting WB, Shaewitz JA, Bhattacharyya D. Analysis, Synthesis, and Design of Chemical Processes. 4th ed. Upper Saddle River: Prentice-Hall; 2012.<br />
<br />
Chemicals Sector Struggles in Recession. Royal Society of Chemistry, rsc.org. July 29, 2009<br />
<br />
The Outlook for the US Chemical Industry. KPMG, kpmg.com. 2010.<br />
<br />
Yan S. China is About to Tighten its Grip on Rare Earth Minerals. CNN, money.cnn.com. June 5, 2015</div>RJKolbehttps://processdesign.mccormick.northwestern.edu/index.php?title=Estimation_of_production_cost_and_revenue&diff=4321Estimation of production cost and revenue2016-02-20T20:27:59Z<p>RJKolbe: /* Market Effects on Process Design */</p>
<hr />
<div>Authors: Nick Pinkerton, Karen Schmidt, and James Xamplas (ChE 352 in Winter 2014)<br />
<br />
Steward: David Chen, Fengqi You <br />
<br />
==Variable Cost of Production==<br />
Variable costs of production are dependent primarily on plant output and rate of production. There are many variables to consider when costing a plant. <br />
# Raw materials consumed<br />
# Utilities-steam, electricity, cooling water, fuel, etc.<br />
# Consumables - acids, bases, solvents, catalysts, etc.<br />
# Disposal<br />
# Shipping<br />
The majority of the variable costs for a production plant are the raw materials and utilities costs. Variable costs can be greatly cut through optimization techniques and intelligent plant design (Towler and Sinnott, 2013).<br />
===Raw Materials Cost===<br />
Calculating the annual cost of a raw material is calculated by simply multiplying the feed rate of the process by the appropriate price per volume or mass. These are the costs of chemical feed stocks required by the process. Feed stocks flow rates are obtained from PFD (Turton et al., 2013).There are several ways to optimize this cost to ensure that a process is not costing more than it should. First one should assess the actual consumption of a plant to see if it is significantly different from what should be expected based on process stoichiometry and selectivities (Towler and Sinnott, 2013). Finding may prove that a process is less efficient than it originally claimed.<br />
It is smart to benchmark a new plant design against an existing plant or pilot plant. Raw materials are typically the largest contributor to overall variable costs. For bulk chemicals and petrochemicals, raw materials represent 80-90% of the total cash cost of production (CCOP). <br />
===Utilities Cost===<br />
These are the costs of the various utilities streams required by the process. The flowrates for the utilities streams are located on the PFD (Turton et al., 2013). This includes:<br />
*Fuel gas, oil, or coal<br />
*Electric power<br />
*Steam<br />
*Cooling water<br />
*Process water<br />
*Boiler feed water<br />
*Air<br />
*Inert gas<br />
*Refrigeration<br />
<br />
Utility streams are excellent ways to streamline a process and are often indicative of how efficient of a process the project is. Process methods such as steam generation and pinch analysis can be used to greatly reduce utility costs across a plant. Further analysis of pinch analysis techniques and optimizing heat exchanger networks can be found in plant design texts such as first reference from Gavin Towler. The determination of process utility costs is often more difficult than the determination of raw material costs; however, the utilities are typically between 5-10% of CCOP (Towler and Sinnott, 2013). The cost of heating a process can be reduced by using process waste streams as fuel which consequently also reduces the need for waste disposal.<br />
<br />
===Waste Disposal Costs===<br />
These are defined as the cost of waste treatment to protect the environment (Turton et al., 2013). These are materials that cannot be recycled or sold off as by-products. Often times these streams require additives or additional treatment to meet governmental regulations. <br />
Hydrocarbon waste can often be incinerated directly to the atmosphere or used as process fuel to heat other streams in the system. Using the stream as process fuel allows the fuel value of the stream to be recovered into the system. The substituted value can be calculated by multiplying the conventional fuel price by the heat of combustion of the waste stream. <br />
<br />
<math>P_{WFV} = P_F * \Delta H_C^o</math><br />
<br />
where <br />
<math>P_{WFV}</math> = waste value of fuel ($/lb or $/kg)<br />
<br />
<math>P_F</math> = price of fuel ($/MMBtu or $/GJ)<br />
<br />
<math>\Delta H_C^o</math> = heat of combustion (MMBtu/lb or GJ/kg)<br />
<br />
Dilute aqueous streams must be sent to wastewater treatment typically prior to purging from the plant. Acidic or basic wastes are neutralized prior to treatment by salting out the acid or base. The cost of wastewater treatment is typically about $6 per 1000 gal but this is only an estimate that doesn't account for regional charges (Towler and Sinnott, 2013).<br />
<br />
Solid waste treatment can typically be sent to a landfill at a cost of approximately $50/ton (Towler and Sinnott, 2013). <br />
<br />
Hazardous wastes arise from the production of concentrated liquid streams that cannot be incinerated. Hazardous wastes should be avoided if possible, but that is not always feasible for some processes. The cost of hazardous waste disposal is strongly dependent on the location of the plant, the plants proximity to waste disposal plants and the degree of hazard of the waste.<br />
<br />
==Fixed Cost of Production==<br />
Fixed costs are those whose amounts are independent of production rates. Much of these costs are personnel salaries, taxes, insurance, and legal payments.<br />
===Labor Costs===<br />
These are the costs attributed to the personnel required to operate the process plant (Turton et al., 2013).<br />
<br />
The number of operators required per shift, <math>N_{OL}</math> can be estimated by<br />
<br />
<math>N_{OL}=(6.29+31.7P^2+0.23N_{np})^{0.5}</math><br />
<br />
where <math>P</math> is the number of processing steps involving particulate solids and <math>N_{np}</math> is the number of other processing steps (Turton et al., 2013). For each of the <math>N_{OL}</math> operators per 8-hour shift, approximately 4.5 operators must be hired for a plant that runs 24 hours per day, to account for the 3 shifts per day and the 3 weeks of leave typically taken by each operator per year (Turton et al., 2013). The salary for a chemical plant operator varies by location, and the estimator should look up the average value for the area.<br />
<br />
===Maintenance Costs===<br />
These are the costs associated with labor and materials necessary to maintain plant production. An estimate of these are 6% of the fixed capital investment (Turton et al., 2013).<br />
<br />
===Research and Development===<br />
These are the costs of research done in developing the process and/or products. This includes salaries for researchers as well as funds for research related equipment and supplies. An estimate of these costs are 5% of the total manufacturing cost (Turton et al., 2013).<br />
<br />
===Taxes and Insurance===<br />
Taxes vary by location, but a first estimate of property taxes and liability insurance is 3% of the fixed capital investment (Turton et al., 2013).<br />
<br />
===Plant Overhead===<br />
Overhead costs are the miscellaneous but necessary costs of running a business, including payroll, employee benefits, and janitorial services. This may be estimated as 70% of the operating labor costs, added to 4% of the fixed capital costs (Turton et al., 2013).<br />
<br />
===Licensing and Royalties===<br />
The costs of paying for the use of intellectual property clearly varies, but an estimate that may be used is 3% of the total manufacturing cost (Turton et al., 2013).<br />
<br />
==Revenues==<br />
The revenues of a process are the income earned form sales of the main products and the by-products. Revenue can be impacted by market fluctuations and production rates.<br />
===By-Product Revenues===<br />
Besides selling the main product from a process, by-products from separations and reactions can also be valuable in the market. Often it is more difficult to decide which by-products to recover and purify than it is to make decisions on the main product. <br />
<br />
By-products made in stoichiometric ratios from reactions must be either sold off or managed through waste disposal. Other by-products are sometimes produced through feed impurities or by nonselective reactions. There are several potential valuable by-products from a process: <br />
# Materials produced in stoichiometric quantities by the reactions that create the main product. If they are not recovered then the waste disposal expenses will be large.<br />
# Components that are produced in high yield by side reactions. <br />
# Components formed in high yield from feed impurities. Many sulfurs are produced as a by-product of fuels manufacture.<br />
# Components that are produced in low yield but have high value. An example includes acetophenone which is recovered as a by-product of phenol manufacture.<br />
# Degraded consumables (e.g. solvents, etc.) that have reuse value.<br />
<br />
A rule of thumb that can be used for preliminary screening of by-products for large plants is that for by-product recovery to be economically feasible the net benefit must be greater than $200,000 a year. A net benefit can be calculated by adding the possible resale value of the by-product and the avoided waste disposal cost (Towler and Sinnott, 2013). <br />
<br />
===Margin===<br />
The gross margin of a process is defined as the sum of product and by-product revenues minus the raw material cost. <br />
<br />
Gross margin = Revenues - Raw materials costs<br />
<br />
Because raw materials are most often the most expensive variable cost of a process, the gross margin is a good gauge as to what the total profitability of a process will be. Raw materials and product pricing are often subject to high degrees of variability which can be difficult to forecast. The size of margins are highly versatile depending on the <br />
industry. For many petrochemical industries the margin may be only 10%; however, for industries such as food additives and pharmaceuticals the margins are generally much higher (Towler and Sinnott, 2013).<br />
<br />
===Profits===<br />
There are several standards for calculating company profits. The cash cost of production (CCOP) is the sum of the fixed and variable production costs. <br />
<br />
<math>CCOP = VCOP + FCOP</math><br />
<br />
where <math>VCOP</math> is the variable cost of production and <math>FCOP</math> is the fixed cost of production. <br />
<br />
Gross profit, which should not be confused with gross margin, is then calculated by the following equation,<br />
<br />
<math>Gross\ profit = Main\ product\ revenues - CCOP</math><br />
<br />
Finally profit can be calculated by subtracting the income taxes that the plant would be subject to depending on the tax code of the county the plant is located in. <br />
<br />
<math>Net\ profit = gross\ profit - taxes</math><br />
<br />
==Pricing Products and Raw Materials==<br />
The revenues and costs of a project are vital to determining its economic feasibility. To calculate these values one needs to multiply the respective product and feed streams by their respective prices. The major difficulty of this process is determining the prices that should be used in this formula. When analyzing a plant, not only do the current prices need to be acknowledged but also the stability of the market to forecast future fluctuations and deviations. <br />
===Pricing Fundamentals===<br />
The pricing of a substance is determined by the fundamental economic principles of supply and demand. A supply curve and demand curve can be graphed and added to determine the market equilibrium price and projected market size. There are many ways a company can combat if the market equilibrium pricing is not suitable for a process. One of these ways is changing the market that the company is selling to. Instead of selling industrial grade product there may be markets for pharmaceutical grade or food grade that would allow for a company to sell their product at higher margins. Another avenue to look into is changing the geographic market being sold to. Rarely is there a global synchronous market, but rather a variation depending on where in the world the product is being sold. It is possible that a company could make more money by dedicating their sales to the Asian market as opposed to the US or vise versa. <br />
===Price Data Sources===<br />
There are many resources when trying to determine the price of a chemical or utility. This are important for looking at current pricing information as well as historical data that can be used for forecasting purposes. <br />
====Internal Company Forecasts====<br />
Large companies will often have the marketing or development departments develop a forecasting database that can be used internally in the company. Forecasts of this magnitude will often have multiple scenarios and projects that are evaluated under the given parameters. Companies may even license these forecasts to other companies for high fees if they desire. <br />
<br />
[[File:Capture.JPG]]<br />
<br />
Table 1 provides common industry acronyms that are used to indicate certain key words when determining pricing information.<br />
<br />
====Trade Journals====<br />
There are also many publications that report pricing data weekly. ''ICIS Chemical Business Americas'' used to publish the prices for hundreds of chemicals but have more recently changed their data to an online database that requires a subscription. This service is very expensive, but necessary for many companies. ''Oil and Gas Journal'' publishes the market prices of many crude oils and other petrochemicals using data from several continents. This journal also provides margin data for many refineries and plants on a monthly basis. ''Chemical Week'' provides the spot and contract prices for 22 chemicals in the US and European markets.<br />
<br />
====Consultants====<br />
If trade journals are not adequate for the information needed, some companies will contract consultants to do deep research into the subject. Consultants are excellent resources for providing economic and marketing information but come at a large price. There are several companies that provide this type of service but some of the larger firms include: ''Purvin and Gertz'', ''Cambidge Energy Research Associates'', ''Chemical Markets Associates Inc.'', and ''SRI: The Chemical Economics Handbook''<br />
<br />
====Online Brokers and Suppliers====<br />
Often time price data can be supplied by the supplier themselves and using online directories. Restraint should be used when quoting these prices however because they are often spot prices that are much higher than what would be expected from bulk contract supplying.<br />
<br />
==Example Case: Estimating Cost of Production==<br />
<br />
Use the following information to estimate the manufacturing cost of a plant producing 120*10^6 lb/year with a product price of $0.20/lb. <br />
<br />
:Fixed Capital: $15,000,000<br />
:Working Capital: $3,000,000<br />
:'''Fixed and Working Capital = FC + WC = $18,000,000'''<br />
:Raw Material Cost: $9,600,000/yr<br />
:Utilities: $1,440,000/yr<br />
:Labor: $1,800,000/yr<br />
:Maintenance (6% yr f.c.): $900,000/yr<br />
:Supplies (2% yr f.c.): $300,000/yr<br />
:Depreciation (8%/yr): $1,200,000/yr<br />
:Taxes, insurance (3%/yr): $450,000/yr<br />
:'''Total Manufacturing Cost = RMC + U + L + M + S + D + T = $15,690,000/yr'''<br />
:'''Gross Sales = Production * Product price = $24,000,000/yr'''<br />
:'''Gross Profit = Gross Sales - Manufacturing Cost = $8,310,000/yr'''<br />
<br />
==Market Effects on Process Design==<br />
Process design, like most other things, is inherently dependent on global markets, and the economy as a whole. Process design can depend on locational markets. For example, if an expected long run exchange rate between two specific currencies makes production of a specific chemical more profitable in a colder climate such as Russia as opposed to a warmer climate such as Mexico, this may have an effect on how the process to produce this specific chemical should be designed. Relative inflation rates of different countries can have similar effects on process design. Additionally, markets for key production inputs can have an effect on process design. If a company was designing a large scale production plant which required massive amounts of steel, the global market for steel (or to a lesser extent, iron mines) would impact how/where this company would choose to design and build their process. Also worth noting is the fact that the state of the economy as a whole may impact process design as well. If the economy is in a recession, funds are likely to be more tightly managed within a company. Thusly, it may make sense for a process engineer to design a process that operates on a smaller scale. Not only will this decrease the cost of running the process (lower utilities costs, lower costs for process inputs), but since less product will be produced, this will also reduce the risk of having the company running an inventory. This is a positive, as running an inventory can lead to losing even more money during a recession. Conversely, a healthy economy may encourage the design of facilities with larger production capabilities. This section aims to look at several recent examples of macroeconomic markets affecting process design, similar to the hypothetical situations described above.<br />
<br />
Back in 2009, when the USA, UK, and many other first world countries were facing a harsh recession, both the profitability and scale of many production processes diminished. The Royal Society of Chemistry found that many chemical companies with plants located in England, when faced with the recession, elected to shut down production entirely rather than simply slow down production (RSC, 2009). Many of these plant closings were accompanied with the construction of new plants in areas of the world less affected by the recession, including the Middle East. Many notable international companies, such as Dow, were involved in this migration from countries entrenched in recession to countries where production would be more economical. While this may seem obvious, it is still worth noting that a process engineer needs to take into account the state of the economy in the location where a production facility is looking to be built.<br />
<br />
Building off of what the Royal Society of Chemistry found, a 2010 KPMG case study aimed to further analyze the effects of the recession on chemical production plants. Though the KPMG case study was based on United States production, the economic climate in the UK was similar to that of the United States, so similar conclusions can be drawn from both studies. What KPMG found in the United States in 2010 backed up what the Royal Society of Chemistry found in England in 2009. The United States was seeing a similar outsourcing of both old production facilities that were being shut down and new production facilities that, though initially proposed for construction in the United States, were being outsourced. However, KPMG went further in depth to analyze how specific markets in the United States were affecting chemical production plants. They found that the domestic auto industry and the construction sector heavily influenced the number and scale of chemical plants being proposed for construction in the USA. This makes sense, as these are two of the largest markets for chemicals in the USA. By 2010, the domestic auto industry was rebounding, and this was found to be largely correlated with an increase in demand for US chemicals (KPMG, 2010). This highlights that a process engineer must consider what sectors use the output of his process (in this scenario, various chemicals) as an input to their process. Analyzing these specific markets in several competitive locations could provide the final input into determining where to build a production facility.<br />
<br />
Another case study, conducted by CNN, analyzed the world market for rare earth minerals. Rare earth minerals are vital to the preparation of catalysts, which impacts a large portion of the chemical engineering industry. Additionally, rare earth minerals are used extensively in a wide variety of consumer products, including but not limited to hybrid cars and smartphone chips. Any process engineer looking to design a plant where production utilizes rare earth minerals should analyze this global market in order to influence his decisions that go into designing the process. The case study conducted by CNN highlights the fact that China is the dominant player in the global market for rare earth minerals. Per National Center for Policy Analysis, with whom CNN consulted during their case study, China controls about 95% of global rare earth mineral production, and holds half of the world’s resources of these metals. In fact, the supply crunch brought on by China forced the lone United States producer of rare earth metals, Molycorp, into bankruptcy. China having a near monopoly on the global market for rare earth metals means that they can exert their dominance on the market in several fashions. One such example came in 2010, when Beijing abruptly reducing their export quota for rare earth minerals lead to skyrocketing prices. A process engineer who’s proposed design includes the use of any catalyst using these rare earth metals must take all of these possibilities into account. In this example, does the influence China has on the global rare earth metals market make it more sensible to build a plant in China? Or maybe the volatility of the prices is too concerning, which could lead to the process engineer being forced to redesign his process without the use of a catalyst. Though this would certainly reduce product yield, it could be the case that the markets for the metals that make the necessary catalyst render the process without the catalyst more profitable on a per unit basis. This rare earth metal example is just one of many; the overall lesson is that a process engineer must evaluate the global markets for all important inputs to his process, as the profitability of different designs will be heavily influenced by these markets.<br />
<br />
==Conclusion==<br />
Thermodynamics and kinetics are essential to designing an operational plant, but at the end of the day profits and margins are what make plants go from the engineering paper pad to operating continuously. Before any ground is broken, estimation of production costs and revenues are absolutely necessary to assure CEO's and shareholders that this process is a profitable and worth while venture. There are many avenues to achieve these answers with some being more accurate than others. The best indicator of these answers will be in pilot plant design which will provide appropriate estimations for scaled up processes.<br />
<br />
==References==<br />
<br />
Biegler LT, Grossmann IE, Westerberg AW. Systematic Methods of Chemical Process Design. Upper Saddle River: Prentice Hall; 1997. <br />
<br />
Peters MS, Timmerhaus KD. Plant Design and Economics for Chemical Engineers. 5th ed. New York: McGraw Hill; 2003.<br />
<br />
Seider WD, Seader JD, Lewin DR. Process Design Principles: Synthesis, Analysis, and Evaluation. 3rd ed. New York: Wiley; 2004.<br />
<br />
Towler G, Sinnott R. Chemical Engineering Design: Principles, Practice and Economics of Plant and Process Design. 2nd ed. Boston: Elsevier; 2013.<br />
<br />
Turton R, Bailie RC, Whiting WB, Shaewitz JA, Bhattacharyya D. Analysis, Synthesis, and Design of Chemical Processes. 4th ed. Upper Saddle River: Prentice-Hall; 2012.<br />
<br />
Chemicals Sector Struggles in Recession. Royal Society of Chemistry, rsc.org. July 29, 2009<br />
<br />
The Outlook for the US Chemical Industry. KPMG, kpmg.com. 2010.<br />
<br />
Yan S. China is About to Tighten its Grip on Rare Earth Minerals. CNN, money.cnn.com. June 5, 2015</div>RJKolbehttps://processdesign.mccormick.northwestern.edu/index.php?title=Estimation_of_production_cost_and_revenue&diff=3933Estimation of production cost and revenue2016-02-05T23:13:30Z<p>RJKolbe: </p>
<hr />
<div>Authors: Nick Pinkerton, Karen Schmidt, and James Xamplas (ChE 352 in Winter 2014)<br />
<br />
Steward: David Chen, Fengqi You <br />
<br />
==Variable Cost of Production==<br />
Variable costs of production are dependent primarily on plant output and rate of production. There are many variables to consider when costing a plant. <br />
# Raw materials consumed<br />
# Utilities-steam, electricity, cooling water, fuel, etc.<br />
# Consumables - acids, bases, solvents, catalysts, etc.<br />
# Disposal<br />
# Shipping<br />
The majority of the variable costs for a production plant are the raw materials and utilities costs. Variable costs can be greatly cut through optimization techniques and intelligent plant design (Towler and Sinnott, 2013).<br />
===Raw Materials Cost===<br />
Calculating the annual cost of a raw material is calculated by simply multiplying the feed rate of the process by the appropriate price per volume or mass. These are the costs of chemical feed stocks required by the process. Feed stocks flow rates are obtained from PFD (Turton et al., 2013).There are several ways to optimize this cost to ensure that a process is not costing more than it should. First one should assess the actual consumption of a plant to see if it is significantly different from what should be expected based on process stoichiometry and selectivities (Towler and Sinnott, 2013). Finding may prove that a process is less efficient than it originally claimed.<br />
It is smart to benchmark a new plant design against an existing plant or pilot plant. Raw materials are typically the largest contributor to overall variable costs. For bulk chemicals and petrochemicals, raw materials represent 80-90% of the total cash cost of production (CCOP). <br />
===Utilities Cost===<br />
These are the costs of the various utilities streams required by the process. The flowrates for the utilities streams are located on the PFD (Turton et al., 2013). This includes:<br />
*Fuel gas, oil, or coal<br />
*Electric power<br />
*Steam<br />
*Cooling water<br />
*Process water<br />
*Boiler feed water<br />
*Air<br />
*Inert gas<br />
*Refrigeration<br />
<br />
Utility streams are excellent ways to streamline a process and are often indicative of how efficient of a process the project is. Process methods such as steam generation and pinch analysis can be used to greatly reduce utility costs across a plant. Further analysis of pinch analysis techniques and optimizing heat exchanger networks can be found in plant design texts such as first reference from Gavin Towler. The determination of process utility costs is often more difficult than the determination of raw material costs; however, the utilities are typically between 5-10% of CCOP (Towler and Sinnott, 2013). The cost of heating a process can be reduced by using process waste streams as fuel which consequently also reduces the need for waste disposal.<br />
<br />
===Waste Disposal Costs===<br />
These are defined as the cost of waste treatment to protect the environment (Turton et al., 2013). These are materials that cannot be recycled or sold off as by-products. Often times these streams require additives or additional treatment to meet governmental regulations. <br />
Hydrocarbon waste can often be incinerated directly to the atmosphere or used as process fuel to heat other streams in the system. Using the stream as process fuel allows the fuel value of the stream to be recovered into the system. The substituted value can be calculated by multiplying the conventional fuel price by the heat of combustion of the waste stream. <br />
<br />
<math>P_{WFV} = P_F * \Delta H_C^o</math><br />
<br />
where <br />
<math>P_{WFV}</math> = waste value of fuel ($/lb or $/kg)<br />
<br />
<math>P_F</math> = price of fuel ($/MMBtu or $/GJ)<br />
<br />
<math>\Delta H_C^o</math> = heat of combustion (MMBtu/lb or GJ/kg)<br />
<br />
Dilute aqueous streams must be sent to wastewater treatment typically prior to purging from the plant. Acidic or basic wastes are neutralized prior to treatment by salting out the acid or base. The cost of wastewater treatment is typically about $6 per 1000 gal but this is only an estimate that doesn't account for regional charges (Towler and Sinnott, 2013).<br />
<br />
Solid waste treatment can typically be sent to a landfill at a cost of approximately $50/ton (Towler and Sinnott, 2013). <br />
<br />
Hazardous wastes arise from the production of concentrated liquid streams that cannot be incinerated. Hazardous wastes should be avoided if possible, but that is not always feasible for some processes. The cost of hazardous waste disposal is strongly dependent on the location of the plant, the plants proximity to waste disposal plants and the degree of hazard of the waste.<br />
<br />
==Fixed Cost of Production==<br />
Fixed costs are those whose amounts are independent of production rates. Much of these costs are personnel salaries, taxes, insurance, and legal payments.<br />
===Labor Costs===<br />
These are the costs attributed to the personnel required to operate the process plant (Turton et al., 2013).<br />
<br />
The number of operators required per shift, <math>N_{OL}</math> can be estimated by<br />
<br />
<math>N_{OL}=(6.29+31.7P^2+0.23N_{np})^{0.5}</math><br />
<br />
where <math>P</math> is the number of processing steps involving particulate solids and <math>N_{np}</math> is the number of other processing steps (Turton et al., 2013). For each of the <math>N_{OL}</math> operators per 8-hour shift, approximately 4.5 operators must be hired for a plant that runs 24 hours per day, to account for the 3 shifts per day and the 3 weeks of leave typically taken by each operator per year (Turton et al., 2013). The salary for a chemical plant operator varies by location, and the estimator should look up the average value for the area.<br />
<br />
===Maintenance Costs===<br />
These are the costs associated with labor and materials necessary to maintain plant production. An estimate of these are 6% of the fixed capital investment (Turton et al., 2013).<br />
<br />
===Research and Development===<br />
These are the costs of research done in developing the process and/or products. This includes salaries for researchers as well as funds for research related equipment and supplies. An estimate of these costs are 5% of the total manufacturing cost (Turton et al., 2013).<br />
<br />
===Taxes and Insurance===<br />
Taxes vary by location, but a first estimate of property taxes and liability insurance is 3% of the fixed capital investment (Turton et al., 2013).<br />
<br />
===Plant Overhead===<br />
Overhead costs are the miscellaneous but necessary costs of running a business, including payroll, employee benefits, and janitorial services. This may be estimated as 70% of the operating labor costs, added to 4% of the fixed capital costs (Turton et al., 2013).<br />
<br />
===Licensing and Royalties===<br />
The costs of paying for the use of intellectual property clearly varies, but an estimate that may be used is 3% of the total manufacturing cost (Turton et al., 2013).<br />
<br />
==Revenues==<br />
The revenues of a process are the income earned form sales of the main products and the by-products. Revenue can be impacted by market fluctuations and production rates.<br />
===By-Product Revenues===<br />
Besides selling the main product from a process, by-products from separations and reactions can also be valuable in the market. Often it is more difficult to decide which by-products to recover and purify than it is to make decisions on the main product. <br />
<br />
By-products made in stoichiometric ratios from reactions must be either sold off or managed through waste disposal. Other by-products are sometimes produced through feed impurities or by nonselective reactions. There are several potential valuable by-products from a process: <br />
# Materials produced in stoichiometric quantities by the reactions that create the main product. If they are not recovered then the waste disposal expenses will be large.<br />
# Components that are produced in high yield by side reactions. <br />
# Components formed in high yield from feed impurities. Many sulfurs are produced as a by-product of fuels manufacture.<br />
# Components that are produced in low yield but have high value. An example includes acetophenone which is recovered as a by-product of phenol manufacture.<br />
# Degraded consumables (e.g. solvents, etc.) that have reuse value.<br />
<br />
A rule of thumb that can be used for preliminary screening of by-products for large plants is that for by-product recovery to be economically feasible the net benefit must be greater than $200,000 a year. A net benefit can be calculated by adding the possible resale value of the by-product and the avoided waste disposal cost (Towler and Sinnott, 2013). <br />
<br />
===Margin===<br />
The gross margin of a process is defined as the sum of product and by-product revenues minus the raw material cost. <br />
<br />
Gross margin = Revenues - Raw materials costs<br />
<br />
Because raw materials are most often the most expensive variable cost of a process, the gross margin is a good gauge as to what the total profitability of a process will be. Raw materials and product pricing are often subject to high degrees of variability which can be difficult to forecast. The size of margins are highly versatile depending on the <br />
industry. For many petrochemical industries the margin may be only 10%; however, for industries such as food additives and pharmaceuticals the margins are generally much higher (Towler and Sinnott, 2013).<br />
<br />
===Profits===<br />
There are several standards for calculating company profits. The cash cost of production (CCOP) is the sum of the fixed and variable production costs. <br />
<br />
<math>CCOP = VCOP + FCOP</math><br />
<br />
where <math>VCOP</math> is the variable cost of production and <math>FCOP</math> is the fixed cost of production. <br />
<br />
Gross profit, which should not be confused with gross margin, is then calculated by the following equation,<br />
<br />
<math>Gross\ profit = Main\ product\ revenues - CCOP</math><br />
<br />
Finally profit can be calculated by subtracting the income taxes that the plant would be subject to depending on the tax code of the county the plant is located in. <br />
<br />
<math>Net\ profit = gross\ profit - taxes</math><br />
<br />
==Pricing Products and Raw Materials==<br />
The revenues and costs of a project are vital to determining its economic feasibility. To calculate these values one needs to multiply the respective product and feed streams by their respective prices. The major difficulty of this process is determining the prices that should be used in this formula. When analyzing a plant, not only do the current prices need to be acknowledged but also the stability of the market to forecast future fluctuations and deviations. <br />
===Pricing Fundamentals===<br />
The pricing of a substance is determined by the fundamental economic principles of supply and demand. A supply curve and demand curve can be graphed and added to determine the market equilibrium price and projected market size. There are many ways a company can combat if the market equilibrium pricing is not suitable for a process. One of these ways is changing the market that the company is selling to. Instead of selling industrial grade product there may be markets for pharmaceutical grade or food grade that would allow for a company to sell their product at higher margins. Another avenue to look into is changing the geographic market being sold to. Rarely is there a global synchronous market, but rather a variation depending on where in the world the product is being sold. It is possible that a company could make more money by dedicating their sales to the Asian market as opposed to the US or vise versa. <br />
===Price Data Sources===<br />
There are many resources when trying to determine the price of a chemical or utility. This are important for looking at current pricing information as well as historical data that can be used for forecasting purposes. <br />
====Internal Company Forecasts====<br />
Large companies will often have the marketing or development departments develop a forecasting database that can be used internally in the company. Forecasts of this magnitude will often have multiple scenarios and projects that are evaluated under the given parameters. Companies may even license these forecasts to other companies for high fees if they desire. <br />
<br />
[[File:Capture.JPG]]<br />
<br />
Table 1 provides common industry acronyms that are used to indicate certain key words when determining pricing information.<br />
<br />
====Trade Journals====<br />
There are also many publications that report pricing data weekly. ''ICIS Chemical Business Americas'' used to publish the prices for hundreds of chemicals but have more recently changed their data to an online database that requires a subscription. This service is very expensive, but necessary for many companies. ''Oil and Gas Journal'' publishes the market prices of many crude oils and other petrochemicals using data from several continents. This journal also provides margin data for many refineries and plants on a monthly basis. ''Chemical Week'' provides the spot and contract prices for 22 chemicals in the US and European markets.<br />
<br />
====Consultants====<br />
If trade journals are not adequate for the information needed, some companies will contract consultants to do deep research into the subject. Consultants are excellent resources for providing economic and marketing information but come at a large price. There are several companies that provide this type of service but some of the larger firms include: ''Purvin and Gertz'', ''Cambidge Energy Research Associates'', ''Chemical Markets Associates Inc.'', and ''SRI: The Chemical Economics Handbook''<br />
<br />
====Online Brokers and Suppliers====<br />
Often time price data can be supplied by the supplier themselves and using online directories. Restraint should be used when quoting these prices however because they are often spot prices that are much higher than what would be expected from bulk contract supplying.<br />
<br />
==Example Case: Estimating Cost of Production==<br />
<br />
Use the following information to estimate the manufacturing cost of a plant producing 120*10^6 lb/year with a product price of $0.20/lb. <br />
<br />
:Fixed Capital: $15,000,000<br />
:Working Capital: $3,000,000<br />
:'''Fixed and Working Capital = FC + WC = $18,000,000'''<br />
:Raw Material Cost: $9,600,000/yr<br />
:Utilities: $1,440,000/yr<br />
:Labor: $1,800,000/yr<br />
:Maintenance (6% yr f.c.): $900,000/yr<br />
:Supplies (2% yr f.c.): $300,000/yr<br />
:Depreciation (8%/yr): $1,200,000/yr<br />
:Taxes, insurance (3%/yr): $450,000/yr<br />
:'''Total Manufacturing Cost = RMC + U + L + M + S + D + T = $15,690,000/yr'''<br />
:'''Gross Sales = Production * Product price = $24,000,000/yr'''<br />
:'''Gross Profit = Gross Sales - Manufacturing Cost = $8,310,000/yr'''<br />
<br />
==Market Effects on Process Design==<br />
Process design, like most other things, is inherently dependent on global markets, and the economy as a whole. Process design can depend on locational markets. For example, if an expected long run exchange rate between two specific currencies makes production of a specific chemical more profitable in a colder climate such as Russia as opposed to a warmer climate such as Mexico, this may have an effect on how the process to produce this specific chemical should be designed. Relative inflation rates of different countries can have similar effects on process design. Additionally, markets for key production inputs can have an effect on process design. If a company was designing a large scale production plant which required massive amounts of steel, the global market for steel (or to a lesser extent, iron mines) would impact how/where this company would choose to design and build their process. Also worth noting is the fact that the state of the economy as a whole may impact process design as well. If the economy is in a recession, funds are likely to be more tightly managed within a company. Thusly, it may make sense for a process engineer to design a process that operates on a smaller scale. Not only will this decrease the cost of running the process (lower utilities costs, lower costs for process inputs), but since less product will be produced, this will also reduce the risk of having the company running an inventory. This is a positive, as running an inventory can lead to losing even more money during a recession. Conversely, a healthy economy may encourage the design of facilities with larger production capabilities. This section aims to look at several recent examples of macroeconomic markets affecting process design, similar to the hypothetical situations described above.<br />
<br />
Back in 2009, when the USA, UK, and many other first world countries were facing a harsh recession, both the profitability and scale of many production processes diminished. The Royal Society of Chemistry found that many chemical companies with plants located in England, when faced with the recession, elected to shut down production entirely rather than simply slow down production. Many of these plant closings were accompanied with the construction of new plants in areas of the world less affected by the recession, including the Middle East. Many notable international companies, such as Dow, were involved in this migration from countries entrenched in recession to countries where production would be more economical. While this may seem obvious, it is still worth noting that a process engineer needs to take into account the state of the economy in the location where a production facility is looking to be built.<br />
<br />
Building off of what the Royal Society of Chemistry found, a 2010 KPMG case study aimed to further analyze the effects of the recession on chemical production plants. Though the KPMG case study was based on United States production, the economic climate in the UK was similar to that of the United States, so similar conclusions can be drawn from both studies. What KPMG found in the United States in 2010 backed up what the Royal Society of Chemistry found in England in 2009. The United States was seeing a similar outsourcing of both old production facilities that were being shut down and new production facilities that, though initially proposed for construction in the United States, were being outsourced. However, KPMG went further in depth to analyze how specific markets in the United States were affecting chemical production plants. They found that the domestic auto industry and the construction sector heavily influenced the number and scale of chemical plants being proposed for construction in the USA. This makes sense, as these are two of the largest markets for chemicals in the USA. By 2010, the domestic auto industry was rebounding, and this was found to be largely correlated with an increase in demand for US chemicals. This highlights that a process engineer must consider what sectors use the output of his process (in this scenario, various chemicals) as an input to their process. Analyzing these specific markets in several competitive locations could provide the final input into determining where to build a production facility.<br />
<br />
Another case study, conducted by CNN, analyzed the world market for rare earth minerals. Rare earth minerals are vital to the preparation of catalysts, which impacts a large portion of the chemical engineering industry. Additionally, rare earth minerals are used extensively in a wide variety of consumer products, including but not limited to hybrid cars and smartphone chips. Any process engineer looking to design a plant where production utilizes rare earth minerals should analyze this global market in order to influence his decisions that go into designing the process. The case study conducted by CNN highlights the fact that China is the dominant player in the global market for rare earth minerals. Per National Center for Policy Analysis, with whom CNN consulted during their case study, China controls about 95% of global rare earth mineral production, and holds half of the world’s resources of these metals. In fact, the supply crunch brought on by China forced the lone United States producer of rare earth metals, Molycorp, into bankruptcy. China having a near monopoly on the global market for rare earth metals means that they can exert their dominance on the market in several fashions. One such example came in 2010, when Beijing abruptly reducing their export quota for rare earth minerals lead to skyrocketing prices. A process engineer who’s proposed design includes the use of any catalyst using these rare earth metals must take all of these possibilities into account. In this example, does the influence China has on the global rare earth metals market make it more sensible to build a plant in China? Or maybe the volatility of the prices is too concerning, which could lead to the process engineer being forced to redesign his process without the use of a catalyst. Though this would certainly reduce product yield, it could be the case that the markets for the metals that make the necessary catalyst render the process without the catalyst more profitable on a per unit basis. This rare earth metal example is just one of many; the overall lesson is that a process engineer must evaluate the global markets for all important inputs to his process, as the profitability of different designs will be heavily influenced by these markets.<br />
<br />
<br />
==Conclusion==<br />
Thermodynamics and kinetics are essential to designing an operational plant, but at the end of the day profits and margins are what make plants go from the engineering paper pad to operating continuously. Before any ground is broken, estimation of production costs and revenues are absolutely necessary to assure CEO's and shareholders that this process is a profitable and worth while venture. There are many avenues to achieve these answers with some being more accurate than others. The best indicator of these answers will be in pilot plant design which will provide appropriate estimations for scaled up processes.<br />
<br />
==References==<br />
<br />
Biegler LT, Grossmann IE, Westerberg AW. Systematic Methods of Chemical Process Design. Upper Saddle River: Prentice Hall; 1997. <br />
<br />
Peters MS, Timmerhaus KD. Plant Design and Economics for Chemical Engineers. 5th ed. New York: McGraw Hill; 2003.<br />
<br />
Seider WD, Seader JD, Lewin DR. Process Design Principles: Synthesis, Analysis, and Evaluation. 3rd ed. New York: Wiley; 2004.<br />
<br />
Towler G, Sinnott R. Chemical Engineering Design: Principles, Practice and Economics of Plant and Process Design. 2nd ed. Boston: Elsevier; 2013.<br />
<br />
Turton R, Bailie RC, Whiting WB, Shaewitz JA, Bhattacharyya D. Analysis, Synthesis, and Design of Chemical Processes. 4th ed. Upper Saddle River: Prentice-Hall; 2012.<br />
<br />
Chemicals Sector Struggles in Recession. Royal Society of Chemistry, rsc.org. July 29, 2009<br />
<br />
The Outlook for the US Chemical Industry. KPMG, kpmg.com. 2010.<br />
<br />
Yan S. China is About to Tighten its Grip on Rare Earth Minerals. CNN, money.cnn.com. June 5, 2015</div>RJKolbe