Wednesday, August 21, 2013

Estimating Gross Profit Margin Percentages for Raw Material to Chemical Product Conversions

In my last blog, I wrote that the butadiene product price was on average 2.6 times the raw material oil price.  In other words, the sales price (revenue price) of butadiene, on average, was 2.6 times the cost of goods (cost of raw material - oil price), from which the butadiene was obtained. This 2.6 average is based on price data for oil and for butadiene from 1988 to 2012,

Using the same data, a gross profit margin percentage (GPM%) for the butadiene sales can be found since sales prices (of butadiene) and cost of good (oil) prices are known.  The average GPM% for the oil to butadiene process is 57% based on the 1988 to 2012 data.   Note this only includes the oil raw material as a cost of good sold.  It does not include other costs of goods, such as labor.  Including these other costs would reduce the 57% GPM% for the business of converting oil to butadiene.

The same GPM% computations should be possible for other raw material to chemical product conversions, if annual raw material and product price data is known.  To test this, I found Brazilian price data of sugarcane and ethanol and US corn and ethanol price data.  Then from this data I determine GPM%s for the conversion of raw material to chemical product..

Brazilian sugarcane and ethanol price data was found (e.g. click here and here) searching the Internet.  For anhydrous ethanol, I found the average GPM% to be 41% and for hydrous ethanol 33% (date range from 2008 to 2012).   In order to do these computations, an amount of ethanol from sugarcane needs to be assumed (85 liters from one ton of sugarcane for anhydrous alcohol and 89 liters for one ton for hydrous ethanol, as reported in Brazilian literature).  Again, as in the case of oil to butadiene, these GPM%s are only for the raw material to product conversion; they do not include other costs of goods.

For US corn conversion to ethanol (e.g. click here and here for price data for corn and ethanol), the average GPM% for the years 1996 to 2012 is 37%.  This includes an assumption of obtaining 2.8 gallons of ethanol from one bushel of corn, which seems to be the present accepted amount.

My experience is that knowing the actual GPM% for an industrial sector (e.g. butadiene and ethanol producers) can be a very useful benchmark metric for single producers to use in evaluating their performance.   I would be happy to research and analyze other raw material to chemical product price data and try to compute gross profit margin percentages from that data.  Please email me if you are interested.

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