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.

Butadiene Production and Price Trends

The first two graphs below show approximate annual butadiene global production amounts and approximate average price amounts for butadiene from 1988 to 2013.   This data was obtained from various websites found by exhaustively searching the Internet.  The data sources are believed to be reasonably reliable.  (One purpose of this blog is to indicate that such data is openly available on the internet.)

Another purpose of the blog is to analyze butadiene prices.

A regression analysis (using Excel) was done to determine the relationship between changes in butadiene production and butadiene price.  An R square value of 71% was found, indicating a reasonably good connection between changes in production with changes in price of butadiene.

A regression analysis was done to determine the fit of the changes in average oil (Brent) prices with changes in butadiene prices.  The R square value is 74%, indicating a reasonably good connection.  (Changes of Brent prices over time are shown in the third graph below.)

A regression analysis was done on the changes in butadiene production, year to year, from 1988 to 2012, with the changes in oil production over the same period.  The R square value was a convincing 98%, indicating a strong connection between the amounts of butadiene produced to the amount of oil produced.   So, it is not surprising that butadiene prices directly and strongly relate to oil prices.   (Changes in oil production over time are shown in the fourth graph below.)

From 1988 to 2012, the butadiene price was on average 2.6 times the oil price.  The standard deviation (using Excel) for this average 2.6 is 1.0.  Therefore, with a good probability, the butadiene price can be estimated to be between 1.6 and 3.6 times the expected oil price, assuming the above is correct.      

Another interesting idea about the 2.6 number is that it might represent a “premium” – an additional cost for the processing of butadiene from oil.  Such a number might be used as a benchmark, to achieve or surpass.

The close correlation between changes in butadiene prices with oil prices suggests to me that the raw material cost (e.g. cost of oil) is an important variable cost.   This would seem to offer a real opportunity for producers of butadiene using cheaper raw material costs, e.g. microbial fermentation of sugars.

With cheaper raw materials (and cheaper butadiene prices), more value should be created for both butadiene producers and users.  Also, with such a raw material as sugar, much less price variance in the raw material would be expected (compared to oil) leading to greater stability in planning and production, another value-creating result.

Websites with Guidance for Exporting Chemical Products

Companies who are interested in exporting chemical products, and who have no experience in doing so, can find useful guidance on the Internet.  This blog identifies some websites with such guidance.  And, the blog makes some general comments about exporting.

A good website to begin to with is a British government site on international trade regulations for chemicals.  (Click here to go to this site.)  Although presented for British companies, guidance provided should be useful to any company developing procedures for exporting chemical products.   An important first point is that chemicals have to be registered according to a classification system acceptable to the importing country.  In exporting, much must be considered, understood, and implemented, and this British guidance covers a lot of those needs.

If a European Union (EU) country is the export destination, a good place to start for guidance is a 2-page EU pamphlet (available in a PDF file – click here).  This pamphlet identifies what a company should do to successfully export chemical products to an EU country.  As indicated above, chemical registration is necessary.  In 2007, the EU established a new regulation that governs exporting chemicals into the EU.  This regulation goes by the acronym REACH (R – registration; E – evaluation; A – authorization; CH – chemicals).  From this site (click here), the necessary details can be found on what is needed for exporting chemicals to an EU country.

REACH is a regulation that likely will serve as a model for other countries when establishing and/or updating their requirements for chemical product imports.  For example, news articles suggest that China is evaluating REACH as a model for its regulations.  REACH seems to be considered a high standard (high bar) with respect to regulatory requirements for exporters to meet.  So, meeting REACH standards will likely put a company into a status of being able to meet other country standards.  This may be a wise objective – reaching the REACH standards – as the apparent global evolution of countries reviewing and raising importing requirements likely will make importing standards increasingly comprehensively.

As mentioned above, a first step in exporting a chemical to a country is to classify the chemical according to the classification system used by the country.  Such a classification system has been established by the United Nations and some countries may be planning or already are using the UN system.   Malaysia, Indonesia, and Vietnam may now be using the UN system.   Click here to go to an Untied States government website that provides a guide to the United Nations chemical classification system.

Although as stated above, being able to meet the EU’s REACH regulatory standards will likely place a company in a good place to meet other country standards, the company should also seek out (e.g. on the Internet) and understand the standards for the country that is being exported into.  Chemical importing guidance and requirements for the United States can be reviewed by clicking here.

Along with knowing the requirements of exporting chemicals into a country, a company also needs to know the other requirements of exporting any product into a country.  Information on these other requirements also often can be found on the Internet.

Countries can, and have, imposed large fines on companies who have exported chemicals into their territories that violate their import requirements.  Companies should know and meet these requirements.  This blog is not met to provide an exhaustive identification of how to export chemical products, but to provide some links to information that can help in starting the process of identifying, understanding, and implementing export requirements.

Using Cost Data for Decisions

In this blog, I will show how a decision can be made between the purchase of two pieces of chemical production equipment, when based on the initial and maintenance costs.  Assumptions are that the two equipment pieces provide basically the same result, but initial costs, maintenance costs per year, and length of maintenance costs are different.

Determining which equipment choice based only on the net present value (NPV) of the two choices leads to an incorrect decision.  The decision should be based not on the net present value, but based on the annuity payment (discounted payment) per year that the initial and maintenance costs represent.

For example, suppose the following (amounts in millions):

                        Initial cost         maintenance      maintenance      maintenance

                                                year 1               year 2               year 3

Equipment A      20 M                 2M                   2M                    0

Equipment B      25M                  1M                   1M                    1M

The NPV of Equipment A, with the above amounts, is 23.72M and the NPV of equipment B is 27.72M.  On the basis of NPV, Equipment A would be chosen, with the assumptions above.

This would be the wrong decision because the lengths of maintenance costs for the two pieces of equipment are different.  The NPV comparisons should not be used for projects of different lengths.  What can be used, and will show the less costly decision correctly, is determining the per year annuity (discounted) payment for each purchase.   Equipment A has an annual payment annuity of 12.76M and Equipment B 10.18M.  Equipment B is less costly on a per year basis.

I would be glad to work with you on determining your annuity costs for your situations similar to what is described above.

Eight Reports on Global Material Shortages

Eight reports with substantive data, information, and analysis on the state of global material shortages are identified below.  These reports were found during an exhaustive Internet search.

The reports are associated with what I judge to be authoritative institutions and authors.  The reports, in my opinion, represent very thorough research and analysis. The resources behind these reports are substantial.  If the resources were used in preparation of the reports, then collectively, the reports likely represent correct facts and views related to global material shortages as of the dates of the reports.   The reports are from: three organizations that represent governments (United States; United Kingdom, and European Union); one from a university (Germany); one from professional associations (United States); and three from consulting groups (the Netherlands; United States).

1.  A December 2011 US Department of Energy report (click here to read report; PDF file) identifies raw materials with potential supply risks.  The focus is on materials important in clean energy technologies, but many of the materials are important in several industries.  The report identifies strategies for addressing the potential risks.

2.  A March 2012 report from the UK Department for Business Innovation & Skills and the Department for Environment, Food, and Rural Affairs (click here; PDF file) was prepared because of concerns about the availability of raw materials.  The report provides an analysis of the various impacts of raw material shortages.

3.  A February 2011 European Commission report (click here; PDF file) identifies 14 raw materials that the authors consider critical to the European Union and which also have supply shortage risks.  The report makes suggestions for responses to material supply shortage risks.

4.  A 2011 University of Augsburg report (click here; PDF file) identifies 19 materials critical to the energy industry and which also have potential supply risks.  Each material is discussed with respect to its use in the energy industry and the potential supply risks.

5.  A November 2009 report from the Dutch Materials Innovation Institute and Corus Research, Development, and Technology (click here; PDF file) discusses expected material shortages.  The report provides analysis of the present situations with respect to material shortages, the potential impact, and solutions.

6.  A 2010/2011 report (click here; PDF file) from the American Physical Society and the Material Research Society makes recommendations on what the United States Government should do to insure the supply of energy-critical materials, which are identified.

7.  An August 2011 report (click here; PDF file) from Skyworks Solutions, Inc. provides a summary of several studies that addressed raw material scarcity.  The summary provides historical data and the various perspectives and assumptions that are used in conclusions made on raw material scarcity.

8.  A December 2011 report provides the results of a 2011 survey conducted by PriceWaterhouseCoopers (click here; PDF file).  Sixty-nine senior executives of manufacturing companies answered questions on the impacts, opportunities, and risks to their companies from material shortages.

These 8 reports likely represent as correct a recent assessment of global material shortages as is available on the Internet.  And, as such, the reports are a valuable resource for those seeking knowledge in this area.

A conclusion I reached from reading the reports is that several variables affect supplies, prices, and other aspects of material availability.  And, these variables change over time.  Therefore, it is very difficult to estimate future market availability of many materials.  Market availability does not equate to amounts of the materials available in the earth.  For amounts present in the earth, the materials will be available for long periods, at today’s annual usage rates.  Nevertheless, shortages can exist in market availability based on the many variables that influence market availability. And, these market availability levels change over time.

Pounds per Person of Acrylonitrile Use

Based on Internet data, the United States consumed approximately 545,000 metric tons of acrylonitrile in 2009 as a starting chemical from which many products were produced.   And, Western Europe in 2010 used approximately 750,000 metric tons.  Using these quantities and the approximate populations of these areas, this acrylonitrile consumption converts to approximately 4 pounds of acrylonitrile used per person in both the USA and Western Europe.

Does 4 pounds per person represent a “mature” amount of acrylonitrile to produce in order to have the desired products that well-developed economies want?  If yes, then estimating the per person use for the world population shows a gap in acrylonitrile needed to provide on a world-wide basis the types of products for everyone that those of us in well-developed economies desire and use.

The estimated world-wide consumption of acrylonitrile in 2011 was 5.25 million metric tons or approximately 1.7 pounds per person.   This suggests a need for a lot more acrylonitrile production as more people become better developed economically and seek to use those acrylonitrile-based products widely used in developed countries such as the United States and Western Europe.

Another conclusion is the importance of increasing demand in lesser-developed countries for certain mature industries in developed countries to grow.

Data used for the above were found at such sites as: clickhere (a Chemical & Engineering News report with acrylonitrile use); click here (a PCI Acrylonitrile, Ltd report on acrylonitrile prices and production); and click here (a Wikipedia site defining Western Europe and providing its population).

Fluorspar Price and Mine Production Data Trends

The United States Geological Survey (USGS) publishes regularly fluorspar price, mine production, and other data.  Using this data, the graphs below on fluorspar, using 1996 to 2012 price and mine production data, were created.

Also, a regression analysis of the data, using Excel, was done to determine how closely the price and mine production quantity changes correlated with one another from year to year.

The R square result of this regression analysis is 81%, generally considered to indicate a good correlation between changes in two sets of data.  This suggests that often when fluorspar price went up (or down) so did the amount of fluorspar mined go up (or down), from year to year.  There seems to be a relationship between the two events – price changes and amounts mined.

Fluorspar’s price per ton increased 287% from 1996 to 2012, using average fluorspar acid prices for the year provided by the USGS in their reports (from $141 per ton in 1996 to $545 per ton in the first quarter 2012).  This is an average annual increase of 22%.  And, the fluorspar mine production went from 4,090,000 metric tons in 1996 to 6,850,000 metric tons in 2012, a 5% per year increase.

USGS estimates 240,000,000 metric tons fluorspar in mining company’s reserves (2012).  This is enough fluorspar inventories to last 35 years at 2012 mine production levels (6,850,000 metric tons).  So, it seems that it is not insufficient amounts of fluorspar reserves but other constraints that mostly affect the price fluctuations from year to year.

Projecting the amount of fluorspar mined over the short-term upcoming months, based on best mining activity data available and good estimates, could be useful in predicting price trends.

The USGS reports used for the data in the graphs below can be read by clicking here: 1, 2, 3, 4, 5, and 6.   USGS issues similar reports on many other minerals, elements, and compounds mined.  The USGS reports are an excellent data source on these materials.