Hello and welcome to a new rule of thumb post. More rule of thumb posts can be found here.
In this post we discuss two topics: investment
decision making based on scaling models and the growth in chemical businesses.
In general, the investment amount in new
production capacity can be estimated using the following equation:
 |
| Equation 1: estimation of investment amount for new production capacity using the "Lang factor" |
The exponent in this equation is called the “Lang
Factor”. It can have different values and ranges typically between 0.6 to 0.7
(6/10-rule).
Investment example
In the following, an example of a capacity increase from 1 million tons material per year to two million tons material per years is shown.
 |
| Investment example: doubling the production capacity leads only to a 57% investment increase compared to the original investment. |
Reasons
why the costs are lower includes the lower operating costs (spreading the fixed
costs over more product), reduced capital investment per unit, and an increased
market clout.
Altogether,
there is no linear relationship between investing and production output.
A word
on growth of chemical businesses
On
average, chemical and plastic manufacturers follow the regional Gross Domestic
Product (GDP) growth. During crises, stock levels along the supply chain will
be consumed and new purchases are decreased. Therefore, in an economic crisis,
growth falls below GDP and after the crisis, demand is increasing leading to a
growth above GDP level. Chemical businesses are cyclic businesses and
similarities to the so-called pig cycle can be found.
More
rule of thumb posts can be found here.
Thank you
for reading and #findoutaboutplastics,
Greeting
Herwig
Interested to talk with me about your plastic selection and part design needs - here you can contact me
Literature:
[1] https://training.nexanteca.com/Global%20Petrochemical%20Industry
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