Benefits of economies of scale
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For a commodity chemical company, economies of scale is an important factor that will decide its success in the current scenario as raw material and energy prices are continue to fluctuate. As companies try to harness scale benefits, their plants are growing, some ten fold over the last three decades. Today, a chemical plant will typically produce half to one million metric tons of chemicals or even more per year.
Global firms such as Dow, BASF, Bayer, DuPont and other top players have singlemindedly focused on improving scale economies, essential for survival. Big firms opt for cost-effective large-scale plants whenever need for fresh capacity arises. For example, M&G, a chemical engineering company headquartered in Tortona, Italy, plans to construct a new purified terephthalic acid (PTA) plant in the State of Pernambuco (North Eastern Brazil) with a production capacity of 750 kiloton/ year. It is expected to be operational by Q1 2008.The world-scale production will mean M&G will use approximately half of the PTA capacity to supply its new PET plant. The rest of the PTA capacity will be made available to satisfy the existing PTA requirements of other companies in South America and any possible demand arising from new fiber projects. Any excess will be exported to markets outside South America.
Dow Chemicals is the largest producer of ethylene and its facilities are spread over the globe and take in North America, Europe, the Middle East and Asia. The twin advantages that Dow Chemical enjoys are: vertical integration and economies of scale. Since it has facilities are all over the world, it can quickly exploit opportunities that are regional in nature. Take ethylene as an example. Gas prices are low in Middle East and high in North America. Now Dow, which has a foot in both the regions, has the opportunity of exploiting low gas prices in Middle East.