The client was a major petrochemicals producer based in the Middle East, and requested that CRU Consulting provide strategic advice as to whether to expand its ammonia and urea production capacity, or whether to instead expand its methanol production capacity.
The goal of the project was therefore for CRU Consulting to provide strategic recommendations to the client, as to which of the two projects was the most attractive option for investment, based upon detailed market and financial analysis of the two options.
Our recommendation
The financial analysis undertaken by CRU Consulting indicated that the investment in the proposed methanol plant would result in both a greater IRR (Internal Rate of Return) and a greater NPV (Net Present Value) than investment in the alternative ammonia/urea production facility, assuming the same supply and cost of natural gas for the two projects.
Although our supply/demand gap analysis indicated that the global ammonia and urea markets would likely require additional production capacity to be built sooner than the global methanol market, the difference between the three markets was not significant enough for this to represent a key consideration in the investment decision.
Methodology
The CRU Consulting team prepared detailed analyses and long-term outlooks to 2040 for the global ammonia, urea, and methanol markets, with an emphasis on the export regions that were most accessible from the Middle East. This included a detailed analysis of the structure of the traded market for each product, an evaluation of the current and future import dependence of major consuming countries for each product, and a detailed analysis of potential target markets and the relative competitiveness of existing Middle Eastern suppliers in these markets. This enabled the client to develop a comprehensive understanding of the market dynamics, current and anticipated industry developments, and the competitive landscape associated with each product market.
This market analysis was accompanied by a detailed financial analysis of the estimated costs and returns associated with each of the two potential projects. As well as providing forecasts for key financial parameters such as the NPV, IRR, and Residual Value, the CRU Consulting team also carried out a range of sensitivity analyses, in order to ascertain the robustness of the project’s economics with different inputs, such as higher natural gas prices. This enabled the client to better evaluate the potential financial risks and returns associated with each project, and weigh these against the market-related opportunities and risks analysed earlier.
Outcome
The CRU Consulting team presented its analysis, findings, and strategic recommendations to the client, and responded to questions from senior management. The report was used as a basis for discussion and deliberation between the Board of Directors. At the time of writing, no final investment decision has yet been made.
