W15_TRI_ Steel Prices and Lending Rate Forecast using Gold Value

1.      Problem recognition, definition and evaluation

In previous chapter, the gold price was forecasted using regression model with Polynomial Formula which had been tested and validated [1]. Then, the predicted gold price is used for estimating steel prices and lending rate for next three years.

2.      Development of the feasible alternative

The estimated steel prices and lending rate will refer to predicted gold price.

3.      Development of the outcome

Figure 1 and figure 2 present range estimate of billet and scrap steel prices for next three years.

Figure 1: Average Monthly Billet Steel Price Forecast Output 2012 –2016 (source: author)

Figure 2: Average Monthly Scrap Steel Forecast Output 2012 –2016 (source: author)

Meanwhile, estimate of Indonesia lending rate based on gold equivalency is developed as presented in Figure 3.

Figure 3: Yearly Indonesia Lending Rate Forecast Output 2012 –2016 (source: author)

4.      Criteria of Selection

The model is selected if it follows current conditions in terms of steel-gold prices and lending rate. 

5.      Analysis

Range estimate of average billet steel price on December 2016 will be between 750 and 1014 USD/Tonne, and range estimate of average scrap steel price on December 2016 will be between 704-1073 USD/Tonne. The price will increase according to future global demand outlook of steel industry particularly generated by emerging countries such as Brazil, India, Mexico, Turkey, China and ASEAN, which have strong fundamentals for local steel demand growth [2].

As shown in Figure 3, estimate of yearly average corporate lending rate in Indonesia Rupiah will be 11.45%-11.50% per annum in 2016. The forecasted rate is in line with current situation, in which Bank Indonesia has regulated Financing Institutions to reduce Net Interest Margin (NIM) and lower lending rate [3], as well as publish Prime Lending rate [4] in order to increase lending distribution for real sector investment.

6.      Selection

Finally, the forecasted steel prices and lending rate based on gold price until 2016 will be used, since it has followed the current trend and situations.

7.      Performance monitoring and post-evaluation of results

This article resulted interesting finding that actual prices of billet and scrap steel used as main material in offshore pipeline has shown range value consistently in term of gold equivalent (ounce gold / tonne steel) [5]. And it was figured out that lending rate has had better correlation with gold instead of inflation, thus gold was treated as reference in forecasting average Indonesia’s corporate lending rate [6]. However, further research could be undertaken to comprehend the linkage between gold value and lending rate.

In the next chapter, cost index of offshore pipeline project in Indonesia will be built using steel prices and lending rate based on gold value.

References:

1.       Asmoro, Trian Hendro. (2012, Oct 18). Gold Price Forecast Model for 2012-2016. Retrieved from: http://aacemahakam.blogspot.com/2012/10/w14tri-gold-price-forecast-model-for.html

2.       Askerov, Eldar. (2012, April 24). Global economic outlook and steel demand trends. Retrieved from: http://www.steelonthenet.com/pdf/worldsteel_global_economic_outlook_23-Apr-12.pdf

3.       Nasution, Dr. Darmin. (2011, Jan 21). Memperkuat Stabilitas Menuju Pertumbuhan Berkesinambungan: Sebuah Tantangan Transformasi. Retrieved from: http://www.bi.go.id/NR/rdonlyres/FB40DB17-1B38-47A0-ACC8-9836DFF0D7E4/22063/pidato_gbi_bankersdinner_11.pdf

4.       Bank Indoensia. (2011, Feb). Prime Lending Rate Transparency by Conventional Commercial Banks in Indonesia. Retrueved from: http://www.bi.go.id/NR/rdonlyres/DCE4A596-55CB-40F2-B576-1DF5CDB4074D/22641/Leaflet_SBDK_en1.pdf

5.       Asmoro, Trian Hendro. (2012, Oct 17). Exploring Cost of Fund against Gold Value. http://aacemahakam.blogspot.com/2012/10/w12tri-exploring-cost-of-fund-against.html

6.       Asmoro, Trian Hendro. (2012, Oct 10). Scrap Steel in Gold Equivalent. http://aacemahakam.blogspot.com/2012/10/w11tri-scrap-steel-in-gold-equivalent.html

W6_Mohammed_When should i start building my house

Problem definition

I have a land in Khartoum, Sudan and I’m planning to proceed with building this land, here im exploring when I can proceed with building considering my savings and inflation rate and the rental fees. The rental fee was requested by the CfH as to be included in this analysis as to arrive to the best decision.

Development of the feasible alternatives

The possible options for starting of the construction could be listed as follows:

1. End of 2012

2. End of 2013

3. End of 2014

Develop the outcomes for each alternative

As per the recent Sudan economical situation by the Sudanese central bank, one US Dollars (USD) equal to 5.5 Sudanese Pound (SDG). My roughly estimation for construction one story house is not less than 65,000USD, Here is the evaluation of my possible choices to start the construction of my house considering my possible savings in the beginning of the construction and then the balance could be through bank installments (bank financing is not considered in this analysis, since the duration for construction is equal among the given alternatives), the plan could be started in one of the below options:

1. End of 2012 considering the savings and the renting expenses

2. End of 2013 considering the savings and the renting expenses

3. End of 2014 considering the savings and the renting expenses

Accepted Criteria

Using the present and future equivalent values of single cash flows, the option which will give the best economical indicators (lowest cost) will be selected as the best option.

Analysis and comparison of the alternatives

Considering that the construction will take around 6 months to one year as an average, the above three options have been evaluated according to the following factors:

-My savings:

1. By end of 2012 ------- I may start with 100,000SDG = 16,700USD

2. By end of 2013 ------- I may start with 180,000SDG = 30,000USD

3. By end of 2014 ------- I may start with 300,000SDG = 50,000USD

-Inflation trends in Sudan based on the central bank of Sudan records which given as 16% by 2011 and 38% by the 2012 and based in the nongovernmental sources it’s expected to decrease to 30% by the 2013 and 20% by 2014 since the economy will recover due to the increasing gold mining and expected new hydrocarbons exploration.

Selection of the preferred alternatives

Considering the time value of money and the inflation rate in Sudan from the central bank of Sudan, by using the relating present and future equivalent values of single cash flows, as follows:

F = P (1+i)ᴺ

Given that:

F:         Future single sum

P:         Present Value

i :         Inflation or interest rate

N:        Period, Years

Solution

Back to the above options:

P: The nowadays estimation of 65,000USD is needed to complete one story building

i: an average of 16% as per the Central Bank of Sudan records

1. End of 2012:

F = P (1+i) ᴺ

   = 65,000 (1+0.38)¹

   = $89,700

-Expenses of renting: Dec 2012 to May 2013 = Renting fees X 6 Months = 1100 X 6 = 6600 SDG = 1100 USD, therefore the total expenses for option one = 89,700 + 1,100 = 90,800 USD

-Considering that I’m planning to save $16,700 by end of 2012 then the difference is going to be $74,100

2. End of 2013:

F = P (1+i) ᴺ =

                           = 65,000 (1+0.30)²

                           = $109,850

-Expenses of renting: Dec 2012 to May 2014 = Renting fees (+10% annual increment) X 18 Months = 1,210 X 18 = 21,780 SDG = 3,630 USD, therefore the total expenses for option one = 109,850 + 3,630 = 113,480 USD

-Considering that I’m planning to save $30,000 by end of 2013 then the difference is going to be $83,480

3. End of 2014:

F = P (1+i) ᴺ =

                           = 65,000 (1+0.20)³

                           = $112,320

-Expenses of renting: Dec 2012 – May 2015 = Renting fees X 6 Months = 1,331 X 30 = 39,930 SDG = 6,655 USD, therefore the total expenses for option one = 112,320 + 6,655 = 118,975 USD

-Considering that I’m planning to save $50,000 by end of 2014 then the difference is going to be $68,975

Selection of the preferred alternatives

As per the above analysis which using the present and future equivalent model with consideration of renting cost over the years of the given options, Option 3 (start the construction by End of 2014) was giving the best results (lowest price comparing to the other portions costs). Therefore option three will be considered.

Performance monitoring and the post evaluation of results

The inflation rate together with my overall savings should be followed closely as to refine those results prior to start immediately with the given option.

Conclusion

Applying the present and future equivalent values of single cash flows, the best option given is the third option, which to start my house building by end of 2014, however the selected option is subjected to the overall Sudanese economy and my possible savings.

References

* Engineering Economics-Fifteen Edition, chapter 4, Relating Present and Future Equivalent Values of Single Cash Flows, page113

* Website of the Central Bank of Sudan: www.CBOS.gov.sd

* Central Bank of Sudan, Public Information Note (July 2012).

W5_FELIX_SELECTING CONTRACTING STRATEGY USING DECISION TREE

1)      Problem Recognition, Definition and Evaluation

In this time I would like to analyze the best contracting model for my EPC project i.e. NPU H2-Rich Gas Recovery.

The scope of the project is to design Burner tip replacement, Interconnecting Pipeline, procure and install chloride treater, and new fuel gas mixing drum.

The value of the project is estimated around 10 million dollars with 2 years estimated duration.

The objective of this topic is to find out what the best contracting model for my project?

2)     FEASIBLE alternatives

Base from McKinsey analysis, there are two contracting model i.e.:

a.       Option 1 : EPCM (Engineering, Procurement & Construction Management).

On an EPCM project, the EPCM contractor provides engineering, procurement and construction management services, but the employer directly employs construction contractors (sometimes called trade contractors) to build the project. The EPCM contractor usually manages the construction contractors for the employer. On one analysis, the EPCM contractor is more like a professional consultant than a contractor, providing design and construction advice (rather than building the project itself).

b.      Option 2 : EPC (Engineering, Procurement & Construction) contractor

An EPC contract is a design and construct contract where a single contractor broadly takes responsibility for all elements of the design (engineering), construction and procurement. The EPC contractor manages and owns the contract for Engineering, procurement and construction services on behalf of owner.  Think Design & Construct style contracts, where the project is largely Contractor managed and the cost risk and control are weighted towards the Contractor and away from the Owner.  The EPC contractor has direct contracts with the construction.
EPC Structure 

EPCM Structure

3)     The outcomes for each feasible alternatives

a.      EPCM (Engineering, Procurement & Construction Management)

Benefit             :   Cost –if EPCM works well it is the lowest cost method, because the  risk contingency may not need to be utilized

Control/flexibility –design changes can be accommodated with potentially less cost and delay

Insolvency and performance failure risks are spread

Disadvantage : More risks retained by the owner

Owner's later package choices may be limited by earlier decisions

Significant demands are placed on the owner's skills and resources (the EPCM contractor may have conflicts of interest which require management)

Complex documentation

Financing options are limited

EPCM works best within established relationships between experienced parties

b.       EPC (Engineering, Procurement & Construction)

Advantage   :The contractor bears the risk of integrating the performance of all package contractors, including designers

Time –the execution project already fix and agreed at the beginning contract

A high degree of certainty (on paper) can therefore be attained as to cost, time and quality

EPC procurement is widely used and understood and is the most "bankable" procurement method

Disadvantage : Cost –contractors will add a substantial risk premium to the price

Control –the contractor controls the detailed design and construction process

Quality –the contractor will aim for the minimum compliant standard

Claims –contractors are motivated to make claims to alleviate risk transfer.

4)     Selection of the acceptable criteria.

a.       Cost to owner

b.      Execution Duration

5)     Analysis for the alternatives

Based from my company experience we can assumed if EPC contract will take 100% budget, than EPCM will take 10% lower or 90% cash from budget.

Contract duration will take 2 years.

EPC contract with his own control probably 80% can be finish on time while EPCM only 10% on time.

If we chose EPC contract and not finish as per schedule assumed delayed 1 year than Company will take maximal LD 5% from the contract, while EPCM if finish on schedule than company will give incentive bonus to EPCM $0.5 million.  The probability for EPCM on time is predict only 10%.

Annual income per year estimated at $2 million. The after tax MARR is 15% per year. Analysis period = 9years. 

 

 

6)     Select the preferred alternative

Base from above analysis E(PW) for EPC is higher than EPCM, so EPC is give more advantage for my project.

 7)     Performance Monitoring & Post Evaluation of Result

This result will be submit to the management and the result will be reported at the end of the year.

 8)     Reference:

i.            PLC Construction                                                         

         http://construction.practicallaw.com/blog/construction/plc/?p=253

ii.           Decision Tree Tutorial in 7 minutes with Decision Tree Analysis & Decision Tree Example (Basic)

         www.mbabullshit.com/Share

iii.          Decision trees f

         http://www.mindtools.com/dectree.html          

iv.          Engineering Economy

        William G. Sullivan, Engineering Economy, Fifteenth Edition, 2012