Friday, February 09, 2007

Stocks, Bonds, and Insulation

In some ways, a manufacturing facility is very similar to a household, at least when it comes to financial management. Both have (or should have) income, consumption expenses, and savings. Most households invest their savings in ways that conserve and grow their wealth. Some households are better than others at making investment decisions. This is also true for manufacturers.

This post discusses the investment power of mechanical insulation, which plays a multi-part role in the portfolio of industrial wealth.

To illustrate the business value of mechanical insulation, consider the analogy of a well-constructed investment portfolio. It will contain:
stocks, which support speculative revenue streams,
bonds, which conserve principal value by providing a steady and predictable stream of returns over time, and
options, which hedge against volatility in equity performance.

Insulation acts like a stock when it adds to a plant’s production capacity. Without insulation, a proportion of boiler fuel contributes directly to radiant heat loss from process tanks, pipes, and related hardware. By capturing those thermal resources, insulation adds plant capacity by redirecting energy to new or expanded production lines. Insulation effectively builds the investor’s equity position by adding to the plant’s ability to generate revenues.

We know that stocks are volatile, providing potential for both upside and downside movement. Household investors usually like to keep some of their wealth free from fluctuation. Bonds serve this purpose by preserving committed principal while paying the investor a “coupon,” which is a steady, predictable stream of income. The upside potential is not as great as is the case with stocks, but the risk of loss with bonds is far less.

Insulation acts like a bond simply by being fitted in place. No matter what the level of thermal throughput, insulation will limit radiant heat loss. So even if the plant has little chance for expanding output during in a weak market, insulation will at least reduce expenditures for the existing level of production. These are steady, predictable savings, like those provided by a coupon bond. What’s more, once the insulation is in place, there’s no need to monitor, measure, or calibrate it. Like a bond, you merely have to own it to collect its payment.

Options are contracts that allow the holder to purchase a commodity at a specific price. It’s a great way, for example, to hedge against volatile fuel prices: if prices go up, you exercise your option to buy fuel at the predetermined price set in the option contract. It prices are steady or fall, you’ve lost only the fee for establishing the contract. At least the option contract fee is a predictable amount; fuel prices are not.

Insulation is similar to an option contract. If fuel prices spike upward, it is all the more important for a plant to attenuate radiant heat losses. Higher fuel prices actually accelerate the payback on insulation. Even when the plant enjoys low fuel prices, insulation continues to avoid some fuel expenditures. In other words, installing insulation is like owning the option to avoid excess fuel purchases. In addition, a change in fuel prices requires no adjustment to the insulation in place. It saves thermal resources no matter what the fuel cost.

Corporate financial staff at a manufacturing company may or may not understand plant engineering. But they certainly understand investment principles. Hopefully, this financial view of insulation may help plant managers make a strong “business case” for valuable energy-saving improvements.



Post a Comment

<< Home

Who links to my website?