Analyzing risk in manufacturing projects

By Staff | October 24, 2012

FutureMetrics Inc. has released an overview of a risk analysis to illustrate advanced modeling techniques for identifying and quantifying risks associated with wood pellet manufacturing projects. The analysis illustrates the use of Monte Carlo simulation to quantify key decision metrics for the development of a wood pellet plant. The Monte Carlo simulation is a computerized mathematical technique that allows people to account for risk in quantitative analysis and decision making.

The analysis includes an example that is based on a 50-ton-per-year pellet plant that is collocated with a combined-heat-and-power plant that supplies hot water for belt drying and power. The example is limited in scope in regard to feedstock, product pricing and operational risks, and includes considerations associated with policy risk for pellet export projects, currency risk, shipping cost risk, and market disruption risk.

The analysis identifies four primary risk factors for the example project, including wood cost, the ability for pellet prices to increase over time, the initial price of pellets sold from the mill, and the ability of the facility to run in the upper end of its nameplate capacity.