The International Investor: Islamic Finance and Equate Project: Harvard Case Solution & Analysis

The International Investor: Islamic Finance and Equate Project:

Qualitative analysis of the project:

Background:

Equate is basically a company formed jointly by the Petrochemical Industry Company (PIC) and Union Carbide. Equate was formed in 1995 after the two years of signing the agreement. The name of Equate is derived from ethylene (E) and quate from Kuwait. The objective behind the formation of Equate was to finance, construct and operate the petrochemical plant in Kuwait.

The project of Equate basically consists of three different plants and three different types of chemical, ethylene, polyethylene, and ethylene glycol. The first plant will produce ethylene and the other two plants will convert ethylene by using it as an input to give the output of polyethylene and ethylene glycol.

Each plant has its own engineering, construction and procurement contractor that belong to different countries.The ethylene cracker is sourced from the Brown and Root of USA, whereas polythene plant belongs to Snamprogetti of Italy and ethylene glycerol plant comes from Foster Wheeler of Italy.

Market analysis of Equate:

Every project will have to analyze its products with the market of the products.If there is high demand of the products manufactured by the project in the market, then there will be high chance of the project to become successful and give enough returns to the investors and sponsors of the project.

Equate is operating in the market of petrochemicals in general and in ethylene industry in particular. Therefore, the investors and sponsors must know the demand of the petrochemical products in the global market before the start of the project. Secondly, the project appraisal with respect to the returns of the project should be carried out by the sponsors to find out the profitability of the project. This may be carried out through Net Present Value or IRR technique, which enables the investor to find out the present values of the returns of the Equate project.

The analysts have different views related to the market of petrochemical products. One analyst says that the ethylene market is over supplied and has high level of rivalry in the market.Due to these rivalries, the prices of the ethylene will decrease in the future.On the other hand,second analyst has viewed the growth in the petrochemical market.

Experts have projected growth in the demand of Equate’s products between 4% and 6% per year. This growth will require an increase in Equate’s production capacity. With constant and significant growth in demands of Equate products, the project has become more attractive for the investors. If the projected growth in the demand of Equate products increases then the project will be highly profitable.

On the other hand, if the management projected the revenues and costs of the project including the growth rate, then the Net Present Value of the projects is highly probable to be positive and significant. The reason is that the input of Equate, which is Ethane gas, will be sourced from local market, thus making it cheap.Moreover, the company will not face any type of shortages in the inputs as Kuwait has significant reserves of Ethane gas............................

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