91.

PROFILE ON VENEER SHEET

MANUFACTURING
 91-2

TABLE OF CONTENTS

PAGE

I. SUMMARY 91-3

II. PRODUCT DESCRIPTION & APPLICATION 91-3

III. MARKET STUDY AND PLANT CAPACITY 91-4

A. MARKET STUDY 91-4
B. PLANT CAPACITY & PRODUCTION PROGRAMME 91-6

IV. RAW MATERIALS AND INPUTS 91-7

A. RAW & AUXILIARY MATERIALS 91-7
B. UTILITIES 91-7

V. TECHNOLOGY & ENGINEERING 91-8

A. TECHNOLOGY 91-8
B. ENGINEERING 91-11

VI. MANPOWER & TRAINING REQUIREMENT 91-14

A. MANPOWER REQUIREMENT 91-14
B. TRAINING REQUIREMENT 91-15

VII. FINANCIAL ANLYSIS 91-16

A. TOTAL INITIAL INVESTMENT COST 91-16
B. PRODUCTION COST 91-17
C. FINANCIAL EVALUATION 91-18
D. ECONOMIC BENEFITS 91-20
 91-3

I. SUMMARY

This profile envisages the establishment of a plant for the production of veneer sheet
with a capacity of 300 tonnes per annum. Veneer sheets are pieces of richly grained or
coloured woods glued in sheets. It is used for furniture decoration, manufacturing
plywood, decorating walls etc.

Basic raw materials required are wood log and gluing chemicals which are available
locally.

The present demand for the proposed product is estimated at 657 tonnes per annum. The
demand is expected to reach at 1,215 tonnes by the year 2017.

The total investment requirement is estimated at Birr 10.92 million, out of which Birr
3.34 million is required for plant and machinery. The plant will create employment
opportunities for 24 persons.

The project is financially viable with an internal rate of return (IRR) of 15.54% and a net
present value (NPV) of Birr 2.53 million, discounted at 8.5 %.

The project has forward linkage effect with construction and furniture manufacturing
sectors. The establishment of such factory will have a foreign exchange saving effect to
the country by substituting the current imports.

II. PRODUCT DESCRIPTION AND APPLICATION

Veneer sheets are pieces of richly grained or colored woods glued in sheets. Veneering
makes use of many beautiful and expensive tropical woods for external decoration. They
are sometimes as thin as ordinary sheets of paper. They are used for furniture decoration,
manufacturing plywood, decorating walls, etc.
 91-4

The project is resource based. Moreover, at present the country import a significant
quantity of the products. Therefore, the project is both resource based and aimed at
import substitution.

III. MARKET STUDY AND PLANT CAPACITY

A. MARKET STUDY

1. Past Supply and Present Demand

The supply for veneer sheets emanates mainly from import. Import data obtained from
Customs Authority is given in Table3.1.

Table 3.1
IMPORT OF VENEER SHEET (TONNES)

Year Import
Source: - 2002 53 Customs
Authority. 2003 175
2004 184
Import of veneer 2005 304 sheets has been
increasing in the 2006 563 past five years.
The yearly average quantity
imported during the period 2003-2004 was around 180 tonnes. But during year 2005 and
2006 the amount supplied to the market has increased to about 305 tones and 563 tonnes,
respectively. The huge increase in import is believed to be due to its demand for the
production of plywood and the boom in the construction sector. The construction activity
is believed to continue vibrant. Considering this an annual average growth rate of 8%
(manufacturing & construction) is applied by taking year 2006 as a base to arrive at the
current (year 2008) demand. Accordingly, current demand is estimated at about 657
tonnes.
 91-5

2. Projected Demand

Demand for veneer sheet is influenced by the activity of plywood manufacturing

industry, furniture and the construction sector. The manufacturing industry has been
growing by about 7% and the construction sector by about 9%. Hence, the average
growth rate of the two sectors, which is 8%, is applied for demand projection (see Table
3.2).

Table 3.2
PROJECTED DEMAND FOR VENEER SHEET (TONNES)

Year Projected Demand

2009 657
2010 709
2011 766
2012 827
2013 893
2014 965
2015 1042
2016 1125
2017 1215
2018 1313

The demand for veneer sheet will increase from about 657 tonnes during the year 2009 to
893 tonnes and 1,313 tonnes by the year 2013 and 2018, respectively.

3. Pricing and Distribution

 91-6

Based on the CIF price of year 2007 and allowing 40% for duty and other charges a
factory gate price of Birr 12,831 per ton is recommended.

The envisaged project can sell its product directly to the end user industries. Small
consumers can be reached through the existing building material enterprises.

B. PLANT CAPACITY AND PRODUCTION PROGRAMME

1. Plant Capacity

As shown in the market study, the projected demand for veneer sheet (Table 3.2) for the
year 2009 will be 657 tonnes, and this demand will grow to 1042 tonnes by the year
2015.

Despite such large demand for the product, it would be advisable to start at lower
production capacity and slowly raise production to a higher capacity. Therefore, the
annual production capacity of the envisaged plant will be 300 tonnes. The plant will
operate single shift of 8 hours a day and for 300 days a year.

2. Production Programme

Table 3.3 below gives production build-up of the plant. The plant will be made to
operate at 65% capacity at the first year, and then production will grow to 75%, 85% and
100% during the second, third and fourth year, respectively.

Table 3.3
PRODUCTIOM PROGRAMME

Year 1 2 3 4 and above

Capacity utilization (%) 65 75 85 100
Production (tonnes) 195 225 255 300
 91-7

IV. MATERIALS AND INPUTS

A. RAW & AUXILIARY MATERIALS

The major raw material required for veneer sheets manufacturing is wooden log. The
country is endowed with different types of plants that can produce logs required by the
envisaged veneer sheet plant. The raw materials are available locally in different areas of
Kaffa and Sheka zones of SNNPRS.

Auxiliary materials required by the plant include gum tape, thermo-plastic glue and other
auxiliaries and can be purchased from the local market. Details of raw & auxiliary
materials are shown in Table 4.1 below.

Table 4.1
RAW AND AUXILIARY MATERIALS REQUIREMENT & COST
(AT FULL CAPACITY)

Sr. Description Qty. Cost (‘000

No. Birr)

A. Raw Materials
1 Wood log (tonnes) 300.5 545
Sub –total 300.5 545
B. Auxiliary Materials
1 Gum tape LS 35
2 Thermo-plastic Glue LS 40
3 Other auxiliaries LS 10
Sub-total 85
Total Cost 630

B. UTILITIES

Utilities required by the plant include: electricity, water and steam. Electricity is used to
run production equipment like veneer lathe, to supply lighting system and power sockets.
Water is used to produce steam, for drinking and other purposes. The steam is used for
 91-8

pre-treatment of hard logs so that they are easily cut into required sizes. Fuel oil and
water are used to produce steam.

Annual requirements of electricity, water and fuel oil at full operation capacity are shown
in Table 4.2.

Table 4.2
ANNUAL REQUIREMENTS OF UTILITIES & COST

Sr. No. Description Qty Cost (‘000 Birr)

1 Electricity (kWh) 150,000 71.10
2 Water (M3) 20,000 65.00
3 Fuel oil (litres) 10,000 58.40
Total Cost - 194.50

V. TECHNOLOGY AND ENGINEERING

A. TECHNOLOGY

1. Production Process

Two major operations are involved in the production of veneer sheets. These are:-
a) Preparation of logs.
b) Veneer manufacturing.

a) Preparation of Logs

This involves two unit operations, namely: cutting of logs and cooking or steaming
of logs. Logs stored in a pond are conveyed to the factory yard and are cut
by the chain saw to the desired length for feeding to the veneer lathe or to the
 91-9

length of the veneer sheets to be produced. In the operation of cooking or steaming

high-density logs are pre-treated by cooking vats or steam chambers because they are
hard and frequently too resinous to permit fresh cutting.

b) Veneer manufacturing

This process involves the following unit operations:

1) Veneer cutting
2) Green veneer clipping
3) Veneer drying
4) Veneer preparation

1) Veneer cutting - The method of rotary cutting is used to produce veneer sheets.
In automated mills, log chargers with log centering devices are usually installed
for speedily, automatic feeding of log to the veneer lathe. As the log is centered
by the centering device before feeding, it can immediately be fixed on the
spindles of the veneer lathe and peeled in an endless sheet by utilization veneer
reeling and un reeling machines. The speed of cutting and reeling is fully
synchronized. Full reels are so stored on the deck of the system. The “edge-
grain” veneer” is then cut by the veneer slicer, which slices across the grain of the
log.

2) Green Veneer Clipping: - The sheet of green veneer peeled by the veneer lathe is
cut by veneer clipper (automatic or manual) into the desired dimensions. Full
rolls of the reeling machine are transferred to the unreeling unit, and the veneer is
unrolled and cut by the veneer clipper.

3) Veneer Drying: - In order to ensure the maximum bonding effect of adhesive,

veneer sheets must be dried adequately before gluing them together. The
 91-10

moisture content of veneer sheets is the most important factor in gluing. There
are two types of veneer dryers, - namely roller and continuous veneer dryers.

4) Veneer Preparation:- Narrow strips of veneer are joined together into full size by
the following methods.

Veneer Jointing - The edges of veneer sheets are cut straight for precise jointing. The
Arisun Clipper or the veneer guillotine jointer is used for this purpose.

Veneer Taping - The veneer taping machine is used to join the veneer edge to edge to
prescribed dimensions.

Veneer Edge Gluing – The veneer edge gluer is used for continuous glue – coating and
splicing of the edges of veneer pieces which are carried with the grain at right angle to
the direction of the feeding, automatically cutting the veneer to the desired length.
Thermo-setting or thermo-plastic glue can be used with this machine. The veneer splicer
is used to join the edges of veneer with glue instead of tape and is suitable for both back
and core veneer sheets. The veneer sheets thus produced are packed and ready for market.
The technological process has no any adverse environmental impact.

2. Source of Technology

Various countries in Europe, Asia and western Africa have many years of experience in
the production of veheer sheets and production equipment. Address of a machinery
supplier is given below.

Maoyingzi Hamlet, Dalianwan Town, Ganjingzi District

Dalian, CHINA
Tel: 86-411-81335615
Fax: 86-41108711 2012
E-mail: [email protected]
 91-11

B. ENGINEERING

1. Machinery and Equipment

The list of machinery and equipment required for the manufacturing of veneer sheets is
shown in Table 5.1 below.
Table 5.1
MACHINERY AND EQUIPMENT REQUIREMENT & COST

Sr. Description Qty Cost (‘000 Birr)

No.
LC FC TC
1 Chain saw 1 - 120 120
2 Steam chamber Set - 60 60
3 Log centering device 1 - 150 150
4 Veneer lathe (with knives and spindles) Unit - 1,250 1,250
5 Knife grinder 1 - 350 350
6 Veneer reeling machine 1 - 165 165
7 Veneer unreeling machine 1 - 165 165
8 Manual veneer clipper 1 - 80 80
9 Tray deck system (pcs) 4 - 140 140
10 Veneer dryer (roller type of dryer) 2 - 130 130
11 Veneer guillotine jointer 1 - 45 45
12 Veneer taping machine 1 - 70 70
13 Veneer edge gluer 1 - 45 45
14 Veneer splices 1 - 25 25
15 Steam generator (Boiler) unit - 250 250
FOB price 3,045 3,045
Customs, Bank, Insurance, Freight, 300 - 300
Materials handling cost
Total CIF Landed Cost 300 3,045 3,345
 91-12

2. Land, Building and civil works

The veneer sheet manufacturing plant requires sufficient open area for log storage,
warehouses for veneer sheets, area for factory, for administration building and general
purpose buildings. Thus, the total land required will be 2,000 m 2 and at the rate of Birr
2,000 per m2, and built-up area of 1,000 m 2, the investment on building will be Birr 2
million. 700m2 areas is required for the production facility, 150m 2 for finished product
store and the remaining 150m2 area is for office building.

According to the Federal Legislation on the Lease Holding of Urban Land (Proclamation
No 272/2002) in principle, urban land permit by lease is on auction or negotiation basis,
however, the time and condition of applying the proclamation shall be determined by the
concerned regional or city government depending on the level of development.

The legislation has also set the maximum on lease period and the payment of lease
prices. The lease period ranges from 99 years for education, cultural research health,
sport, NGO , religious and residential area to 80 years for industry and 70 years for trade
while the lease payment period ranges from 10 years to 60 years based on the towns
grade and type of investment.

Moreover, advance payment of lease based on the type of investment ranges from 5% to
10%.The lease price is payable after the grace period annually. For those that pay the
entire amount of the lease will receive 0.5% discount from the total lease value and those
that pay in installments will be charged interest based on the prevailing interest rate of
banks. Moreover, based on the type of investment, two to seven years grace period shall
also be provided.

However, the Federal Legislation on the Lease Holding of Urban Land apart from setting
the maximum has conferred on regional and city governments the power to issue
regulations on the exact terms based on the development level of each region.
 91-13

In Addis Ababa the City’s Land Administration and Development Authority is directly
responsible in dealing with matters concerning land. However, regarding the
manufacturing sector, industrial zone preparation is one of the strategic intervention
measures adopted by the City Administration for the promotion of the sector and all
manufacturing projects are assumed to be located in the developed industrial zones.

Regarding land allocation of industrial zones if the land requirement of the project is
blow 5000 m2 the land lease request is evaluated and decided upon by the Industrial Zone
Development and Coordination Committee of the City’s Investment Authority. However,
if the land request is above 5,000 m2 the request is evaluated by the City’s Investment
Authority and passed with recommendation to the Land Development and
Administration Authority for decision, while the lease price is the same for both cases.

The land lease price in the industrial zones varies from one place to the other. For
example, a land was allocated with a lease price of Birr 284 /m 2 in Akakai-Kalti and Birr
341/ m2 in Lebu and recently the city’s Investment Agency has proposed a lease price of
Birr 346 per m2 for all industrial zones.

Accordingly, in order to estimate the land lease cost of the project profiles it is assumed
that all manufacturing projects will be located in the industrial zones. Therefore, for this
profile, which is a manufacturing project a land lease rate of Birr 346 per m2 is adopted.

On the other hand, some of the investment incentives arranged by the Addis Ababa City
Administration on lease payment for industrial projects are granting longer grace period
and extending the lease payment period. The criterions are creation of job opportunity,
foreign exchange saving, investment capital and land utilization tendency etc.
Accordingly, Table 5.2 shows incentives for lease payment.
 91-14

Table 5.2
INCENTIVES FOR LEASE PAYMENT OF INDUSTRIAL PROJECTS

Payment
Grace Completion Down
Scored Point Period Period Payment
Above 75% 5 Years 30 Years 10%
From 50 - 75% 5 Years 28 Years 10%
From 25 - 49% 4 Years 25 Years 10%

For the purpose of this project profile the average i.e. five years grace period, 28 years
payment completion period and 10% down payment is used. The period of lease for
industry is 60 years .

Accordingly, the total lease cost, for a period of 60 years with cost of Birr 346 per m 2, is
estimated at Birr 41.52 million of which 10% or Birr 4,152,000 will be paid in advance.
The remaining Birr 37.37 million will be paid in equal installments with in 28 years, i.e.,
Birr 1,334,571 annually.

VI. MANPOWER AND TRAINING REQUIREMENT

A. MANPOWER REQUIREMENT

The veneer sheets manufacturing plant requires manpower both for production and
administrative work. Production workers for operating production equipment,
technicians for maintenance and trouble shooting of technical problems, and unskilled
workers for assisting operators. Administrative workers include factory manager,
secretary, personnel, accountant, etc. The details of manpower requirement are given in
Table 6.1.
 91-15

B. TRAINING REQUIREMENT

Short term training (for a period of one month) is required for the wood work expert,
machinery operators and technicians. A total of Birr 50,000 is allotted to conduct the
training programme.

Table 6.1
MANPOWER REQUIREMENT AND LABOUR COST (BIRR)

Sr. Description Req. Monthly Salary Annual Wages

No. No.
A. Administration
1 Plant manager 1 3,000 36,000
2 Secretary 1 900 10,800
3 Personnel 1 1,200 14,400
4 Sales/purchase man 1 1,200 14,400
5 Accountant 1 1,200 14,400
6 Clerk 1 700 8,400
7 Guards 4 1400 16,800
Sub-total 10 115,200
B. Production
1 Production supervisor (wood 1 1,200
work expert) 14,400
2 Skilled workers 6 4500 54,000
3 Unskilled workers 4 1600 19,200
4 Technicians 2 1800 21,600
5 Production clerk 1 600 7,200
Sub-total 14 116,400
Workers’ Benefit (25% BS) - 57,900
Total 24 289,500
 91-16

VII. FINANCIAL ANALYSIS

The financial analysis of the veneer sheet project is based on the data presented in the
previous chapters and the following assumptions:-

Construction period 1 year

Source of finance 30 % equity
70 % loan
Tax holidays 3 years
Bank interest 8.5%
Discount cash flow 8.5%
Accounts receivable 30 days
Raw material local 30 days
Work in progress 1 days
Finished products 30 days
Cash in hand 5 days
Accounts payable 30 days
Repair and maintenance 5% of machinery cost

A. TOTAL INITIAL INVESTMENT COST

The total investment cost of the project including working capital is estimated at Birr
10.92 million, of which 28 per cent will be required in foreign currency.

The major breakdown of the total initial investment cost is shown in Table 7.1.
 91-17

Table 7.1
INITIAL INVESTMENT COST ( ‘000 Birr)

Sr. Cost Items Local Foreign Total

Cost Cost Cost
No.
1 Land lease value 4,152.00 - 4,152.00
2 Building and Civil Work 2,000.00 - 2,000.00
3 Plant Machinery and Equipment 300.00 3,045.00 3,345.00
4 Office Furniture and Equipment 450.00 - 450.00
5 Vehicle 100.00 - 100.00
6 Pre-production Expenditure* 768.86 - 768.86
7 Working Capital 105.69 - 105.69
  Total Investment cost 7,876.55 3,045.00 10,921.55

* N.B Pre-production expenditure includes interest during construction ( Birr 618.86

thousand, training (Birr 50 thousand ) and Birr 100 thousand costs of registration,
licensing and formation of the company including legal fees, commissioning expenses,
etc.

B. PRODUCTION COST

The annual production cost at full operation capacity is estimated at Birr 2.12
million (see Table 7.2). The raw material cost accounts for 29.70 per cent of the
production cost. The other major components of the production cost are depreciation,
financial cost and utility which account for 26.62 %, 23.28% and 9.17 % respectively.
The remaining 11.23 % is the share of direct labour, repair and maintenance, labour
overhead and other administration cost.
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Table 7.2
ANNUAL PRODUCTION COST AT FULL CAPACITY ('000 BIRR)

Items Cost %
Raw Material and Inputs
630.00 29.70
Utilities 194.50 9.17
Maintenance and repair
167.25 7.89
Labour direct 37.35 1.76
Labour overheads
12.45 0.59
Administration Costs 21.16 1.00
Land lease cost
- -
Total Operating Costs 1,062.71 50.11
Depreciation 564.50 26.62
Cost of Finance 493.72 23.28
Total Production Cost
2,120.93 100

C. FINANCIAL EVALUATION

1. Profitability

Based on the projected profit and loss statement, the project will generate a profit through
out its operation life. Annual net profit after tax will grow from Birr 586.06 thousand to
Birr 1.26 million during the life of the project. Moreover, at the end of the project life the
accumulated cash flow amounts to Birr 15.82 million.

2. Ratios

In financial analysis financial ratios and efficiency ratios are used as an index or yardstick
for evaluating the financial position of a firm. It is also an indicator for the strength and
weakness of the firm or a project. Using the year-end balance sheet figures and other
relevant data, the most important ratios such as return on sales which is computed by
 91-19

dividing net income by revenue, return on assets ( operating income divided by assets),
return on equity ( net profit divided by equity) and return on total investment ( net profit
plus interest divided by total investment) has been carried out over the period of the
project life and all the results are found to be satisfactory.

3. Break-even Analysis

The break-even analysis establishes a relationship between operation costs and revenues.
It indicates the level at which costs and revenue are in equilibrium. To this end, the
break-even point of the project including cost of finance when it starts to operate at full
capacity ( year 3) is estimated by using income statement projection.

BE = Fixed Cost = 20%

Sales – Variable Cost

4. Payback Period

The pay back period, also called pay – off period is defined as the period required to
recover the original investment outlay through the accumulated net cash flows earned by
the project. Accordingly, based on the projected cash flow it is estimated that the
project’s initial investment will be fully recovered within 5 years.

5. Internal Rate of Return

The internal rate of return (IRR) is the annualized effective compounded return rate that
can be earned on the invested capital, i.e., the yield on the investment. Put another way,
the internal rate of return for an investment is the discount rate that makes the net present
value of the investment's income stream total to zero. It is an indicator of the efficiency or
quality of an investment. A project is a good investment proposition if its IRR is greater
than the rate of return that could be earned by alternate investments or putting the money
 91-20

in a bank account. Accordingly, the IRR of this porject is computed to be 15.54 %

indicating the vaiability of the project.

6. Net Present Value

Net present value (NPV) is defined as the total present ( discounted) value of a time
series of cash flows. NPV aggregates cash flows that occur during different periods of
time during the life of a project in to a common measuring unit i.e. present value. It is a
standard method for using the time value of money to appraise long-term projects. NPV
is an indicator of how much value an investment or project adds to the capital invested. In
principal a project is accepted if the NPV is non-negative.

Accordingly, the net present value of the project at 8.5% discount rate is found to be
Birr 2.53 million which is acceptable.

D. ECONOMIC BENEFITS

The project can create employment for 24 persons. In addition to supply of the domestic
needs, the project will generate Birr 2.31 million in terms of tax revenue. The
establishment of such factory will have a foreign exchange saving effect to the country by
substituting the current imports. The project has forward linkage effect with construction
and furniture manufacturing sectors