Pricing and Distribution
Pricing and Distribution
Pricing and Distribution
TABLE OF CONTENTS
PAGE
I. SUMMARY 190-3
A. TECHNOLOGY 190-8
B. ENGINEERING 190-8
I. SUMMARY
This profile envisages the establishment of a plant for the production of kraft paper
with a capacity of 7,500 tonnes per annum.
The present demand for the proposed product is estimated at 5,504 tonnes per annum.
The demand is expected to reach 8,894 tonnes by the year 2020.
The total investment requirement is estimated at Birr 19.12 million, out of which Birr
7.5 million is required for plant and machinery.
The project is financially viable with an internal rate of return (IRR) of 24 % and a
net present value (NPV) of Birr 15.34 million discounted at 8.5%.
Kraft Paper is a material made from woodchips or other cellulose materials. All kinds
of paper products, such as packaging and boxes for consumer products, writing,
copying and printing papers, and high-gloss papers and coated cardboards. But the
number of potential uses is astronomical, ranging from facial tissue to masking tapes
and photographic papers. The list is limited only by human imagination and is thus
expanding daily.
In this profile Kraft paper from woodchips is considered and it is intended that this
raw material shall be provided by out growers.
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A. MARKET STUDY
Paper has become an important necessity of our day to day life. Modern life depends
on paper and millions of tonnes of it are made and used each year. The range of
possible uses of paper is limitless and new ways of using it are being devised daily.
We use paper for news prints, magazines, writing, printing, packaging, sanitary
purpose and household uses. Books, exercise books, report cards, receipts, envelops
greeting cards, calanders, diaries, wall papers, toilet tissue, towels are a few among
the usages of paper.
Kraft paper which is made primarily from pine wood is mostly used to produce paper
bags, heavy load carrying paper sacks, etc. The supply of kraft paper in Ethiopia is
through import. (See Table 3.1).
Table 3.1
KRAFT PAPER SUPPLY IN TONNES
Year Import
2000 2,046
2001 5,713
2002 2,457
2003 7,771
2004 3,753
2005 5,869
2006 10,922
Average 5,504
Source; External Trade Statistics.
As can be seen from Table 3.1, during the period 2000-2006 the maximum supply of
kraft paper was 10,922 tonnes (year 2005), while the minimum 2046 tonnes was
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registered in year 2000. In the remaining years total supply was fluctuating between
these two extremes, around a mean figure of 5,504 tonnes. In general the supply of the
product during the period under consideration shows a fluctuation trend.
Considering the nature of the product’s supply data, it is assumed that the average
supply in the last three years (2004 – 2006) is assumed to reflect the present effective
demand. Accordingly, the present effective demand for kraft paper is estimated to be
5,504 tonnes.
2. Projected Demand
Since modern life needs usage of paper every day, the demand for paper is increasing
with population and modernization. Changes in life style, growth in standard of
living, the service and industrial sector and educational coverage will contribute to the
growth in demand for paper. In forecasting the demand for paper, therefore, GDP
growth rate attained in 1999-2004, i.e., 3.76% is applied. The projected demand is
presented in Table 3.2.
Table 3.2
PROJECTED DEMAND FOR KRAFT PAPER
Based on current retile price and considering margin for wholesalers and retailers the
recommended price for the envisaged project is Birr 2.75 per kg. The product can be
distributed by establishing own distribution outlets in strategic towns or by using
hired or commissioned agents.
1. Plant Capacity
According to the market study, the unsatisfied demand of paper in the year 2008 will
be 5,711 tonnes, whereas this demand will grow to 8,894 tonnes by the year 2020.
Taking in to account the economic scale of production, and the availability of the
major raw material, the envisaged plant will have an annual production capacity of
7500 tonnes of paper will be installed. Production capacity is based on a schedule of
300 working days per annum and 3 shifts of eight hours per day.
2. Production Programme
The envisaged production programme is given in Table 3.3 below. The schedule is
worked out in consideration of the time required for gradual build-up in labour
productivity and fine-tuning of machinery. Production starts at 75% of plant capacity
in the first year of operation and reaches full-gear in the 3rd year of operation and
thereafter.
Table 3.3
PRODUCTION PROGRAMME
Year 1 2 3-10
Capacity Utilization (%) 75 85 100
Production (tones) 5,625 6,375 7,500
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A. RAW MATERIALS
The raw materials required for the envisaged small-scale paper plant are indicated in
Table 4.1 below. Total cost of raw materials at the proposed full capacity of the plant
is estimated at about Birr 5,770,000.
Table 4.1
ANNUAL RAW MATERIALS REQUIREMENTS AND COST
B. UTILITIES
Electricity water and stem are the three major utilities required by the plant. Steam is
supposed to be generated by electric boilers; hence, its costs to the project are
included in electricity and water costs. Table 4.2 shows annual requirements and
associated costs at full production capacity. Annual cost of utilities, at the proposed
full production capacity, is estimated at about Birr 8,436,380.00.
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Table 4.2
ANNUAL UTILITIES REQUIREMENT AND COSTS
4 Total 8436.38
A. TECHNOLOGY
1. Production Process
Kraft pulp is produced by converting wood chips into pulp through a chemical
process. All chips come directly from mobile chipping facilities at the harvest site, or
as a by-product from sawmills. Chips are delivered by single or tandem trucks and
trailers, which are tipped up and unloaded by large hydraulic dumpers. The chips are
reclaimed from the huge piles in the mill yard by a massive computerized system of
underground and elevated conveyors, augers and hoppers.
The chips are screened to quality and size specifications and transported to the
digester, a large pressure vessel, where they are "cooked" (combined with sodium
hydroxide and sodium sulphide at high temperature). This process removes some of
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the lignin (natural "glue" which holds the wood fibers together) to soften the fibers,
reduce the discoloration and stabilize the brightness of the pulp. The spent chemicals
and lignin, known as black liquor, are recovered through the recovery boiler in order
to recover chemicals and generate steam and power, which in turn reduces both
effluent and costs. The pulp moves on through a series of washers and screens, in
preparation for further processing.
The pulp is bleached with chlorine dioxide, hydrogen peroxide and oxygen.
The bleached wet pulp, with a brightness of 90 ISO (International Standards
Organization) and a consistency similar to wet cotton batting, is ready to be form by
the pulp machine.
Here, a moving belt of woven nylon mesh, or "wire", forms the pulp into a thick mat
by removing much of the water. Next, a series of presses removes more of the water,
until the sheet is about 45 percent dry. Then steam-heated, "air borne" dryers dry the
sheet to 94 percent. The sheet is cooled and cut into smaller sheets of a thick, porous,
paper-like card. These sheets are compressed, wrapped and shipped to customers.
Effluent treatment and disposal is another topic, which needs careful attention. The
effluent from a paper mill can contain different chemical species, which, if discharged
directly into the environment, would cause untold damage. In medium and large-scale
plants specialized recovery equipment is used to reclaim chemicals for reuse or for
incineration to provide energy. This is not cost effective in smaller plants and so some
form of treatment and/or disposal is required. Biological treatment plants, such as the
anaerobic digester, are sometimes used to treat the effluent. This method has the
added benefit of producing methane through digestion of the organic matter in the
effluent, which can be used to provide as much as 30 % of the mills energy
requirement. The remaining sludge can then be disposed of on the land.
2. Source of Technology
The manufacturing technology and machinery for small-scale paper production can be
obtained from renowned suppliers in Europe and Asia. The following company can
be contacted for the supply of machinery and knowhow:
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B. ENGINEERING
The list of machinery and equipment required for Kraft paper making plant is given in
Table 5.1 below. The total cost is estimated at Birr 7.5 million.
Table 5.1
LIST OF MACHINERY AND EQUIPMENT
The plant requires a total of 7500 m2 area of land out of which 3,000 m2 is built-up
area which includes Processing area, raw material stock area, offices etc. Assuming
construction rate of Birr 2500 per m2, the total cost of construction is estimated to be
Birr 7.5 million. The total cost, for a period of 80 years with cost of Birr 1 per m2, is
estimated at Birr 7,500. The total investment cost for land, building and civil works is
estimated at Birr 7,507,500.
3. Proposed Location
It is highly recommendable (and also sustainable) to base a pulp -& paper mill on
commercial forests, i.e., trees that are planted on purpose with modern re-forestation
schemes.
According to the resource potential study of the region, the raw material is identified
in Aleta, Sodo Zuri woredas. Based on the availability of raw material infrastructure,
utility and market out let Aleta Wondo town of Aleta Woreda is selected and
recommended to be the location of the envisaged plant.
A. MANPOWER REQUIREMENT
Table 6.1 shows the list of manpower required and the estimated annual labor costs.
Total manpower requirement, including skilled and unskilled labor, is 75 persons.
Correspondingly total annual labour cost, including fringe benefits, is estimated at
Birr 726,750.
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Table 6.1
MANPOWER REQUIREMENT AND LABOR COST
B. TRAINING REQUIREMENT
An on-site training programme can be arranged for key production, maintenance and
quality control personnel in consultation with the machinery and technology supplier.
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Additionally, a training programme can be arranged at the Ethiopian Pulp & Paper
Share Company.
The financial analysis of the kraft paper project is based on the data presented in the
previous chapters and the following assumptions:-
The total investment cost of the project including working capital is estimated at Birr
19.12 million, of which 63 per cent will be required in foreign currency.
The major breakdown of the total initial investment cost is shown in Table 7.1.
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Table 7.1
INITIAL INVESTMENT COST
* N.B Pre-production expenditure includes interest during construction ( Birr 805,880 ) training
(Birr 300 thousand ) and Birr 150 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 17.09 million
(see Table 7.2). The material and utility cost accounts for 83.09 per cent, while
repair and maintenance take 0.67 per cent of the production cost.
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Table 7.2
ANNUAL PRODUCTION COST AT FULL CAPACITY ('000 BIRR)
Items Cost %
Raw Material and Inputs 5,770.0 33.75
Utilities 8,436.38 49.34
Maintenance and repair 115 0.67
Labour direct 232.56 1.36
Factory overheads 116.28 0.68
Administration Costs 348.84 2.04
Total Operating Costs 15,019.06 87.84
Depreciation 1305 7.63
Cost of Finance 773.76 4.53
Total Production Cost 1,797.82 100
C. FINANCIAL EVALUATION
1. Profitability
According to the projected income statement, the project will start generating profit in
the first year of operation. Important ratios such as profit to total sales, net profit to
equity (Return on equity) and net profit plus interest on total investment (return on
total investment) show an increasing trend during the life-time of the project.
The income statement and the other indicators of profitability show that the project is
viable.
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2. Break-even Analysis
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 = 14 %
Sales – Variable Cost
3. Payback Period
The investment cost and income statement projection are used to project the pay-back
period. The project’s initial investment will be fully recovered within 4 years.
Based on the cash flow statement, the calculated IRR of the project is 24 % and the
net present value at 8.5% discount rate is Birr 15.34 million.
D. ECONOMIC BENEFITS
The project can create employment for 75 persons. In addition to supply of the
domestic needs, the project will generate Birr 7.9 million in terms of tax revenue.