TF PIPES LIMITED ISLAMABAD

FEASIBILITY STUDY OF HDPE PIPES MANUFACTURING PLANT

Submitted by Masood Hayat

WA ASSOCISTES (PVT) LIMITED

#210, First Floor, Shahid Plaza, Jinnah Avenue, Blue Area, Islamabad.

TABLE OF CONTENTS SECTION-1: Project Description, Background and History 1.1 Background and history 1.2 Project and project objectives SECTION 2: Markets and Capacity 2.1 Size and composition of markets 2.2 Product mix and production programme SECTION 3: Materials and Inputs 3.1 Raw materials 3.2 Utilities 3.3 Materials management & transportation SECTION 4: Project Engineering and Technical Solutions 4.1 Conditions at the project site 4.2 Machinery and equipment 4.3 Structures and facilities 4.4 Production process SECTION 5: Project Organization and Human Resources 5.1 Organization lay-out 5.2 Manpower and skills assessment 5.3 Training plan SECTION 6: Project Costs and Financing 6.1 Investment cost by component 6.2 Sources of finance, and regulations of financing SECTION 7: Environmental Assessment SECTION 8: Financial and Economic Analysis 8.1 Capital cost estimates and financing plan 8.2 Projected income statements 8.3 Break-even analysis 8.4 Projected balance sheets 8.5 Projected Cash Flow Statements 8.6 Internal Financial Rate of Return SECTION 9: Risk Analysis

SECTION 1
PROJECT DESCRIPTION BACKGROUND AND HISTORY

SECTION-1: Project Description, Background and History

1.1 Background and history TF Pipes Limited (TFPL) is currently in the process of planning to launch a High Density Polyethylene (HDPE) Pipes manufacturing plant within the factory area of its existing PVC Pipes Manufacturing Facility. TFPL being a dynamic organization is fully cognizant of changing circumstances and has adopted the policy of expansion by venturing into new lines of production within its niche area with the objective of increasing profits and maintaining its market share. To undertake the establishment of the HDPE Pipes Manufacturing Plant in a systematic manner, TF Pipes Ltd. acquired professional services of WA Associates (Pvt) Limited for conducting a feasibility study of the project and produce a standardized document by ensuring professional excellence. Before venturing into the project objectives and other components of the feasibility study, the consultants find it expedient to provide a brief introduction of the TFPL's vision, mission and current standards of manufacturing and quality control that will serve as background information for the discussions concerning the proposed project of HDPE Pipes Manufacturing Facility. TF Pipes Limited was incorporated in May 1992 with the mission to maintain high quality standards of PVC pipes and products as per national and international specification. Currently, TFPL manufactures top quality pressure and non-pressure PVC pipes, bend and sockets on state of the art computerized machinery with stringent quality control. TFPL is an ISO 9002 certified company since January 2002 and got ISO 9001-2000 certification in November 2003. The rated capacity of the PVC plant is 6500 tons per annum with size range from 1/2" to 12" dia for pressure pipes and 3/4" to 6" dia for non-pressure pipes. TFPL adores very good market reputation for its products and keeps itself abreast with changing market conditions to salvage its market share. 1.2 Project and project objectives

Location: The project is proposed to locate on the land belonging to the TF Pipes Limited being adjacent to the PVC plant. This plot is in the heart of the industrial sector of Islamabad and is connected to other parts of the country by road and rail links. Description of plant & machinery: The project envisages establishment of a High Density Polyethylene Pipes manufacturing plant with two single screw extruders having installed production capacity of 1800 metric tons per annum with facility for producing 16mm to 63mm HDPE pipes on one extruder and 75mm to 160mm on the other extruder. The main plant and its auxiliary machine are proposed to be imported from China, manufactured by M/s Zhangjiagang Xingang Plastic Machinery Company, and include the following:
1. Two Single screw extruders

2. 3. 4. 5. 6. 7. 8. 9.

Moulds Vacuum sizing tank One set of cooling tank Haul off machine Cutter Stacker Feeding Machine Hopper dryer.

The serviceable life of the plant and machinery has been estimated at 10 to 12 years by the technical staff of the TFPL. Products and markets: HDPE pipe products include pressure and nonpressure pipes. Pressure pipes are normally used for water and gas supplies, while non-pressure pipes are used as conduit for electricity lines, fiber optic cables, and any other type of data communication line. The benefit associated with these products are discussed below: Plastics piping systems are the most indispensable elements to civilized living from individual life to industry activities i.e., they are a basic infrastructure for urban environments. These are used for supply of hot/cold water including human consumption and irrigation, for discharge of sewage, waste, sub-soil and rain inside/outside of buildings, for supply of gaseous fuels and for industrial applications of various uses. Remarkably, PE pipes
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for gas supply show its resistance to earthquake in recent several big earthquakes1. High density polyethylene (HDPE) pipes are often used as an alternative to GI pipes as they can withstand similar pressures and are less expensive. They are often more appropriate than PVC pipes because they come in rolls which are easier to transport and handle than lengths of PVC pipe, and they do not deteriorate in sunlight2. The main marketing focus of the project will be the public sector organization like Public Works Department, Sui Northern Gas Pipelines Limited (SNGPL), Sui Southern Gas Pipelines Limited (SSGPL), PTCL, Strategic Plans Division (SPD) of Joint Services Headquarters, Water and Sanitation Departments and private mobile phone service providers. Marketing potential also exists for use of the pipe in rehabilitation of the 2005 earthquake affected areas. Other marketing plans include appointment of sole distributors in important cities and appointment of dealers in other parts of the Country. A detailed discussion on marketability of HDPE pipes and production planning has been provided in the section on Markets and Capacity. Quality control: The quality of HDPE pipes is determined by the standard thermoplastics pipe material designation code defined in ASTM F412. The HDPE pipes for water supply will conform to the standards prescribed by ISO 4427, DIN 8074 and PS 3580: 1994. Local conditions (physical, regulatory): The plant will be housed on the land belonging to the TF Pipes Limited in the vicinity of the existing PVC pipes manufacturing plant. It will work as the second production unit of the TFPL, as such, no regulatory formalities such as registration of a company to own the plant is required. However, necessary permissions for installation and functioning of the plant will have to be obtained from CDA. Project promoters, ownership: The proposed plant will be owned by the TF Pipes Limited who is also the owner of the presently functioning PVC pipes manufacturing plant.
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ISO/TC 138 Business Plan; Date: 25-11-2004; Version: Draft 1 Towards better programming; A water handbook; United Nations Childrens Fund, 1999.

Implementation plan and time-schedule: Total time estimated by the technical management of TFPL for implementation of the project is four to five months, of which around 2 months will be consumed in the construction of normal concrete floor with holes drilling depth of 200 mm, acquisition and installation of prefabricated building structure. The remaining time of three months is estimated to be used for finalizing a deal with the machinery suppliers, receiving and installation of the main plant and machinery etc.

SECTION 2
MARKETS AND CAPACITY

SECTION 2: Markets and Capacity

2.1 Size and composition of markets Competition: The project will face competition from two types of HDPE pipes manufacturers: (i) high profile manufacturers producing quality products with established good will for the brand names of their products; (ii) small manufacturers producing low quality products and selling them at cheaper rates. To face the challenge of high profile manufacturers, TF Pipes Ltd. has a well established market reputation of its existing line of production i.e. PVC Pipes. It will endeavour to build reputation of HDPE pipe products by implementing strict quality control as per applicable standards. However, to counter unhealthy competition of small and low quality manufacturers, it plans to focus its marketing strategy on quality conscious public sector organizations and multi-national companies. Other marketing strategies include appointment of sole-distributors in major cities and establishing a dealership network throughout the country. Market potential of products: In Pakistan, the HDPE Pipes are being used in four major areas: Water supply; drainage; conduits and tube wells. Their sizes vary from to16 diameter. Pipes can also be divided in two categories as follows: a) Pressure pipes Used for Water Distribution & in Tube wells b) Non Pressure pipes Used for drainage/sewerage and as Conduits Water supply can be for the purpose of household or for municipal sector. Water supply segment can be divided into internal and external applications. The size of pipes used for water distribution range from 0.5 to more than 60. These pipelines are commonly known as External Water Supply lines, and are usually of AC (60%), PVC (20%), and MS (20%). HDPE has a lot of growth potential in this segment as AC pipes are now becoming extinct in international arena and MS pipes are much expensive than HDPE pipes. PVC pipes also suffer the risk of possible leaks or pipe/pressure failure.

HDPE pressure pipe is best choice as a pressure piping solution for two important reasons: (i) HDPE pressure pipe is fusion welded together and the weld is as strong as the original pipe, it is a monolithic or one-piece pressure piping solution. This makes it ideal for pressure applications compared to other piping materials such as PVC or ductile iron pipe, and others, which have a bell and spigot, or possibly a flange joint every few meters making them susceptible to possible leaks or pipe/pressure failure; (ii) when any pipe or piping system is under extremely high pressure, the joints must be restrained to keep from bursting apart. In most cases, joints, bends, tees, caps, etc., are anchored with mechanical restraints or blocks of concrete, so that the joint doesn't pull apart. Since HDPE pipe is one continuous piece, it is self-restrained, i.e., requiring no mechanical restraints3. In the recent past, HDPE pipes have been successfully used for water supply system in Pakistan by Earthquake Rehabilitation and Reconstruction Authority (ERRA) in the earthquake affected areas and by Faisalabad Development Authority in its City Housing Scheme. Sui Northern Gas Pipelines Limited is also using HDPE pipes as gas supply lines. Pakistan being an agricultural country needs the use of HDPE Pipes in large quantities for the irrigation purposes, due to their inherent characteristics of sustaining pressure and leaks. Tube wells are used for water supply or to drop the sub soil water level. Material used for this application is PVC and MS ranging from 4 to 12 dia. HDPE pipes can dominate this market due to its longer life span in sub soil conditions dominating this segment. Drainage and sewerage pipes are used to transport waste and sewerage water to the main sewerage system. Average size of pipes used for this purpose ranges between 3 to 12 dia. Materials used for this application are PVC, CI, RCC and AC. Internal Drainage segment is dominated by RCC and AC while PVC is also popular in this area. Internationally, however, HDPE is the dominant player in this market as it has a very long life and lower leaks susceptibility. Communications and fiber optic conduit pipes house and protect fiber optic cable as well as any other type of data or communication transmission line. Reliance on the phone, cable TV, radio and other networks like the Internet
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Material Improvements Position HDPE Pipe for Expanding Role In Construction Industry. Steve D. Sandstrum, McElory News Letter.

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places a high demand on the protection and performance of these cables. HDPE conduit pipe exceeds these expectations with low cost installation, enduring the normal stresses of installation along with providing long-term benefits such as reliability and superior protection. Conduits are also used for installation of electric cables in construction industry. The size of conduit pipe ranges from 0.5 to 4. Conduits are used for underground cabling. This segment is currently dominated by PVC pipes but internationally a trend towards change to HDPE pipes is evident. 2.2 Product mix and production programme: The project plans to produce all types of water supply, sewerage and conduit pipes currently in demand in the dia size ranging from 0.5 to 6. Main focus will, however, be on producing large dia size pipes (60%) while small dia pipes (40%) will be produced to cater to the market demand for small dia pipes. A large market for conduit pipes currently exists as the Strategic Plans Division of Joint Services Headquarters has undertaken positioning of country-wide backbone optical fiber on an approximate area of 24,000 kilometers. The project was started in the year 2006 and would complete in 2010. Similarly many mobile phone service providers like Wateen Telecom, World Call, Multi-net and Nayatel are undertaking the laying of communication and fiber-optic lines. This is important to note that NLC and some other public sector organizations are planning to replace their redundant communication infrastructure with new technology, which will also translate into high demand for HDPE pipes. Capacity: The proposed plant has a rated capacity of 1,800 metric tons per annum at the rate of production of 250 Kgs per hour with three shifts of eight hours each, operating for 300 days in a year. The capacity utilization has been projected as under: Year 1 Year 2 Year 3 Year 4 Year 5 and onwards 1,000 M.Tons 1,200 M.Tons 1,500 M.Tons 1,600 M.Tons 1,700 M.Tons

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SECTION 3
MATERIALS AND INPUTS

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SECTION 3: Materials and Inputs 3.1 Raw materials Raw material for the project is High Density Polyethylene (HDPE) Resin, which is a by-product of petrochemical industry. It is supplied in the shape of granuals, which come in the colours of black, blue, yellow and white. No auxiliary material/chemical is added to the raw material during the production process. Use of raw material for production does not practically result in wastage as any wastage is reprocess-able. HDPE Resin is mainly supplied by oil producing countries like UAE, Saudi Arabia, Iran, Malaysia, Russia and United States of America. According to information provided by some of the HDPE pipes manufacturers, the raw material is mainly imported from UAE, Saudi Arabia and Malaysia. It may be available with local dealers but at a high price. No shortage of material was reported by the manufacturers but price fluctuation is a common feature. 3.2 Utilities Utilities for the project include: 400 KVA connected load of electricity 630 KVA transformer of B-2 category 300-400 Amp. Circuit Breakers and panel fittings Water supply line and Chiller Plant (existing Chiller Plant will be used) Gear oil and lubricants 3.3 Materials management & transportation Material management and transportation has been proposed on contract basis or existing facilities will be utilized. No provisions kept on account of new transport or material management equipments.

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SECTION 4
PROJECT ENGINEERING AND TECHNICAL SOLUTIONS
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SECTION 4: Project Engineering and Technical Solutions 4.1 Conditions at the project site The new project is proposed as the second production line of the TF Pipes Limited, accordingly, many of the available facilities will be shared by the new project. Developed land for the proposed plant is available within the existing factorys boundary. For housing plant and machinery an area of 50 x 150 ft. has been earmarked, while another plot of 20 x 60 ft. has been reserved for delivery compound. Existing water connection and chiller plant will be shared between the two projects. Expenditure on administrative and accounting staff will minimize by charging some portion of existing expenditure on this account to the proposed project. 4.2 Machinery and equipment The main machinery and equipment of the project include: Two extruders ranging from 16mm to 160mm and 75mm to 160mm; Single screw extruders, moulds; Vacuum sizing tank, one set of cooling tank; Haul off machine, cutter, and stacker; Feeding machine, hopper dryer. Plant is of China origin manufactured by M/s Zhangjiagang Xingang Plastic Machinery Company. Its serviceable life has been estimated by TF Pipes technical staff as 10 to 12 years. 4.3 Structures and facilities A prefabricated building structure of 50 x 150 ft. will be used to house plant and machinery. Since no special foundations are required for installation of the machinery, normal concrete floor with hole-drilling depth of 200mm will be used for machinery installation. HDPE pipes are not sensitive to environment, as such do not require an enclosed warehouse. To stock finished products a delivery compound of 20 x 60 ft. has been planned. Office and other facilities of TF Pipes Ltd. will also be used by the proposed project staff. 4.4 Production process
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HDPE pipes are produced by the conventional extrusion process. HDPE resin is fed into a twin screw extruder, where it is plasticized and forced through a die to form a pipe. The sizing of pipe is done through calibration equipment. The pipe is then cooled off by passing it through a water bath. The Haul off unit is responsible for pulling the pipe. A rotary cutter can be employed to cut the pipe into standard predetermined lengths. Typically manufacturing process consists of the following steps: Extrusion process: HDPE resin granules are fed into twin screw extruder through a hopper and a dosage feeder, are heated in different stages between the ranges of 150-230 C. Dosage feeder controls the feed rate to extruder. Material is heated, compressed, air vented by vacuum and metered in the extruder barrel (containing twin screws) before entering into die. HDPE Pipe dies have many parts/die sets, which can be changed to produce different dia pipes with, desired wall thickness. For example one die would have die sets or parts to produce pipes from to 4 dia pipes. Die has thickness control bolts for control of circumferential thickness of pipes. The resulted melted paste is passed through the die to obtain a very unstable hot end product. At this point the product is viable to damage due to unsuitability for which it needs cooling down. Calibration and hauling off: Exact diameter of pipe is formed in the water bath where calibration bush is installed. Cooling water and vacuum is applied for exact control of pipe diameter according to standards. The pipe is continuously balanced by the haul off speed through which minimum thickness of pipe is controlled. The obtained product needs to be cooled down immediately to strengthen it. For this purpose the pipe/product is passed through the room temperature water. The cooling provides strength and toughness to the product. Printing: After the product has been prepared as per the requirements the brand name, size, density is printed on to the pipe. In normal practices the text is printed three times on a single pipe. Sometimes the printing is done after the product has been prepared and tested per the customers requirements.

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Cutting: The pipes need to be cut into appropriate sizes. Cutting is done either manually or automatically. The cutter cuts the pipe at pre determined lengths usually 5 meter in Pakistan. Pipe testing: A sample of each batch is tested for opacity, gravity, toughness, heat reversion and hydrostaticity.

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SECTION 5
PROJECT ORGANIZATION AND HUMAN RESOURCES
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SECTION 5: Project Organization and Human Resources 5.1 Organization lay-out The proposed project shall work as second manufacturing unit of TF Pipes Ltd. as such only a factory building within the boundary of existing factory will be constructed. The new project will use the administrative, water and transport facilities of the existing PVC plant and share their expenditure. 5.2 Manpower and skills assessment Proposed HDPE pipes manufacturing plant is not labour intensive project. It is fully automatic plant that requires seven personnel to handle the entire production process. The required staff strength is as under: Plant Engineer Technical Supervisor Operator Helpers 5.3 Training plan Training of the staff on new plant shall be arranged by the suppliers of the plant and machinery as a component of the machinery supply contract. 01 01 01 04

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SECTION - 6
PROJECT COSTS AND FINANCING

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SECTION 6: Project Costs and Financing 6.1 Investment cost by component Cost of Fixed Assets Import Price of Plant (FOB) Freight (10% of FOB price) Insurance (1% of FOB cost) FOB Price + Freight + Insurance Rate of Exchange (per USD) Vaue for Custom Duty Custom Duty (5%) Value for Excise Duty Excise Duty (1%) Landed Cost of Imported Plant Cost of factory building (Prefabricated) Cost of Transformer (630 KVA in B-category) Total cost of plant, machinery and factory building 6.2 Sources of finance, and regulations of financing The total loan requirement has been assessed at Rs. 37.730 million. The management has negotiated for the loan with a local commercial bank as running finance. The loan carries an interest rate of 13% per annum and will
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USD. 114,227 11,423 1,142 126,792 Rs. 80 10,143,382 507,169 10,650,551 106,506 10,757,056 8,000,000 700,000 Rs. 19,457,056

be secured against mortgage of plant and machinery as well as hypothecation of raw material, finished goods and stores. Repayment period is five years with one year grace period for repayment of installment.

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SECTION - 7
ENVIRONMENTAL ASSESSMENT

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SECTION 7: Environmental Assessment HDPE pipes manufacturing process is environmentally safe because it neither produces any smoke, dust or other pollutants nor it discharges any unwanted chemicals into the water used in the production process. The water used once is reusable after cooling in the chiller. PE is recyclable, both post industrial waste and post consumer waste is recycled. A process to recover plastics pipes from construction and demolition waste is being used in the developed countries, which removes practically all plastics pipes from the waste and produces granulated materials suitable for new pipe feedstock. PE is thermoplastic materials and as such is readily recycled. Being thermoplastics any waste generated in the manufacturing process is recycled.

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SECTION - 8
FINANCIAL AND ECONOMIC ANALYSIS
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SECTION 8: Financial and Economic Analysis 8.1 Capital cost estimates and financing plan The project is estimated to cost Rs.37.731 million of which Rs. 17.457 is the fixed cost and Rs. 20.274 million denotes working capital. The fixed capital cost is 46% of the total project cost and remaining 54% is the working capital component. The project is proposed to be financed mainly from loan and sponsors will be contributing by providing land for the project and certain facilities available with the existing PVC pipes manufacturing plant. Since a monitory valuation of the facilities offered by the sponsors has not been done, a debt/equity ratio has not been calculated in the financial analysis. From the financiers point of view it may not be an ideal situation but as the project is proposed to be added as another line of production in the existing factory, the financiers will have to appraise the financial plan for the project in reference to the overall financial picture of the TF Pipes Limited. Since the major component (54%) of the total project cost is working capital, finances against this component may be obtained against hypothecation of stocks etc. 8.2 Projected Income Statements The projected income statement for ten years shows a healthy operating position of the proposed project. Gross profit margins are in the range of 12 to 14 percent showing a healthy trend. The information collected from two well established HDPE pipes manufacturing plants in the country indicate that the gross profit margin of the proposed plant compares well with the operating results of these organizations. A comparative statement of various profitability ratios has been given at the foot of the Income Statement in annexure A. 8.3 Break-even Analysis Break-even point is estimated to occur at a sales level of Rs. 41.062 million in the first year of operation of the project. The working of the break-even

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point is given at the foot of the Projected Income Statement in annexure A. 8.4 Projected Balance Sheets The projected Balance Sheets for ten operational years have been set out in the annexure A. The Balance Sheets indicate a satisfactory liquidity position reflected in the ratios calculated at the foot of the Balance Sheets 8.5 Projected Cash Flow Statements Projected Cash Flow Statements indicate a very satisfactory position. Debt service coverage is estimated to range between 1.9 to 4.7 times, showing ability of the project to service its debt obligations as and when falling due. Even after debt servicing, the project has sufficient funds to invest in product diversification programme. 8.6 Internal Financial Rate of Return The Internal Financial Rate of Return (IFRR) has been calculated based on assumption that the project life will be no less than ten years and beyond fifth year of its operation, its net profits (after tax and depreciation) will be in vicinity of the range as in the fifth year of operation. The IFRR has been estimated at 55.7% that compares very favourably with the cost of capital, which is 13%. Please peruse working of IFRR at the foot of the Projected Cash Flow Statement in annexure A.

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SECTION-9 RISK ANALYSIS

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SECTION 9: Risk Analysis Project faces two kinds of risks: firstly that the financiers are ready to provide a loan of Rs. 37.731 million including a foreign exchange component of Rs.10 million against pledge of new plant/machinery, building and hypothecation of stocks and stores; and secondly that TF Pipes Limited is able to confirm its market with institutional buyers, as our market study tells that non-institutional buyers are not quality conscious and prefer to compromise quality in the interest of lower price. There are quite a few HDPE pipes manufacturers in the private sector offering low price products using low quality resin.

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ANNEXURES

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