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21.

PROFILE ON PRODUCTION OF COTTON SEED OIL

21-2 TABLE OF CONTENTS PAGE I. II. III. SUMMARY PRODUCT DESCRIPTION & APPLICATION MARKET STUDY AND PLANT CAPACITY A. MARKET STUDY B. PLANT CAPACITY & PRODUCTION PROGRAMME MATERIALS AND INPUTS A. RAW MATERIALS B. UTILITIES TECHNOLOGY & ENGINEERING A. TECHNOLOGY B. ENGINEERING VI. MANPOWER & TRAINING REQUIREMENT A. MANPOWER REQUIREMENT B. TRAINING REQUIREMENT FINANCIAL ANALYSIS A. TOTAL INITIAL INVESTMENT COST B. PRODUCTION COST C. FINANCIAL EVALUATION D. ECONOMIC BENEFITS SUMMARY 21-3 21-3 21-4 21-4 21-6 21-7 21-7 21-8 21-9 21-9 21-10 21-12 21-12 21-12 21-13 21-13 21-14 21-15 21-16

IV.

V.

VII.

I.

This profile envisages the establishment of a plant for the production of cotton seed oil with a capacity of 4,128 tonnes per annum.

The present demand for the proposed product is estimated at 59,313 tonnes per annum. The demand is expected to reach at 184,350 tonnes by the year 2020. The plant will create employment opportunities for 51 persons.

21-3 The total investment requirement is estimated at Birr 45.26 million, out of which Birr 33 million is required for plant and machinery. The project is financially viable with an internal rate of return (IRR) of 33 % and a net present value (NPV) of Birr 48.18 million discounted at 8.5%. II. PRODUCT DESCRIPTION AND APPLICATION

Cotton seed oil is derived from the seeds of various species of cotton that are grown primarily for their fibres. The oil and protein contents of the seeds vary with the variety and agroclimatic conditions. Some varieties may have up to 25% oil content. Refined cotton seed oil is used mainly for edible purposes such as salad and cooking oils, shortening, margarine and to a lesser extent in the packing of fish and cured meat. Low grade oil is used in the manufacture of soaps, lubricants and protective coatings. The by-product of the proposed plant is expeller cake which is used for animal feed. Cotton seed oil is a resource based product that will substitute the imported vegetable oil.

21-4 III. A. 1. MARKET STUDY AND PLANT CAPACITY MARKET STUDY Past Supply and Present Demand

Cotton seed is one of the varieties of oil rich seeds used for cooking and food manufacturing. As compared with animal fats, most vegetable oils are considered more desirable dietary ingredients. Nigger seed, sesame seed and linseed are export oil seeds having more value in the international market as compared with the local edible oil market. Therefore, most edible oil mills in Ethiopia use cotton seed and rape seed as their raw material. Even though the supply of edible oil is met through both domestic and imported products the market is quite dominated by imports. During the period 2000-2005, the highest market share local production could capture was 26% of the total supply which was attained in 2003, while the average for the period of analyses was 15% (see Table 3.1). Table 3.1 SUPPLY OF EDIBLE OIL IN TONNES Year Domestic** % Import* 70,789 24,785 34,196 22,283 121,812 82,014 59,313 % Total

Share 2000 6579 8.50 2001 6,637 21.12 2002 8,329 19.59 2003 7,993 26.40 2004 8,027 6.18 2005 6,931 7.79 AVERAGE 7,416 15 Source : * External Trade Statistics. ** Statistical Abstract, CSA.

Share 91.5 77,368 78.9 31,422 80.4 42,525 73.6 30,276 93.8 129,839 92.2 88,945 85 66,729

21-5 As can be seen from Table 3.1, domestic production of edible oil was fluctuating from year to year around a mean figure of 7,416 tonnes. On the other hand, import of edible oil has shown a substantial increase during the recent two years, i.e., year 2004 and 2005. The import level which was in the range of 22,283 tonnes and 34,196 tonnes during the year 2001-2003 has increased to 121,812 tonnes and 82,014 tonnes during 2004 and 2005, respectively. Total apparent consumption (total supply) during the past six years ranged from 30,276 tonnes (2003) to 129,839 tonnes (2004). The mean apparent consumption during the period of analyses was 66,729 tonnes, and this amount is considered to represent current effective demand. The current unsatisfied demand which excludes local production (about 7,416 tonnes) would, thus, be 59,313 tonnes. 2. Projected Demand

The demand for edible oil is directly related with food consumption or growth in standard of living and population. Food consumption of families increases with growth in income. Since in poorest countries like Ethiopia most of the people are undernourished due to the lowest level of per capita income, the growth in income for families will result in growth in consumption of edible oil and food. Thus, the demand for edible oil is projected with a slight modification of GDP growth rate attained in 2004 or 10 %. The projected demand for edible oil is presented in Table 3.2.

Table 3.2

21-6 PROJECTED DEMAND FOR EDIBLE OIL (TONNES) Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 3. Pricing and Distribution Projected Demand 58,740 64,614 71,075 78,183 86,001 94,601 104,061 114,468 125,914 138,506 152,357 167,592 184,351

The current retail price of domestic edible oil per liter is Birr 12. The recommended price for the envisaged project is Birr 7. Since edible oil should be available in the nearest retail shop for households; to the consumer's convenience, intensive distribution through delivery to the retailers as well as its own shops in selected centers is recommended. B. 1. PLANT CAPACITY AND PRODUCTION PROGRAMME Plant Capacity

The annual production capacity of the envisaged plant is 4,128 tonnes of refined oil and 11,000 tonnes of expeller cake, based on 300 working days and 3 shifts per day. 2. Production Programme

Considering the gradual development of processing skill and marketing of the products, the rate of capacity utilization during the 1 st and 2nd year of production will be 70 and

21-7 85%, respectively. Full capacity will be attained in the third year and then after. Table 3.3 shows the production program of the proposed project. Table 3.3 PRODUCTION PROGRAMME Sr. Production 1 2889.6 7700 70 Production Year 2 3508.8 9350 85

No. 1 Cotton seed oil (tonnes) 2 Expeller cake (tonnes) 3 Capacity utilization rate (%) IV. A. MATERIAL AND INPUTS RAW MATERIALS

3-10 4128 11,000 100

The principal raw materials and inputs are cotton seed, caustic soda & bleaching earth. Cotton seed can be obtained from cotton ginning plants operating in the region or other parts of the country. Caustic soda and bleaching earth are also obtained locally. The annual requirement and cost of these inputs are indicated in Table 4.1. The total annual cost of raw material is estimated at Birr 7,282,200.

21-8 Table 4.1 ANNUAL RAW MATERIAL REQUIREMENT & COST Sr. No. 1 2 3 4 Cotton seed Caustic soda Bleaching earth Replacement of drums (75% packed in drums and 10% replacement) Total B. UTILITIES 7,102.8 180 7,282.2 Materials Qty (Tonnes) 22,800 18 90 1,550 Cost (000 Birr) LC FC TC 6,840 108 180 154.8 6,840 108 180 154.8

Electricity, furnace oil and water are utilities of the proposed project. Table 4.2 indicates the annual utilities requirement and cost at full capacity. Process water shall be supplied by submersible pumps installed by the project. Table 4.2 ANNUAL UTILITIES REQUIREMENT & COST Sr. No. 1 2 3 Electricity Furnace oil Water Total Utility Unit kWh Tonne m3 Qty 2,700,00 0 360 2,000 Cost (000 Birr) 1279.8 1,947.6 20 3,247.4

21-9 V. A. 1. TECHNOLOGY AND ENGINEERING TECHNOLOGY Process Description

Edible oil processing is classified in two groups: crude and refined oil production. Cotton seed first conveyed to the cleaning unit in which magnetic separators, vibratory screens & pneumatic cleaners are involved. The clean seed then enters the delinting section where the lint is removed from the seed and then cleaned and bailed. The delinted cotton seed black seed, is further conveyed to the decortication unit in which the husk is removed by decorticators and screening machines. The meat with about 10% husk enters to the pressing unit. Before the seed is pressed, it shall be conditioned in the cooker with steam. Conditioning has the following functions: a) b) c) d) Rupture the oil cells by the action of heat and moisture making oil readily available for extraction Increase the fluidity of oil by increasing the temperature of meat and oil, Coagulates the protein portion of meat and Dries the meat to a moisture content suitable for extraction

The cooked meat is then pressed to produce crude oil which shall be screened and filtered before entering the refinery unit. In the refinery, there exist three major operations: neutralization, bleaching and deodorization. In the neutralizer, the free fatty acid content of crude oil shall be lowered by adding caustic soda. The colour of oil shall be controlled in the bleacher using bleaching earth. Finally the components of oil which are responsible for the odour are removed by the deodorization process. The final refined oil is then dispatched for sales.

21-10 2. Source of Technology

The technology of cotton oil processing can be acquired form different suppliers. For example, the following company may be required for quotation. Plot No. 2 Dhormajuan Industrial Estate Gokuldham Main Road Rajkot 360004, Gujarat India Fax: 91281 2366010 B. 1. ENGINEERING Machinery and Equipment The total cost of

The list of machinery and equipment is indicated in Table 5.1. currency. Table 5.1 LIST OF MACHINERY AND EQUIPMENT Sr. No. 1 2 3 4 Description Cotton seed cleaning unit Decortications unit Press section - Press - Screen & filter Refinery - Neutralizer - Washer - Bleacher - Deodorizer Boiler Submersible pump Cooling towers Laboratory equipment Barrel Washing unit

machinery is estimated at Birr 33 million of which Birr 27.5 million is required in foreign

Qty. (No) 1 1 1 1

5 6 7 8 9

1 1 1 Set

21-11 2. Land, Building & Civil Works

The total area of the project is 10,000 m 2 of which 3200 m2 is a built-up area. The cost of building is estimated at Birr 6.4 million. 800,000, at a rate of 1 Birr per m2 for 80 years. 3. Proposed Location The lease value of land is about Birr

The major cotton growing areas are found in Gamogoffa and South Omo, around Abaya & Chamo Basin below 1400m. For its proximity to the raw material source and market, availability of infrastructure, Arbaminch is selected to be the best location for the envisaged project. VI. A. MANPOWER AND TRAINING REQUIREMENT MANPOWER REQUIREMENT

The envisaged project required 51 employees. The list of manpower and annual labor cost are indicated in Table 6.1. The total annual cost of labour is estimated at Birr 592,500.

21-12 Table 6.1 MANPOWER REQUIREMENT & LABOUR COST Sr. No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Manpower General manager Secretary Sales and marketing officers Accountant Production & tech. head Clerk Mechanic Purchaser Driver Operators Ass. Operators Labourers Laboratory technicians Guards Sub-total Benefit (25% BS) Grand total Req. No. 1 1 2 1 1 1 3 1 1 12 9 12 3 3 51 Monthly Salary (Birr) 3,500 800 3,000 2,000 2,500 400 4,500 1,000 800 8,400 3,600 3,600 4,500 900 39,500 9,875 49375 Annual Salary (Birr) 42,000 9,600 36,000 24,000 30,000 4,800 54,000 12,000 9,600 100,800 43,200 43,200 13,500 10,800 474,000 118,500 592500

B.

TRAINING REQUIREMENT

On-the-job training shall be carried out during plant erection and commissioning by experts of machinery supplier. The total cost of training is estimated at Birr 50,000.

21-13 VII. FINANCIAL ANALYSIS

The financial analysis of the cotton seed oil project is based on the data presented in the previous chapters and the following assumptions:Construction period Source of finance Tax holidays Bank interest Discount cash flow Accounts receivable Raw material local Work in progress Finished products Cash in hand Accounts payable A. 1 year 30 % equity 70 % loan 5 years 8% 8.5% 30 days 30 days 2 days 30 days 5 days 30 days

TOTAL INITIAL INVESTMENT COST Birr

The total investment cost of the project including working capital is estimated at 42.26 million, of which 51 per cent will be required in foreign currency. The major breakdown of the total initial investment cost is shown in Table 7.1.

21-14 Table 7.1 INITIAL INVESTMENT COST Sr. No. 1 2 3 4 5 6 7 Cost Items Land lease value Building and Civil Work Plant Machinery and Equipment Office Furniture and Equipment Vehicle Pre-production Expenditure* Working Capital Total Investment Cost Foreign Share Total Cost (000 Birr) 800.0 6,400.0 33,000.0 100.0 200.0 2,625.6 2,136.6 45,262.2 51

* N.B Pre-production expenditure includes interest during construction ( Birr 2.47 million) 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 16.89 million (see Table 7.2). The material and utility cost accounts for 62.31 per cent, while repair and maintenance take 0.74 per cent of the production cost.

21-15 Table 7.2 ANNUAL PRODUCTION COST AT FULL CAPACITY ('000 BIRR) Items Raw Material and Inputs Utilities Maintenance and repair Labour direct Factory overheads Administration Costs Total Operating Costs Depreciation Cost of Finance Total Production Cost C. 1. FINANCIAL EVALUATION Profitability

Cost 7,282.20 3247.4 125 284.4 94.8 189.6 11,223.40 3700 1974.99 16,898.39

% 43.09 19.22 0.74 1.68 0.56 1.12 66.42 21.90 11.69 100

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.

21-16

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 Sales Variable Cost 3. Pay Back Period = 33 %

The investment cost and income statement projection are used to project the pay-back period. The projects initial investment will be fully recovered within 3 years. 4. Internal Rate of Return and Net Present Value

Based on the cash flow statement, the calculated IRR of the project is 33 % and the net present value at 8.5% discount rate is Birr 48.18 million. D. ECONOMIC BENEFITS

The project can create employment for 51 persons. In addition to supply of the domestic needs, the project will generate Birr 27.37 million in terms of tax revenue. substituting the current import of vegetable oil. The establishment of such factory will have a foreign exchange saving effect to the country by