149.

PROFILE ON PRODUCTION OF PLYWOOD

149-2 TABLE OF CONTENTS

PAGE

I.

SUMMARY

149-3

II.

PRODUCT DESCRIPTION & APPLICATION

149-3

III.

MARKET STUDY AND PLANT CAPACITY A. MARKET STUDY B. PLANT CAPACITY & PRODUCTION PROGRAMME

149-4 149-4 149-9

IV.

MATERIALS AND INPUTS A. RAW & AUXILIARY MATERIALS B. UTILITIES

149-10 149-10 149-10

V.

TECHNOLOGY & ENGINEERING A. TECHNOLOGY B. ENGINEERING

149-11 149-11 149-12

VI.

MANPOWER & TRAINING REQUIREMENT A. MANPOWER REQUIREMENT B. TRAINING REQUIREMENT

149-14 149-14 149-15

VII.

FINANCIAL ANALYSIS A. TOTAL INITIAL INVESTMENT COST B. PRODUCTION COST C. FINANCIAL EVALUATION D. ECONOMIC BENEFITS

149-15 149-15 149-16 149-17 149-18

149-3

I.

SUMMARY

This profile envisages the establishment of a plant for the production of plywood with a capacity of 3,800 mt. cub per annum.

The present demand for the proposed product is estimated at 2.37 million mt.cub per annum. The demand is expected to reach at 4.66 million mt.cub by the year 2017.

The plant will create employment opportunities for 42 persons.

The total investment requirement is estimated at Birr 11.25 million, out of which Birr 7.84 million is required for plant and machinery.

The project is financially viable with an internal rate of return (IRR) of 15 % and a net present value (NPV) of Birr 5.12 million discounted at 8.5%.

II.

PRODUCT DESCRIPTION AND APPLICATION

A product obtained as a result of several even numbered boards bonded together is called plywood. Plywood, thus, produced has the particular features of being a wood with the least defects, wide size, high length and strength mechanically or physically. It is used for general construction purposes as interior material for housing, ships, vehicles and furniture

149-4 III. MARKET STUDY AND PLANT CAPACITY

A.

MARKET STUDY

1.

Past Supply and Present Demand

Demand for plywood is met both from domestic production and import. the Ethiopian plywood Enterprise with a branch in Jimma is the only producer of plywood in Ethiopia. Domestic production of plywood in the past eight years if shown in Table 3.1.

Table 3.1 DOMESTIC PRODUCTION OF PLYWOOD (MT.CU)

Year 1998 1999 2000 2001 2002 2003 2004 2005

Domestic Production 985 375 430 455 677 1,168 8,722

Source:- Statistical Abstract of Ethiopia, CSA.

Table 3.1. reveals that the yearly average domestic production of plywood during the period 1998-2003 was about 682 mt.cub. During 2004 there was no domestic production of plywood for some reasons probably due to renovation and expansion. In the year 2005 the domestic production has enormously expanded and has reached to a level of 8,722mt. With regard to import, the Customs Authority has classified plywood into four types as indicated below.

149-5

Plywood with > = 1 outer ply tropical woods each ply =< 6mm thickness ( in Ton) Plywood, veneered panels and similar laminated wood n.e.s. ( in Ton) Plywood each = < 6mm thickness ( in mt.cu) Plywood > 6 mm with > = 1 ply non coniferous wood ( in mt.cu)

The types and quantity imported in the past nine years is shown in Table 3.2. It has to be noted that the unit of measure for the first two types is in weight i.e. ton, while for the last two is in volume i.e. mt.cub. For this reson the analysis is presented separately due to difficulty of summing different units of measure.

As could be seen from the data the quantity of plywoods of the first two types imported in the past eight years is highly erratic with out any trend. Nevertheless, it is found that the total supply of the first two types on yearly average during the period considered was 1,078.7 tons.

149-6

Table 3.2 IMPORT OF PLYWOOD BY TYPE

Plywood With >= 1 Outer Year Ply Tropical Woods Each Ply =< 6 Mm Thick (Ton)'

Plywood Veneered Panels And Similar Laminated Wood N.E.S (Ton)2

Total Of 1&2 (Ton)

Plywood Each =< 6mm Thickness (Mt.Cu)3

Plywood > 6 M.M With >=1 Ply Non Coniferous Wood (Mt.Cu)4 145 11,011 116 214 381 3,578 39,052 1,184 174,877

Total Of 3 & 4 (Mt.Cu)

1998 1999 2000 2001 2002 2003 2004 2005 2006 Total Average

48.0 205.6 452.1 453.7 90.3 93.7 395.8 2.3 281.7 2,023.2 224.8

273.3 302.9 810.0 2,493.2 1,447.0 1,693.9 294.0 280.3 90.8 7,685.4 853.9

321.3 508.5 1,262.1 2,946.9 1,537.3 1,787.6 689.8 282.6 372.5 9,708.6 1,078.7

780,017 421,235 223,515 415,957 343,368 824,256 945,281 2,147928 2,404292

780,162 432,246 223,631 416,171 343,749 828,834 984,333 2,149,112 2,579,169

Source :- Compiled from Ethiopian Customs Authority.

With regard to the other two types i.e plywood each= 6mm thickness and plywood >6 mm with >=1 ply coniferous wood the general trend is an increasing one although there are some fluctuation in the first five years (1998- 2002). During the recent four years the imported quantity has shown a large increase. The imported quantity which was around 400 thousand mt.cub during 2001/2002 has increased to about 907 thousand mt.cub by the years 2003 and 2004. In the recent two years ( 2005/2006) the imported quantity has increased tremendously. During these two years the

average imported quantity is about 2,364,140 mt.cub. This is about 2.6 fold compared to the two previous years. This huge increase is due to the fast expansion of the construction and the manufacturing sector all over the country in the last 4-5 years.

In general, what can be deduced from Table 3.1. and Table 3.2. is that the supply emanating from domestic production is extremely very low composed to import throughout the time covered by the data series. If we take the highest domestic production which is 8,722 mt.cu and compare only with the last two types of

plywood imported to the country its share is less than one percent. This indicates that there is a huge market in the country through import substitution using locally available raw materials.

To determine the current effective demand the following methodology is adopted. For the first two types of plywood the average quantity imported in the past nine years has been taken since the data does not show any trend. Accordingly current demand is set at 1080 tons. For the last two types of plywood the average quantity imported in the past two recent years plus the domestic production during 2005 is considered to reflect the current demand. Accordingly current demand is estimated at

2,372,862 mt .cub ( 2,364,140 mt cub from import and 8,722 mt.cub domestic production).

2.

Projected Demand

The demand for plywood is directly related with the growth of the housing construction sector, household and office furniture's, vehicles assembly and repair service. Plywood has various uses in housing construction for floors, roots, walls and

149- 8 doors. Inside a house, plywood often is used in a variety of furnishings, including cabinetry, shelves, tables and wall paneling. The demand for these items inturn

will depend on income, population growth, urbanization, and the manufacturing sector. Hence, by considering the recent past growth of the construction and the manufacturing sector a modest growth of rate of 7% per annum is deemed to be realistic to project demand for plywood. The projected demand for the two groups of plywood is shown in Table 3.3.

Table 3.3 PROJECTED DEMAND FOR PLYWOOD

Year

Plywood of Group 1 (Ton)

Plywood of Group 2 (mt.cub) 2,538,962 2,716,690 2,906,858 3,110,338 3,328,062 3,560,026 3,810,298 4,077,019 4,362,410 4,667,779

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

1163 1245 1332 1425 1525 1631 1745 1668 1998 2138

Table 3.3. reveals that a number of small to medium and large industries can be established to satisfy the demand for ply wood.

3.

Pricing and Distribution

The current producers price of locally produced plywood is Birr 3,350 per mt. cub. This envisaged project can adopt a similar price.

149- 9 Distribution of plywood would be handled through direct delivery to major construction companies and furniture manufacturing enterprise. In addition, the

existing building materials enterprise can be used to reach for non-bulk purchasers.

B.

PLANT CAPACITY AND PRODUCTION PROGRAMME

1.

Plant Capacity

According to the market study, the demand of plywood (Group two types) in the year 2008 will be 2,538,962 m3, where as this demand will grow to 4667,779 m3 by the year 2017. Taking only about 1.5% of the demand of the year 2008, the proposed plant will have a capacity of 3,800 m3 per annum. This quantity of plywood of 4mm thickness, which is a product mostly, used for general construction purposes such as interior materials for housing, ships, vehicles, and furniture, etc. Its demand is ever on the increase. However, additional market requirement can be met by running the production unit on a second or third shift.

2.

Production Programme

The unit is planned to operate one shift of 8 hours a day for a total working of 300 days a year by taking Sundays and national holidays into considerations.

It is also anticipated to operate at 70% and 80% of installed capacity in the first and second year, respectively. Full capacity production is expected to be achieved in the successive years. The low production level at the initial stage is planned to develop substantial market outlets for the product and to build up production capacity of new equipment.

149- 10 IV. MATERIAL AND INPUTS

A.

RAW AND AUXILIARY MATERIALS

Logs, which are suitable for plywood, urea resin, glue and ammonium chloride are the materials used to produce plywood. Except for urea resin and ammonium chloride which are to be imported, the other materials required are locally available. The

annual raw material requirement is calculated on the bases of the final output. Thus, the total cost of materials at full operation capacity of the plant is estimated to be Birr 8,045,282 The detail breakdown is shown in Table 4.1.

Table 4.1 RAW AND AUXILIARY MATERIALS REQUIREMENT AND COST ('000 BIRR)

Sr. No. 1 2 3 4

Description Logs (m3) Urea resin (tonne) Ammonium chloride (kg) Glue (tonne) Grand Total

Qty. FC 8,750 290 100 15 794.8 0.482 795.28

Cost '000 Birr LC 7000 250 7,250 Total 7000 794.8 0.482 250 8045.282

B.

UTILITIES

The major utilities of the project are electricity, furnace oil and water. The annual water requirement is about 32,000 m3. thus, about Birr 1,446,045.00. The total annual expenditure on utilities is,

Annual requirement and cost of utilities is indicated in Table 4.2.

149- 11 Table 4.2 UTILITIES REQUIREMENT AND COST

Sr. No 1 2 3

Description

UOM

Qty.

Cost (000 birr)

Electricity Furnace oil Water

kWh m3 Total

93,000

44.0448 1,082 320 1,446.045

lt 200,000 32,000

V.

TECHNOLOGY AND ENGINEERING

A.

TECHNOLOGY

1.

Process Description

The manufacturing of plywood comprises of three major steps. These are:Preparation of logs; Veneer manufacturing from logs; and Plywood manufacturing from veneer.

a)

Preparation of logs

This section consists of two major log treatment operations. In the first one, logs are cut by chain saw to a desired length and fed to the lathe to make veneer sheets, while in the second high-density logs are cooked in cooking vats or steam chambers to facilitate the cutting operation.

b)

Veneer Manufacturing

Under this process several physical actions such as cutting, clipping, drying, joining, etc. are conducted on the log obtained from the first section in order to prepare good quality veneer suitable for plywood making.

149- 12 c) Plywood manufacturing from veneer

In plywood making, the initial operation is the preparation of glue for the

process.

The proceeding step is the spreading of glue on the core veneer sheets and the final is the pre-pressing of the stacked sheets by the cold press.

After pre-pressing, the obtained plywood is fed to hot-press machine, where it is subjected to a pressure at a specified temperature. Then, the plywood is cut to a predetermined size by cutting machine and stored for delivery.

2.

Source of Technology

The machinery required for the envisaged plant could be obtained from the following England company. Scott & Sergeant Woodworking Machinery Ltd. Blatchford Rd, Horsham, RH13SQR, England. Tel. + 44 (0) 1403273000. Email: sales@scorsarg.co.uk.

B.

ENGINEERING

1.

Machinery and Equipment

Cutting, slicing, clipping or pressing and drying units are some of the major machinery and equipment required in the production of plywood. The total cost of

machinery and equipment is estimated at Birr 7.84 million, of which Birr 7 million is required in foreign currency. Table 5.1 shows the list of machinery and equipment required by the envisaged plant.

149- 13 Table 5.1 LIST OF MACHINERY AND EQUIPMENT

Sr. No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Peeler Veneer router Veneer clipper

Description

Qty.

1 1 1 1 1 1 1 1 1 1 1 1 1 1

Veneer drying machine Veneer splinter Veneer splicer Gluing machine Conveyor (roller) Pressing machine Drying press Plywood edger Sanding machine (scraper belt, drum) Boiler with its accessories Polishing

2.

Land, Building and Civil Works

The plant requires a total of 2500m2 area of land out of which 1,600m2 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 4 million. The total cost, for a period of 80 years with cost of Birr 1 per m2, is estimated at Birr 2,500. The total investment cost for land, building and civil works is estimated at Birr 4,002,500.

149- 14 3. Proposed Location

According to the resource potential study of the region, the raw material is identified in Bitta ,Andricha ,Maji woredas. Based on the availability of raw material

infrastructure, utility and market outlet Tum town of Maji Woreda is selected and recommended to be the location of the envisaged plant. VI. A. MANPOWER AND TRAINING REQUIREMENT MANPOWER REQUIREMENT

The plywood manufacturing plant will create job opportunities for about 42 workers, of these 36 of the employees are production workers while the remaining are administrative staff. The detail is indicated in Table 6.1. Table 6.1 MANPOWER REQUIREMENT AND ANNUAL LABOUR COST (BIRR) Sr. No. A. 1 2 3 4 5 6 B. 1 2 3 4 Manager Administrator Accountant Secretary Salesperson General service Sub-Total Production Supervisor Skilled workers Unskilled workers Technician Sub-Total Total Benefits (25% of basic salary) Grand Total 42 1 20 12 3 36 42 1,050 500 250 500 1,050 120,000 36,000 18,000 175,050 233,850 58,462.50 292,312.50 Description Administration 1 1 1 1 1 1 6 1,800 950 750 450 600 350 21,600 11,400 9,000 5,400 7,200 4,200 38,800 Req. No. Monthly Salary Annual Salary

149- 15 B. TRAINING REQUIREMENT

Imparting skill both on the supervisor and the operators who will be directly involved in the plywood production is an essential task. Thus, on-job-training by the

machinery supplier for about two weeks should be given locally. The training cost is estimated to be Birr 40,000.

VII.

FINANCIAL ANALYSIS

The financial analysis of the plywood

project is based on the data presented in the

previous chapters and the following assumptions:-

Construction period Source of finance

1 year 30 % equity 70 % loan

Tax holidays Bank interest Discount cash flow Accounts receivable Raw material local Raw material, import Work in progress Finished products Cash in hand Accounts payable

3 years 8% 8.5% 30 days 30 days 90 days 1 days 30 days 5 days 30 days

A.

TOTAL INITIAL INVESTMENT COST

The total investment cost of the project including working capital is estimated at Birr 14.91 million, of which 59 per cent will be required in foreign currency.

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

149- 16

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) 200.0 4,000.0 7,840.0 100.0 200.0 764.4 1,811.7 14,916.1 59

* N.B Pre-production expenditure includes interest during construction ( Birr 664.43 training (Birr 40 thousand ) and Birr 60

thousand )

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 11.25 million (see Table 7.2). The material and utility cost accounts for 84.35 per cent, while repair and maintenance take 1.33 per cent of the production cost.

149- 17 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

Cost 8,045.28 1446.05 150 140.4 46.8 93.6 9,922.13 672 657.62 11,251.75

% 71.50 12.85 1.33 1.25 0.42 0.83 88.18 5.97 5.84 100

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.

149- 18 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

= 80 %

3.

Pay Back Period

The investment cost and income statement projection are used to project the pay-back period. The projects initial investment will be fully recovered within 7 years.

4.

Internal Rate of Return and Net Present Value

Based on the cash flow statement, the calculated IRR of the project is 15 % and the net present value at 8.5% discount rate is Birr 5.12 million.

D.

ECONOMIC BENEFITS

The project can create employment for 42 persons.

In addition to supply of the

domestic needs, the project will generate Birr 3.51 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.