61.

PROFILE ON NAIL MANUFACTURING

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TABLE OF CONTENTS

PAGE

I. SUMMARY 61-3

II. PRODUCT DESCRIPTION & APPLICATION 61-3

III. MARKET STUDY AND PLANT CAPACITY 61-4

A. MARKET STUDY 61-4
B. PLANT CAPACITY & PRODUCTION PROGRAMME 61-6

IV. RAW MATERIALS AND INPUTS 61-6

A. RAW & AUXILIARY MATERIALS 61-6
B. UTILITIES 61-7

V. TECHNOLOGY & ENGINEERING 61-8

A. TECHNOLOGY 61-8
B. ENGINEERING 61-9

VI. MANPOWER & TRAINING REQUIREMENT 61-10

A. MANPOWER REQUIREMENT 61-10
B. TRAINING REQUIREMENT 61-11

VII. FINANCIAL ANALYSIS 61-12

A. TOTAL INITIAL INVESTMENT COST 61-12
B. PRODUCTION COST 61-13
C. FINANCIAL EVALUATION 61-14
D. ECONOMIC BENEFITS 61-15
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I. SUMMARY

This profile envisages the establishment of a plant for the production of nails
with a capacity of 2,400 tonnes per annum.

The present demand for the proposed product is estimated at 18,541 tonnes per annum.
The demand is expected to reach at 31,940 tonnes by the year 2017 .

The plant will create employment opportunities for 62 persons.

The total investment requirement is estimated at about Birr 7.22 million, out of which
Birr 3.96 million is required for plant and machinery.

The project is financially viable with an internal rate of return (IRR) of 28 % and a net
present value (NPV) of Birr 5.89 million discounted at 8.5%.

II. PRODUCT DESCRIPTION AND APPLICATION

A nail is pin shaped sharp object of hard metal typically steel used as fastener. Nails are
driven into the work piece by a hammer. A nail holds materials together by friction. The
common kind of nail is called “wire nail” to distinguish it from other types of nails.

Tack is a short nail with a wide, flat head used for fixing carpets to floorboards and for
stretching fabric on to wood.
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III. MARKET STUDY AND PLANT CAPACITY

A. MARKET STUDY

1. Past Supply and Present Demand

The nail markets is supplied by import as well as domestic production. Supply of nails is
presented in Table 3.1 while domestic production is in the increase, imported nails seem
to be decreasing indicating the successful substitution of domestic products. Particularly
in the last three years the domestic production shows a significant growth of 70%.

The linear trend equation fitted for 1997-2005 total supply of nails reveals.

Y = 1,339.9 X + 3,802.3 R2 = 71.2%

Applying this supply equation, the current effective demand for nails is estimated at
18,541 tons.

Table 3.1.
SUPPLY OF NAILS AND RACKS OF IRON OR STEEL

Year Ton
Local Import Total
1997 3,494 375 3,869
1998 2,702 5,810 8,512
1999 2,454 6,449 8,903
2000 2,773 5,325 8,098
2001 3,817 7,950 11,767
2002 5,190 6,582 11,772
2003 5,330 3,282 8,612
2004 8,664 4,961 13,625
2005 15,335 4,025 19,360
Source: Customs Authority
CSA, Survey of Manufacturing Industries
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2. Demand Projection

The demand for nails is related with construction and building sectors. New as well as
renovation of buildings and other constructions are the main end users of nails. The
growing construction sector development as evidenced in the successive increase of nail
supplies is expected to consume more. Therefore in this study the linear trend equation;

Y = 1,339.9 X + 3,802.3 R2 = 71.2%

is applied to project the demand for nails. Accordingly the demand for nails in 2017 will
be 31,940 tons. Projected demand for nails is presented in Table 3.2.
Table 3.2
PROJECTED DEMAND FOR NAILS

Year Tons
2008 19,881
2009 21,221
2010 22,561
2011 23,900
2012 25,241
2013 26,580
2014 27,920
2015 29,260
2016 30,600
2017 31,940

3. Pricing and Distribution

The average retail price of nails at Addis Ababa is 7 Birr per kg. The recommended price
for the new product under study is Birr 5 per kg.
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Distribution of the product will be through own retail and wholesale shop, the main outlet
being regional wholesale.

B. PLANT CAPACITY AND PRODUCTION PROGRAMME

1. Plant Capacity

According to the market study, and the economic scale of nail manufacturing, the rated
capacity of the plant is proposed to be 2,400 tonnes of nail per annum.

The selected production capacity is based on 300 working days per annum, 3 shifts of
eight hours each per day. The rest of calendar days are left for cleaning and
maintenance.

2. Production Programme

The production program is based on the time required for the adjustment of feedstock,
labour and equipment to the technology selected. Accordingly capacity utilization is set
as follows:

- 75% of plant capacity during the 1st year

- 85% of plant capacity during the 2nd year
- 100% of plant capacity during the 3rd year

IV. MATERIALS AND INPUTS

A. RAW MATERIALS

Raw materials required for production of nails are:-

1. Low carbon steel wire for both types, and

2. Cold rolled steel sheet for roof nails.
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Assuming that 12.5% of the total product will be roofing nails, the annual requirement of
these raw materials is shown in Table 4.1. Roofing nails are usually galvanized for
protection against corrosion. The finished products are packed with a hard rolled paper.

Table 4.1
SUMMARY OF ANNUAL CONSUMPTION FOR RAW AND AUXILIARY
MATERIALS AND COST

Sr. Description Unit of Annual Cost in '000 Birr

No. Measure Con's FC LC TC
1. Low carbon steel wire Tonnes 2,324 7,360 1,464 8,024
2. Cold-rolled steel sheet Tonnes 112 448 90 538
3. Saw dust Tonnes 8 - 0.52 0.52
4. Zinc Tonnes 16 125 25 150
5. HCI Lt. 1,500 9.4 1.9 11.3
6. Ammonium chloride Tonnes 204 44 8.8 52.8
7. Packing material - 64.6 64.6
Total 7,986.4 1,654.82 8,841.22

B. UTILITIES

Industrial water of 250 m3 and electric power of 15000 kWh are consumed in this plant
per annum. The total cost of utilities is estimated to be Birr 7,879. Details of which are
shown in Table 4.2.
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Table 4.2
ANNUAL REQUIREMENT OF UTILITIES AND COST

Sr. Description Qty. Unit Price (Birr) Cost ('000

No. Birr)
1 Electricity (kWh) 15,000 0.4736 7.104
2 Water (m3) 250 3.10 0.775
Grand total 7.879

V. TECHNOLOGY AND ENGINEERING

A. TECHNOLOGY

1. Production Process

Manufacturing of nails passes through the following steps.

- Feeding of wire coil to nail making machine

- Forming the bottom and top portion of nail and cutting on the nail making
machine manufacturing of flat head nails ends here
- Manufacturing of the nail head on a washer making machine
- Polishing of head part
- Feeding the head to the nail making machine
- Punching of the head to the nail and pressing to umbrella shape
- Galvanizing
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2. Source of Technology

Visiting Ethiopian Iron and Steel foundary Factory, which is located in Addis Ababa-
Akaki; and discussing with the technical personnel as well as referring to the technical
document it is possible to compile information for the technology.

B. ENGINEERING

1. Machinery and Equipment

The list of machinery and equipment required for the manufacture of nails is given in
Table 5.1. Total cost of machinery and equipment is estimated at Birr 3.969 million, out
of which Birr 3.199 million is required in foreign currency.

The plant needs one pick-up vehicle for transportation of finished product and for office
activities. The total cost of vehicle is estimated at Birr 220,000.
Table 5.1
MACHINERY AND EQUIPMENT REQUIREMENTS AND COST

Sr. Description Qty. Cost in '000 Birr

No. FC LC TC
1. Washer making machine 1 600 120.00 720
2. Nail making machine 4 1657.47 360.00 2017.47
3. Wire coil stand 4 16.86 3.36 20.22
4. Accessories 4 set 246.00 40.00 286.00
5. Head polisher 1 pc 128.26 31.16 159.42
6. Galvanizing equipment 1 372 80.0 452.00
7. Compressor 1 98.08 22.61 120.69
8. Surface grinder 1 81.08 16.22 97.3
9. Weighing scale 1 - 5 5
10. Hard pallet truck 1 - 7 7
Total 3199.75 685.35 3969.1
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2. Land, Building and Civil Works

The plant requires a total of 1000 m2 area of land out of which 600 m2 is built-up area
which includes manufacturing area, raw material stock area, offices etc. Assuming
construction rate of Birr 1300 per m2, the total cost of construction is estimated to be Birr
780,000. The total cost, for a period of 80 years with cost of Birr 0.15 per m2, is
estimated at Birr 12,000. The total investment cost for land, building and civil works is
estimated at Birr 792,000.

3. Proposed Location

Availability of raw materials, labor force, utilities and infrastructure like road for ease of
transportation of raw materials and products are the major factors considered for selection
of location. Therefore, Butajira is proposed to be the best location for nails manufacturing
plant.

VI. MANPOWER AND TRAINING REQUIREMENTS

A. MANPOWER REQUIREMENT

Total manpower requirement, including skilled and unskilled labour is 62 persons.

Correspondingly, total annual labour cost, including fringe benefits, is estimated at Birr
453,000. Table 6.1 below shows the list of manpower required and the estimated annual
labour costs.
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Table 6.1
MANPOWER REQUIREMENT & LABOUR COST

Sr. Job Position Req. Salary per Salary per

No. No. Month Year
A. Production
1. Manger 1 2000 24,000
2. Production and maintenance 3 3600 43,200
supervisor
3. Production clerk 1 450 5,400
4. Operator 36 21,600 259,200
5. Mechanic 6 3,900 46,800
6. Labour 6 1,500 18,000
7.
B. Others
1. Stores, Finance ,administration 1 1,300 15,600
2. and sales head
3. Salesman 1 600 7,200
4. Secretary 1 600 7,200
5. Cashier/ clerk 1 600 7,200
6. Store clerk 1 450 5,400
7. Security guard 2 500 6,000
8. Messenger/ cleaner 1 200 2,400
Driver 1 450 5,400
Total 62 37,750 453,000

B. TRAINING REQUIREMENT

All operators need basic training so that they can be acquainted to the operation. This
can be done during the commissioning period of the plant. The cost of such training is
estimated at Birr 50,000.
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VII. FINANCIAL ANALYSIS

The financial analysis of the nail manufacturing 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%
Discount cash flow 8.5%
Accounts receivable 30 days
Raw material local 30days
Raw material, import 90days
Work in progress 5 days
Finished products 30 days
Cash in hand 2 days
Accounts payable 30 days

A. TOTAL INITIAL INVESTMENT COST

The total investment cost of the project including working capital is estimated at Birr
7.22 million, of which 36 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

Sr. Total Cost

No. Cost Items (‘000 Birr)
1 Land lease value 12.0
2 Building and Civil Work 780.0
3 Plant Machinery and Equipment 3,969.1
4 Office Furniture and Equipment 125.0
5 Vehicle 200.0
6 Pre-production Expenditure* 508.6
7 Working Capital 1,629.6
Total Investment cost 7,224.4
Foreign Share 36

* N.B Pre-production expenditure includes interest during construction ( Birr 358.63 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 10.39
million (see Table 7.2). The material and utility cost accounts for 85.12 per cent, while
repair and maintenance take 1.91 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 8,841.22 85.05
Utilities 7.88 0.08
Maintenance and repair 198.46 1.91
Labour direct 271.8 2.61
Factory overheads 90.6 0.87
Administration Costs 181.2 1.74
Total Operating Costs 9,591.16 92.26
Depreciation 518.41 4.99
Cost of Finance 286.11 2.75
Total Production Cost 10,395.68 100

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 ) is estimated by using income statement projection.

BE = Fixed Cost = 25 %
Sales – Variable Cost

3. Pay Back 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.

4. Internal Rate of Return and Net Present Value

Based on the cash flow statement, the calculated IRR of the project is 28% and the net
present value at 8.5% discount rate is Birr 5.89 million.

D. ECONOMIC BENEFITS

The project can create employment for 62 persons. In addition to supply of the
domestic needs, the project will generate Birr 3.77 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.