109.

PROFILE ON ALKYD RESIN

MANUFACTURING
 109-2

TABLE OF CONTENTS

PAGE

I. SUMMARY 109-3

II. PRODUCT DESCRIPTION & APPLICATION 109-4

III. MARKET STUDY AND PLANT CAPACITY 109-4

A. MARKET STUDY 109-4
B. PLANT CAPACITY & PRODUCTION PROGRAMME 109-7

IV. MATERIALS AND INPUTS 109-7

A. RAW MATERIALS 109-7
B. AUXILIARY MATERIALS & UTILITIES 109-8

V. TECHNOLOGY & ENGINEERING 109-9

A. TECHNOLOGY 109-9
B. ENGINEERING 109-10

VI. MANPOWER & TRAINING REQUIREMENT 109-13

A. MANPOWER REQUIREMENT 109-13
B. TRAINING REQUIREMENT 109-14

VII. FINANCIAL ANLYSIS 109-15

A. TOTAL INITIAL INVESTMENT COST 109-15
B. PRODUCTION COST 109-16
C. FINANCIAL EVALUATION 109-17
D. ECONOMIC BENEFITS 109-19

I. SUMMARY

This profile envisages the establishment of a plant for the production of alkyd resins
with a capacity of 1,357 tones per annum. Alkyd resins are large group of synthetic low
molecular weight polyesters manufactured from polybasic and polyhydric alcohols. They
are used in the production of a wide variety of paints and coatings.
 109-3

The major raw materials needed for the production of alkyd resins are linseed oil, Soya
bean oil, xylene, phthalic anhydride and turpentine oil. Of these, only linseed oil and
Soya bean oil is expected to be locally available; the others have to be imported.

With growth in the construction and industrial sectors, the demand for paints and
protective coatings is also expected to rise. Correspondingly, the demand for alkyd resin
is expected to grow. The present demand for the proposed product is estimated at
2,268 tones per annum. The demand is expected to reach 5,288 tones by the year 2018.

The total investment requirement is estimated at about Birr 27.47 million, out of which
Birr 15.80 million is required for plant and machinery. The plant will create employment
opportunities for 24 persons.

The project is financially viable with an internal rate of return (IRR) of 14.63% and a net
present value (NPV) of Birr 7.87 million discounted at 8.5%.

The project will create backward and forward linkages both with the agricultural and
paint industries. The establishment of such factory will have a foreign exchange saving
effect to the country by substituting the current imports.

II. PRODUCT DESCRIPTION AND APPLICATION

Alkyd resins are a large group of synthetic low molecular weight polyester prepared from
polybasic acids and polyhydric alcohols. Alkyd resins are the most important class of
protective coatings. They are used in both clear pigmented, industrial and trade sales
coatings to protect and decorate a wide variety of substances.

III. MARKET STUDY AND PLANT CAPACITY

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A. MARKET STUDY

1. Past Supply and Present Demand

Alkyd resin, which is used in the production of a wide variety of paints, is supplied to the
Ethiopian market both from domestic production and import. Currently there is only one
factory in Ethiopia known as Alkyd Resin S.C. located in Addis Ababa. According to the
feasibility study of the project the plant has an annual production capacity of 1,500 tones.
With regard to import data obtained from the Customs Authority is presented in Table
3.1.

Table 3.1
IMPORT OF ALKYD RESIN

Year Import (Tones) Value (Birr)

2000 193.4 1,865,818
2001 263.9 3,207,475
2002 518.4 5,172,886
2003 1,111.5 10,151,671
2004 1,200.5 11,305,231
2005 315.3 3,657,641
2006 446.1 5,219,817
Source:- Ethiopian Custom Authority
Import of alkyd resin during the period 2000-2004 has exhibited an increasing trend. The
imported quantity which was 193.4 tones in the year 2000 has reached to a level of
1200.5 tones by the year 2004. Annual average growth rate of import during the first five
years was more than 50%. But during the last two recent years the imported quantity has
declined substantially. The imported quantity during 2004 and 2005 was 315.3 tones and
446.1 tones respectively. This is believed to be because of the high stock during the
previous two years.

By considering the increasing trend observed between year 2000-2004 and declining
trend during the last two years the average of the recent four years is believed to reflect
the demand that emanates from import. Accordingly, the unsatisfied demand that is met
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through import is calculated at 768 tones. When the imported quantity added to the
domestic production total current effective demand for the product is estimated at 2,268
tones.

2. Projected Demand

Alkyd resin is mainly used as an intermediate input for production of paint. The
production of paint in turn is influenced by the growth of the construction sector. The
construction sector has been growing by more than 8% in the past few years. Assuming
the past trend to continue for the future demand for alkyd resin is forecasted by applying
an 8% annual average growth rate. The total projected demand and the unsatisfied
demand is given in Table 3.2.
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Table 3.2
PROJECT DEMAND FOR ALKYD RESIN (TONNES)

Year Total Domestic Unsatisfied

Demand Production Demand
2008 2,449 1,500 949
2009 2,645 1,500 1,145
2010 2,857 1,500 1,357
2011 3,086 1,500 1,586
2012 3,332 1,500 1,832
2013 3,599 1,500 2,099
2014 3,887 1,500 2,387
2015 4,198 1,500 2,698
2016 4,534 1,500 3,034
2017 4,896 1,500 3,396
2018 5,288 1,500 3,788

The unsatisfied demand for alkyd resin will grow from 949 tones during 2008 to 2099
tones and 3788 tones by the year 2013 and year 2018, respectively.

3. Pricing and Distribution

Currently, the existing factory in Addis Ababa sells its product at Birr 18,000 per ton.
This price is adopted for sales revenue projection. The product has to be sold directly to
the end user industries, mainly paint factories.
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B. PLANT CAPACITY AND PRODUCTION PROGRAMME

1. Plant capacity

Basing on the market study, the envisaged plant will have a capacity of 1,357 ton per
annum to cover the unsatisfied demand of alkyd resin working 8 hours a day for 300 days
per year.

2. Production programme.

The production programme considers that for the first production year the plant will
utilize 80% of its capacity and 90% in the second year. For the third year on ward the
plant will utilize its full capacity.

Table 2.1
PRODUCTION PROGRAMME

Sr. Product Year of production (Tones)

1 2 3 and
No.
then after
1 Alkyd Resin 1,085.6 1,221.3 1,357
Capacity utilization rate (%) 80 90 100

IV. MATERIALS AND INPUTS

A. RAW MATERIALS

The main raw materials are linseed and other drying and semi-drying oils, and phthalic
anhydride. The major raw materials are linseed or soya bean oil which are locally available
in oil mills operating in the country. The total cost of raw materials is estimated Birr
 109-8

16,715,932 out of which Birr 5,499,932 will be in foreign currency. The annual raw
materials requirement of the plant is given in Table 4.1.

Table 4.1
ANNUAL CONSUMPTION OF RAW-MATERIALS & COST

S.No Description Unit Of Qty. Required for Unit Cost Cost In

. Meas. 100% plant out In’000 '000 (Birr)
put (Birr)
1 Linseed oil Tones 701 16.0 11,216

2 Phthalic anyhadride Tones 271 4.0 1,084

3 Pentaerythritol Tones 280 7.0 1,960

4 Xylene Tones 43 5.213 224.182

5 White sprite Tones 565 3.95 2,231.75

Total 16,715.932

B. AUXILIARY MATERIAL AND UTILITY

Packaging material is the auxiliary material required by the plant. The utilities required
include electric power, water and furnace oil. Annual auxiliary material and utility
requirement and the corresponding cost at full capacity operation are given in Table 4.2.

Table 4.2

ANNUAL CONSUMPTION OF AUXILARY MATERIALS AND UTILITIES

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Cost in '000 Birr

Description Unit of Qty.
Meas.
F.C L.C T.C
Auxiliary Material

Packaging Barrel 670 134.0 134.0

Utilities

Electricity kwh 170,000 80.5 80.5

Furnace oil m3 95 554.8 554.8
Water m3 11,300 36.7 36.7

Total 806.03 806.03

V. TECHNOLOGY AND ENGINEERING

A. TECHNOLOGY

1. Process description

Alkyd resin can be manufactured by four different processes, solvent process being the
main commercial process which starts by adding all the raw materials in reaction kettle
and the agitation of the same is continued then, inert gas is sparged through the spare line.
The vapour are condensed and recycled back to the kettle.

The reacted mass is dropped into a jacketed tank, containing the desired solvent. The
cooled resin solution after thinning is filtered in filter press and sludge is removed. It is
lastly tested, packed and stored.

2. Source of Technology
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The technical data and information related to this technology can be obtained from India.
One of the machineries and equipment supplier address is given below:-

Dosh Engineering work

MorgaVilla Road,Andheri(E)
Mumbai,India
Tel. +91-22-28360802/28360854
Fax. +91-22-28361748

3. Environmental Impact

Effluents of alkyd resin production can cause to contaminate surface and ground waters,
and land. To make the manufacturing process environment friendly it is necessary to
have a waste disposal and treatment basin. The cost of treatment basin is estimated at Birr
125,000.

B. ENGINEERING

1. Machinery and Equipment

The list of production machinery and equipment required for the plant is provided in Table
6.1. The total cost of plant machinery and equipment is estimated at Birr 15,678,438 out of
which Birr 13,009,783 will be in foreign currency.

Table 6.1
LIST OF MACHINERY & EQUIPMENT REQURED
 109-11

Sr. Cost in ‘000 Birr

Description Qty
No. FC LC Total
1 Resin kettle 1 3,135.68 - 3,135.68
2 Vacuum pump 1 2,508.55 - 2,508.55
3 Condenser 1 3,449.25 - 3,449.25
4 Mini boiler 1 3,916.28 - 3,916.28
5 Linseed oil storage tank 1 - 1,098.491 1,098.49
6 Alky & resin storage tank 1 - 1,570.16 1,570.16
Total 13,009.78 2,668.65 15,678.43

1. Land, Building and Civil Works

The total land requirement for the envisaged plant is estimated at 2,000 m 2out of this 750
m2 is built-up area.500m2 will be covered by production facility, 150 m 2 will be covered
by stores and the remaining 100m2 will be for office building. Cost of building
construction with a rate of Birr 2,400 per m2 amounts to Birr 1,800,000.

According to the Federal Legislation on the Lease Holding of Urban Land (Proclamation
No 272/2002) in principle, urban land permit by lease is on auction or negotiation basis,
however, the time and condition of applying the proclamation shall be determined by the
concerned regional or city government depending on the level of development.

The legislation has also set the maximum on lease period and the payment of lease
prices. The lease period ranges from 99 years for education, cultural research health,
sport, NGO , religious and residential area to 80 years for industry and 70 years for trade
while the lease payment period ranges from 10 years to 60 years based on the towns
grade and type of investment.
Moreover, advance payment of lease based on the type of investment ranges from 5% to
10%.The lease price is payable after the grace period annually. For those that pay the
entire amount of the lease will receive 0.5% discount from the total lease value and those
that pay in installments will be charged interest based on the prevailing interest rate of
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banks. Moreover, based on the type of investment, two to seven years grace period shall
also be provided.

However, the Federal Legislation on the Lease Holding of Urban Land apart from setting
the maximum has conferred on regional and city governments the power to issue
regulations on the exact terms based on the development level of each region.

In Addis Ababa the City’s Land Administration and Development Authority is directly
responsible in dealing with matters concerning land. However, regarding the
manufacturing sector, industrial zone preparation is one of the strategic intervention
measures adopted by the City Administration for the promotion of the sector and all
manufacturing projects are assumed to be located in the developed industrial zones.

Regarding land allocation of industrial zones if the land requirement of the project is
blow 5000 m2 the land lease request is evaluated and decided upon by the Industrial Zone
Development and Coordination Committee of the City’s Investment Authority. However,
if the land request is above 5,000 m2 the request is evaluated by the City’s Investment
Authority and passed with recommendation to the Land Development and
Administration Authority for decision, while the lease price is the same for both cases.

The land lease price in the industrial zones varies from one place to the other. For
example, a land was allocated with a lease price of Birr 284 /m 2 in Akakai-Kalti and Birr
341/ m2 in Lebu and recently the city’s Investment Agency has proposed a lease price of
Birr 346 per m2 for all industrial zones.

Accordingly, in order to estimate the land lease cost of the project profiles it is assumed
that all manufacturing projects will be located in the industrial zones. Therefore, for this
profile which is a manufacturing project a land lease rate of Birr 346 per m2 is adopted.

On the other hand, some of the investment incentives arranged by the Addis Ababa City
Administration on lease payment for industrial projects are granting longer grace period
and extending the lease payment period. The criterions are creation of job opportunity,
 109-13

foreign exchange saving, investment capital and land utilization tendency etc.
Accordingly, Table 5.2 shows incentives for lease payment.

Table 5.2
INCENTIVES FOR LEASE PAYMENT OF INDUSTRIAL PROJECTS

Payment Down
Grace Completion Paymen
Scored point period Period t
Above 75% 5 Years 30 Years 10%
From 50 - 75% 5 Years 28 Years 10%
From 25 - 49% 4 Years 25 Years 10%

For the purpose of this project profile the average i.e. five years grace period, 28 years
payment completion period and 10% down payment is used. The period of lease for
industry is 60 years .

Accordingly, the total lease cost, for a period of 60 years with cost of Birr 346 per m 2, is
estimated at Birr 41.52 million of which 10% or Birr 4,152,000 will be paid in advance.
The remaining Birr 37.37 million will be paid in equal installments with in 28 years i.e.
Birr 1,334,571 annually.

VI. MANPOWER AND TRAINING REQUIREMENT

A. MANPOWER REQUIREMENT

In order to run the envisaged plant efficiently, it needs 24 employees. The estimated
annual cost of manpower is Birr 330,000. The detail of which is shown in Table 7.1.
Table 7.1
MANPOWER REQUIREMENT AND ESTIMATE ANNUAL COST

Sr. Description Req. Monthly Annual Salary

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No. No. Salary (Birr) (Birr)

1 Manager 1 3,500 42,000
2 Administration + Finance Head 1 2,800 33,600
3 Secretary 1 900 10,800
4 Commercial Head 1 2,800 33,600
5 Production Supervisors 1 1,200
14,400
6 Operator 3 2,700 32,400
7 Analytical chemist 1 1,200 14,400
8 Technicians 2 1,800 21,600
9 Laborers 6 2,100 25,200
10 Store keeper 1 600 7,200
11 Guard 4 1,400 16,800
12 Driver 2 1,000 12,000
Sub-Total 24 264,000
Employees benefit 20 % 66,000
Grand total 330,000

B. TRAINING REQUIREMENT

The training of chemist, operators, mechanics and technician would be essential. It has to
be arranged during the erection and commissioning period by machinery suppliers. The
cost of training is estimated at Birr 50,000.

VII. FINANCIAL ANALYSIS

The financial analysis of the alkyd resin project is based on the data presented in the
previous chapters and the following assumptions:-

Construction period 1 year

Source of finance 30 % equity
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70 % loan
Tax holidays 2 years
Bank interest 8.5%
Discount cash flow 8.5%
Accounts receivable 30 days
Raw material local 30 days
Raw material import 90 days
Work in progress 1 days
Finished products 30 days
Cash in hand 5 days
Accounts payable 30 days
Repair and maintenance 5% of machinery cost

A. TOTAL INITIAL INVESTMENT COST

The total investment cost of the project including working capital is estimated at Birr
27.47 million, of which 47 per cent will be required in foreign currency. The major
breakdown of the total initial investment cost is shown in Table 7.1.

Table 7.1
INITIAL INVESTMENT COST ( ‘000 Birr)

Sr. Cost Items Local Foreign Total

Cost Cost Cost
No.
1 Land lease value 4,152.00 - 4,152.00
2 Building and Civil Work 1,800.00 - 1,800.00
 109-16

3 Plant Machinery and Equipment 2,793.7 13,009.78 15,803.44

4 Office Furniture and Equipment 100.00 - 100.00
5 Vehicle 450.00 - 450.00
6 Pre-production Expenditure* 1,554.20 - 1,554.20
7 Working Capital 3,611.01 - 3,611.01
  Total Investment cost 14,460.87 13,009.78 27,470.65

* N.B Pre-production expenditure includes interest during construction ( Birr 1.40

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 21.87
million (see Table 7.2). The raw material cost accounts for 76.43 per cent of the
production cost. The other major components of the production cost are depreciation,
financial cost and utility which account for 9.18%, 5.61% and 3.69% respectively. The
remaining 5.09% is the share of direct labour, labour overhead, repair and maintenance
and other administration cost.

Table 7.2
ANNUAL PRODUCTION COST AT FULL CAPACITY ('000 BIRR)

Items Cost %
Raw Material and Inputs
16,715.93 76.43
Utilities 806.04 3.69
Maintenance and repair
783.92 3.58
 109-17

Labour direct 158.40 0.72

Labour overheads
66.00 0.30
Administration Costs 105.60 0.48
Land lease cost
- -
Total Operating Costs 18,635.89 85.21
Depreciation 2,007.94 9.18
Cost of Finance 1,226.48 5.61
Total Production Cost
21,870.31 100

C. FINANCIAL EVALUATION

1. Profitability

Based on the projected profit and loss statement, the project will generate a profit through
out its operation life. Annual net profit after tax will grow from Birr 1.09 million to Birr
2.46 million during the life of the project. Moreover, at the end of the project life the
accumulated cash flow amounts to Birr 20.83 million.

2. Ratios

In financial analysis financial ratios and efficiency ratios are used as an index or yardstick
for evaluating the financial position of a firm. It is also an indicator for the strength and
weakness of the firm or a project. Using the year-end balance sheet figures and other
relevant data, the most important ratios such as return on sales which is computed by
dividing net income by revenue, return on assets ( operating income divided by assets),
return on equity ( net profit divided by equity) and return on total investment ( net profit
plus interest divided by total investment) has been carried out over the period of the
project life and all the results are found to be satisfactory.

3. Break-even Analysis
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The break-even analysis establishes a relationship between operation costs and revenues.
It indicates the level at which costs and revenue are in equilibrium. To this end, 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 = 36%

Sales – Variable Cost

4. Payback Period

The pay back period, also called pay – off period is defined as the period required to
recover the original investment outlay through the accumulated net cash flows earned by
the project. Accordingly, based on the projected cash flow it is estimated that the
project’s initial investment will be fully recovered within 6 years.

5. Internal Rate of Return

The internal rate of return (IRR) is the annualized effective compounded return rate that
can be earned on the invested capital, i.e., the yield on the investment. Put another way,
the internal rate of return for an investment is the discount rate that makes the net present
value of the investment's income stream total to zero. It is an indicator of the efficiency or
quality of an investment. A project is a good investment proposition if its IRR is greater
than the rate of return that could be earned by alternate investments or putting the money
in a bank account. Accordingly, the IRR of this porject is computed to be 14.63 %
indicating the vaiability of the project.

6. Net Present Value

Net present value (NPV) is defined as the total present ( discounted) value of a time
series of cash flows. NPV aggregates cash flows that occur during different periods of
time during the life of a project in to a common measuring unit i.e. present value. It is a
 109-19

standard method for using the time value of money to appraise long-term projects. NPV
is an indicator of how much value an investment or project adds to the capital invested. In
principal a project is accepted if the NPV is non-negative.

Accordingly, the net present value of the project at 8.5% discount rate is found to be
Birr 7.87 million which is acceptable.

D. ECONOMIC BENEFITS

The project can create employment for 24 persons. In addition to supply of the domestic
needs, the project will generate Birr 4.13 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. The project will create backward and forward linkages
both with the agricultural and paint industries.