110.

PROFILE ON ALUMINIUM HYDROXIDE

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TABLE OF CONTENTS

PAGE

I. SUMMARY 110-3

II. PRODUCT DESCRIPTION & APPLICATION 110-3

III. MARKET STUDY AND PLANT CAPACITY 110-4

A. MARKET STUDY 110-4
B. PLANT CAPACITY & PRODUCTION PROGRAMME 110-7

IV. MATERIALS AND INPUTS 110-8

A. RAW AND AUXILIARY MATERIALS 110-8
B. UTILITIES 110-8

V. TECHNOLOGY & ENGINEERING 110-9

A. TECHNOLOGY 110-9
B. ENGINEERING 110-10

VI. MANPOWER & TRAINING REQUIREMENT 110-13

A. MANPOWER REQUIREMENT 110-13
B. TRAINING REQUIREMENT 110-14

VII. FINANCIAL ANLYSIS 110-15

A. TOTAL INITIAL INVESTMENT COST 110-15
B. PRODUCTION COST 110-16
C. FINANCIAL EVALUATION 110-17
D. ECONOMIC BENEFITS 110-19

I. SUMMARY

This profile envisages the establishment of a plant for the production of aluminum
hydroxide with a capacity of 398 tonnes per annum. Aluminum Hydroxide is a white
crystalline powder used for production of glass, ceramics, iron free aluminum and
aluminum salts, manufacture of activated alumina, flame retardant, rubber reinforcing
agent, paper coating, filler and cosmetics.

The major raw materials required are sodium carbonate and aluminum sulphate, which
are available locally.
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The present demand for the proposed product is estimated at 329 tonnes per annum. The
demand is expected to reach at 853 tonnes by the year 2018.

The total investment requirement is estimated at Birr 7.96 million, out of which Birr 1.77
million is required for plant and machinery. The plant will create employment
opportunities for 18 persons.

The project is financially viable with an internal rate of return (IRR) of 25.71 % and a net
present value (NPV) of Birr 6.60 million, discounted at 8.5%.

The plant will have forward linkage with the manufacturing sector. 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

Aluminum hydroxide is an alkalizer for preparation of pharmaceutical suspension or

tablet together with other chemicals. It is used in water purification, water proofing
fabrics, filtering medium, in manufacturing aluminum salt, production of glass, ceramics,
activated aluminum, rubber reinforcing agent, fillers, paper coating, cosmetic and
medicines.

III. MARKET STUDY AND PLANT CAPACITY

A. MARKET STUDY

1. Past Supply and Present Demand

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Aluminum hydroxide has vast applications in the manufacturing sector. It is used for the
production of glass, ceramics, and activated aluminum, rubber reinforcing agent, paper
coating, fillers, cosmetics and the like.

As there is no plant in the country that manufactures aluminum hydroxide, the local
demand for the product is met through import. Imported quantity of the product for the
past seven years covering the period 2000-2006 is shown in Table 3.1.

Table 3.1
IMPORT OF ALUMINUM HYDROXIDE(TONNES)

Year Import
2000 300.0
2001 240.0
2002 260.2
2003 352.8
2004 314.7
2005 197.7
2006 410.1
Source:- Ethiopian Custom Authority.

Table 3.1 reveals that the imported quantity of aluminum hydroxide during the period
2000-2004 was revolving in the range of about 240 to 353 tones per annum. During this
period the highest quantity (353 tones) imported was during year 2003 and the lowest
(240 tones) during year 2001.

Exceptionally low and high import figures are registered during year 2005 and 2006. The
amount of aluminum hydroxide imported during 2005 was about 198 tones and sharply
increased to 410 tones by the year 2006. The average of these two years which is about
304 tones is slightly higher than the average of the previous five years. Compared to the
average of the first five years average import of year 2005-2006 is higher than by about
4%.
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In order to arrive at the current (year 2008) effective demand a 4% annual growth rate has
been applied by taking the recent two years average imported quantity as a base.
Accordingly current effective demand for the product is estimated at 329 tones.

2. Projected Demand

Due to its vast application the demand for aluminum hydroxide is expected to rise in the
future with the development of the end uses, mainly the manufacturing sector.

A number of projects in the paper, glass, ceramics, chemicals and the like are either under
implementation or at the stage of feasibility study. When these projects are fully
operational the demand for aluminum hydroxide will increase substantially. Considering
the past and future growth of the manufacturing sector, an annual growth rate of 10% is
applied to project the future demand (see Table 3.2).

Table 3.2
PROJECTED DEMAND FOR ALUMINAM HYDROXIDE (TONNES)

Year Projected Demand

2009 362
2010 398
2011 438
2012 482
2013 530
2014 583
2015 641
2016 705
2017 776
2018 853
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Demand for aluminum hydroxide in the country will increase from 362 tonnes in 2009 to
530 tonnes and 853 tonnes by the years 2013 and 2018, respectively.

3. Pricing and Distribution

The average imported CIF price of aluminum hydroxide in 2006 was Birr 27 per kg.
Allowing 35% for duty, inland transport and other charges Birr 36,450 per tonne is
recommended as a factory-gate price.

The end users of this product are manufacturing enterprises. Hence, direct sale to the end
users is the appropriate mode of distributing the product.

B. PLANT CAPACITY AND PRODUCTION PROGRAMME

1. Plant Capacity

The envisaged plant will produce aluminum hydroxide with annual capacity of 398
tonnes; working in single shift of 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 (see Table 3.3).

Table 3.3
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PRODUCTION PROGRAMME

Sr. Product Year of production

1 2 3-10
No.
1 Capacity utilization rate (%) 80 90 100
2 Aluminum hydroxide (tonnes) 318 358 398

IV. MATERIAL AND INPUTS

A. RAW AUXILIARY MATERIALS

The raw materials required for production of aluminum hydroxide are sodium carbonate and
aluminum sulphate. The total cost of annual raw and auxiliary materials in local currency is
estimated at Birr 10,929,000.

Table 4.1
ANNUAL REQUIREMENT OF RAW AUXILIARY MATERIALS AND COST

Description Unit of Qty. Unit Cost in

Measure Price Birr‘000
 110-8

Sodium carbonate Tonnes 796 350 2,786

4,250
Aluminum sulphate Tonnes 1,910 8,117.5
50 kg each paper bag Pcs 7,960 3.25 25.87

Total 10,929

B. UTILITIES

Utilities required for manufacturing aluminum hydroxide include electric power and water.
The annual utilities requirement of the plant is given in Table 4.2.

Table 4.2
ANNUAL REQUIREMENT OF UTILITIES AND COST

Sr. Description Unit of Quantity Unit Cost Total Cost

No. Measurement (Birr) (Birr)
1 Electricity kWh 48,320 0.4736 22,884.35
2 Water m3 25,000 3.25 81,250
Grand Total 104,134.4

V. TECHNOLOGY AND ENGINEERING

A. TECHNOLOGY

1. Process Description
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Sodium carbonate and water are dissolved in a vessel equipped with agitator. The
solution is then filtered. Then, aluminium sulphate is dissolved in water and added into
sodium carbonate solution. Additional sufficient water is added to the final solution. The
carbon dioxide produced is allowed to escape. The solution is further diluted with cold
water in a concrete tank and washed. The resulting gel is homogenized by agitation and
packed. Finally, some flavoring agents and preservatives are added.

Effluents of aluminum hydroxide production can cause contamination of 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 42,000.

2. Source of Technology

The technology required for manufacturing essential oil can be obtained from India. One of
the Plant and machinery supplier address is given below
Sterling Auxiliaries Pvt Ltd
Plot 30/31, Marol Co-operative Industrial Estate, Marol, Andheri (E) Mumbai
400059
Maharashtra, India

B. ENGINEERING

1. Machinery and Equipment

The list of production machinery and equipment required for the plant is provided in Table
5.1. The total cost of plant machinery and equipment is estimated at Birr 1,727,148, out of
which Birr 1,422,300 will be required in foreign currency.

Table 5.1
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MACHINERY AND EQUIPMENT REQUIREMENT AND COST

Sr. Cost in’000 Birr

No. Description Qty. FC LC TC
1 Vessel fitted with agitator 2 476.7
405.2 71.5
2 Filter press 1 202.6 35.8 238.4
3 Aluminum trays set 67.5 11.9 79.4
4 Drier 1 135.1 23.8 158.9
5 Pulverizer 1 135.1 23.8 158.9
6 Demineralized water plant 1 476.7 476.7
7 Concrete tank 2 - 42.0 42.0
8 Miscellaneous tools and set - 96.0 96.0
equipment
Grand Total 1,422.3 3 04.8 1,727.1

2. Land, Building and Civil Works

The total land requirement for the envisaged plant is estimated at 1,000 m 2; out of this
350 m2 is built-up area. Out of the total built up area, 200m 2 is for production facility,
90m2 is for store and the rest 60m2 is for office building. Cost of building construction at
a rate of Birr 2400 per m2 amounts to Birr 840,000.

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.
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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
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 5,000 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.
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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,
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
Grace Completion Down
Scored Point Period Period Payment
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 20.76 million of which 10% or Birr 2,076,000 will be paid in advance.
The remaining Birr 18.68 million will be paid in equal installments with in 28 years, i.e.,
Birr 667,286 annually.

VI. MANPOWER AND TRAINING REQUIREMENT

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A. MANPOWER REQUIREMENT

In order to run the envisaged plant efficiently, it needs 18 employees. The estimated
annual cost of manpower is Birr 243,000. The detail of which is shown in Table 6.1.

Table 6.1
MANPOWER REQUIREMENT AND ESTIMATED LABOUR COST

Sr. Req. Monthly Annual Salary

Description
No. No. Salary (Birr) (Birr)
1 Manager 1 3000 36,000
2 Administration + Finance Head 1 2,500 30,000
3 Secretary 1 900 10,800
4 Sales and purchase Head 1 2,000 24,000
5 Production Supervisors 1 1,800
21,600
6 Operators 2 1,200 14,400
7 Assistant Operator 2 900 10,800
8 Technicians 2 1,200 14,400
9 Laborers 3 1050 12,600
10 Store keeper 1 500 6,000
11 Guard 2 700 8,400
12 Driver 1 450 5,400
Sub-Total 18 194,400
Employees benefit 25 % 48,600
Total 243,000
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B. TRAINING REQUIREMENT

Training of production workers shall be carried out during plant erection and
commissioning by the experts of the machinery suppliers. The cost of such training is
estimated at Birr 35,000.

VII. FINANCIAL ANALYSIS

The financial analysis of the aluminum hydroxide 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 8.5%
Discount cash flow 8.5%
Accounts receivable 30 days
Raw material local 30 days
Work in progress 3 days
Finished products 10 days
Cash in hand 5 days
Accounts payable 30 days
Repair and maintenance 5% of machinery cost

A. TOTAL INITIAL INVESTMENT COST

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The total investment cost of the project including working capital is estimated at Birr
7.96 million, of which 18 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 2,076.00 - 2,076.00
2 Building and Civil Work 840.00 - 840.00
3 Plant Machinery and Equipment 1,422.30 1,769.10
346.8
4 Office Furniture and Equipment 100.00 - 100.00
5 Vehicle 450.00 - 450.00
6 Pre-production Expenditure* 409.03 - 409.03
7 Working Capital 2,318.51 - 2,318.51
  Total Investment cost 6,540.34 1,422.30 7,962.64

* N.B Pre-production expenditure includes interest during construction ( Birr 274.03

thousand), training ( Birr 35 thousand) and Birr 100 thousand costs of registration,
licensing and formation of the company including legal fees, commissioning expenses,
etc.

B. PRODUCTION COST
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The annual production cost at full operation capacity is estimated at Birr 12.02
million (see Table 7.2). The raw material cost accounts for 90.91 per cent of the
production cost. The other major components of the production cost are depreciation,
financial cost and direct labour and which account for 3.60%, 1.88% and 0.97%
respectively. The remaining 2.64 % is the share of utility, repair and maintenance, labour
overhead, financial cost and other administration cost.

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

Items Cost %
Raw Material and Inputs
10,929.00 90.91
Utilities 104.13 0.87
Maintenance and repair
86.36 0.72
Labour direct 116.64 0.97
Labour overheads
48.60 0.40
Administration Costs 77.76 0.65
Land lease cost
- -
Total Operating Costs 11,362.49 94.51
Depreciation 433.27 3.60
Cost of Finance 226.25 1.88
Total Production Cost
12,022.01 100

C. FINANCIAL EVALUATION

1. Profitability
 110-17

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 1.32 million to Birr
1.89 million during the life of the project. Moreover, at the end of the project life the
accumulated cash flow amounts to Birr 16.61 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

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 = 19 %
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
 110-18

the project. Accordingly, based on the projected cash flow it is estimated that the
project’s initial investment will be fully recovered within 4 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 25.71 %
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
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 6.60 million which is acceptable.

D. ECONOMIC BENEFITS

The project can create employment for 18 persons. In addition to supply of the domestic
needs, the project will generate Birr 3.29 million in terms of tax revenue. The
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establishment of such factory will have a foreign exchange saving effect to the country by
substituting the current imports.