111.

PROFILE ON ALUMINIUM SULPHATE FROM

KAOLIN
 111-2

TABLE OF CONTENTS

PAGE

I. SUMMARY 111-3

II. PRODUCT DESCRIPTION & APPLICATION 111-3

III. MARKET STUDY AND PLANT CAPACITY 111-4

A. MARKET STUDY 111-4
B. PLANT CAPACITY & PRODUCTION PROGRAMME 111-6

IV. MATERIALS AND INPUTS 111-7

A. RAW MATERIALS 111-7
B. UTILITIES 111-7

V. TECHNOLOGY & ENGINEERING 111-8

A. TECHNOLOGY 111-8
B. ENGINEERING 111-9

VI. MANPOWER & TRAINING REQUIREMENT 111-12

A. MANPOWER REQUIREMENT 111-12
B. TRAINING REQUIREMENT 111-13

VII. FINANCIAL ANLYSIS 111-13

A. TOTAL INITIAL INVESTMENT COST 111-13
B. PRODUCTION COST 111-14
C. FINANCIAL EVALUATION 111-15
D. ECONOMIC BENEFITS 111-17
 111-3

I. SUMMARY

This profile envisages the establishment of a plant for the production of aluminum
sulphate from kaolin with a capacity of 3,566 tonnes per annum. Aluminum sulphate is
used in sizing paper, mordant for dyeing, foaming agent in fire foams; fire proofing cloth,
leather tanning, clarifying agent for fats and oils and lubricating compositions and
precipitating agent in sewage treatment and water purification.

The major raw materials for the production of aluminium sulphate are kaolin and
sulphuric acid which are available locally.

The present demand for the proposed product is estimated at 6,745 tonnes per annum.
The demand is expected to reach at 21,169 tonnes by the year 2020.

The total investment requirement is estimated at Birr 9.77 million, out of which Birr 1.37
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 24.88 % and a
net present value (NPV) of Birr 6.34 million discounted at 8.5%.

The project has a backward linkage effect with sulphuric acid manufacturing plant and
kaolin production plant and a forward linkage effect with the manufacturing 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

Aluminum sulphate is a white, monoclinic (hydrate) crystalline and water soluble solid. It
is used in water purification, as mordant in dyeing and printing textiles, to reduce the PH
 111-4

of garden soil, as water proofing agent and accelerator in concrete, a foaming agent in
fire fighting foam and pain relief from stings and bites.

III. MARKET STUDY AND PLANT CAPACITY

A. MARKET STUDY

1. Past Supply and Present Demand

The country's requirement for aluminum sulphate is met through imports and local
production. The local producer of the product i.e. Awash Melkassa Aluminum Sulfate
and Sulfuric Acid Factory during the period 1996 – 1998 E.C has produced 4,596 tonnes
of aluminum sulphate. The amount of imports of the product during 1997-2006 is shown
in Table 3.1. As can be seen from the information depicted in the Table, the amount of
imports was fluctuating with a rising trend. During the period under reference, imports
varied from 20.16 tonnes in 1997 to 1022.10 tons in 2006. Imports averaged at 435.63
tonnes per annum during the period under consideration.

Table 3.1
IMPORTS OF ALUMINUM SULPHATE (TONNES)

Year Imports
1997 20.16
1998 80.38
1999 26.13
2000 -
2001 197.52
2002 90.00
2003 570.00
2004 913.08
2005 1001.31
2006 1022.10
Average 435.63
Source: Customs Authority, External Trade Statistics, 1997-2006.
 111-5

Assuming supply was driven by demand, the average annual supply for the recent three
years ( 2004 – 2006 ), which constitutes imports and local production, is considered as
the effective demand for the product for the year 2006. As stated above, aluminum
sulphate is widely used in various industries including the construction industry, paper
industry, and water treatment. Given the substantially remarkable economic growth that
has been achieved in the country and the developments that are observed in many of the
industries where the product is used as an input, a conservative estimate of 10% rate of
growth is adopted in estimating the demand for the product. The present demand for the
product (i.e. 2008) is, thus, estimated at 6,745 tonnes.

2. Projected Demand

As stated above, a growth rate of 10% is considered in projecting the demand for
aluminum sulphate. The projected demand for the product is shown in Table 3.2.

Table 3.2
PROJECTED DEMAND FOR ALUMINUM SULPHATE (TONNES)

Projected Existing Demand

Year Demand Supply Supply Gap
2009 7,420 4,596 2,824
2010 8,162 4,596 3,566
2011 8,978 4,596 4,382
2012 9,876 4,596 5,280
2013 10,863 4,596 6,267
2014 11,949 4,596 7,354
2015 13,144 4,596 8,549
2016 14,459 4,596 9,863
2017 15,905 4,596 11,309
2018 17,495 4,596 12,899
2019 19,245 4,596 14,649
 111-6
2020 21,169 4,596 16,573

3. Pricing and Distribution

Based on the CIF price of the external trade statistics for 2007 and allowing 25% for
import duty and other clearing expenses, the factory gate price for the envisaged plant is
estimated at Birr 5,000 per ton.

The envisaged plant can supply its product directly to users. The plant can also appoint
agents at selected locations.

B. PLANT CAPACITY AND PRODUCTION PROGRAMME

1. Plant Capacity

Basing on the market study, the envisaged plant will have a capacity of 3,566 tonnes per
annum to cover the unsatisfied demand of aluminium sulphate working in two shifts for
300 days per annum.

2. Production Programme

Production will commence at 80%, and then will grow to 90% and 100% in the second
year, and the third year and then after, respectively. The plant starts operation at a lower
capacity due to the period needed to develop skill in the production and fine tuning of
machineries and market penetration. Detail production programme is shown in Table 3.3
below.
Table 3.3
PRODUCTION PROGRAMME

Year 1 2 3&
onwards
Capacity utilization (%) 80 90 100
 111-7
3,209 3,566
Production (tones) 2,853

IV. MATERIALS AND INPUTS

A. RAW MATERIALS

In additional to sulphuric acid, a source of aluminium is required for aluminium sulphate

production and frequently pure minerals like kaolin or bauxite are used. But for the
envisaged project Kaolin is used as aluminium source. Sulphuric Acid will be obtained
from Aluminum Sulphate and Sulphuric Acid Plant found at Awash Melkasa. Kaolin is
white, soft, non-plastic clay mainly composed of fine-grained platy minerals, kaolinite, that
is generally derived from alteration of alkali feldspars and micas. Kaoline is found
abundantly in Kenticha, Buambuawiha and Hosaena of SNNPRS. The total cost of annual
raw materials is estimated at Birr 8,460,130.

Table 4.1
ANNUAL CONSUMPTION OF RAW AND AUXILARY MATERIALS & COST

No. Description Unit Of Qty Unit Cost Cost In '000 (Birr)

Meas. (Birr) F.C L.C Total

1 Kaolin Ton 1,733 500.02 - 866.53 866.53

2 Sulphuric acid Ton 1,836 4,000 - 7,344.0 7,344.0

3 PP bags for packing pcs 71,320 3.50 249.62 249.62

Total cost 8,460.13 8,460.13

B. UTILITIES
 111-8
Utilities required for manufacturing Aluminium sulphate from Kaolin include electric
power, water and furnace oil. The annual utilities requirement of the plant is given in Table
4.1.

Table 4.1
ANNUAL CONSUMPTION OF UTILITIES

Description     Cost
Unit of Qty. ( in 000 Birr )
Measur  
e
Electricity kWh 105,00 49.73
0
Furnace oil m3 224 1,308.16
Water m3 15,000 48.75
Total     1,406.64

V. TECHNOLOGY AND ENGINEERING

A. TECHNOLOGY

1. Process Description

Prepare 35% kaolin suspension in a reactor and add proportional amount of sulphuric
acid. The leaching process is to be conducted at 145-150oC at 0.45 atm. for 4-6 hours.
The post suspension in the reactor tank is agitated at 80oC and then filtered by filter press
at 200 bars. The liquid and solid part is separated by filtration; the solid part (filter cake)
is silica sand, which is the byproduct. The filtrate is a mixture of aluminum oxide and
aluminum sulphate. The aluminum sulphate is separated from the oxide by evaporating at
113oC and crystallizing.

The liquid waste to be generated due to leakage of pipes and vessels and washing of the
production facility is collected in a concrete made containment vessel. The content will
 111-9
be neutralized by checking its PH and adding caustic soda till it becomes neutral and safe
for disposal. The construction cost of the vessel with its accessories like pump and stirrer
is estimated at Birr 90,000. The annual cost of the required treatment comical i.e. caustic
soda is estimated at Birr 15,000.

2. Source of technology

The technology of aluminum sulphate production machinery can be purchased from

India. Addresses of machinery suppliers is given below:-

MEGATECH INTERNATIONAL PVT, LTD.

G-1-1428, RHCO Industrial Area, Phase V, Rampur, Mundana, Bhiwadi – 201301,
Rajasthan, India
Phone: 91-1493-512430
Fax: 91-1493-226000

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 1,287,000 out of
which Birr 1,093, 950 will be in foreign currency.

Table 5.1
LIST OF REQUIRED MACHINERY & EQUIPMENT AND THER COST

Cost in Birr .000

Sr.
Description Qty
No. LC FC Total
1 Digester 2 - 437.58 437.58
2 Suspension tank 2 38.61 - 38.61
3 Filter press 2 - 87.51 87.51
4 Evaporator 2 - 328.18 328.18
5 Storage tank 3 144.78 - 144.78
6 Crystallizing tray 2 - 109.39 109.39
7 Ball mill 4 - 131.27 131.27
8 Pump 4 9.653 - 9.65
Total 193.05 1,093.950 1,287.00
 111-10
1. Land, Building and Civil Works

The total land requirement for the envisaged plant is estimated at 2000 m 2 out of this 600
m2 is built-up area. 400 m2 of the built up area is covered by production facility, 140m 2 is
used for store and the remaining balance i.e. 60 m 2 will be used for office building. Cost
of building construction with at rate of Birr 2400 per m2 amounts to Birr 1,440,000.

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
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
 111-11
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,
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%
 111-12

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 297,000. The detail of which is shown in Table 6.1

Table 6.1
MANPOWER REQUIREMENT AND ESTIMATE ANNUAL COST

SR. Req. Monthly Annual Salary

Description
No. No. Salary (Birr) (Birr)
1 Manager 1 3,000 36,000
2 Administration + Finance Head 1 2,500 30,000
3 Secretary 1 900 10,800
4 Sales and purchase Head 1 2,500 30,000
5 Production Supervisors 1 1,800
21,600
6 Operator 3 1,800 21,600
7 chemist 1 1,000 12,000
8 Technicians 2 1,200 14,400
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 24 237,600
Employees benefit 20 % 59,400
 111-13
Grand Total 24 297,000

B. TRAINING REQUIREMENT

The training of 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 aluminum sulphat from kaolin 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 2 years
Bank interest 8.5%
Discount cash flow 8.5%
Accounts receivable 30 days
Raw material local 30 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
9.77 million, of which 11 per cent will be required in foreign currency. The major
breakdown of the total initial investment cost is shown in Table 7.1.
 111-14

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 1,440.00 - 1,440.00
3 Plant Machinery and Equipment 283.1 1,093.95 1,377.00
4 Office Furniture and Equipment 100.00 - 100.00
5 Vehicle 450.00 - 450.00
6 Pre-production Expenditure* 609.97 - 609.97
7 Working Capital 1,641.12 - 1,641.12
  Total Investment cost 8,676.14 1,093.95 9,770.09

* N.B Pre-production expenditure includes interest during construction ( Birr 459.97

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 10.94 million
(see Table 7.2). The raw material cost accounts for 77.46% of the production cost. The
other major components of the production cost are utility, depreciation and financial cost
which account for 12.86%, 3.35% and 3.02% respectively. The remaining 3.30% is the
share of direct labour, repair and maintenance, labour overhead and other administration
cost.
 111-15

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

Items Cost %
Raw Material and Inputs
8,475.13 77.46
Utilities 1,406.64 12.86
Maintenance and repair
64.35 0.59
Labour direct 142.56 1.30
Labour overheads
59.40 0.54
Administration Costs 95.04 0.87
Land lease cost
- -
Total Operating Costs 10,243.12 93.62
Depreciation 330.70 3.02
Cost of Finance 366.96 3.35
Total Production Cost
10,940.78 100

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 1.69 million to Birr
2.38 million during the life of the project. Moreover, at the end of the project life the
accumulated cash flow amounts to Birr 17.01 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
 111-16

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 = 25 %
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 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
 111-17
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 project is computed to be 24.88 %

indicating the viability 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 6.34 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 3.70 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 has a backward linkage effect with sulphuric
acid manufacturing plant and kaolin production plant and a forward linkage effect with
the manufacturing industries.