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Contents
I. OVERVIEW OF THE COMPANY....................................................................3

II. ANALYSIS OF THE BUSINESS ENVIRONMENT........................................4

III. INVESTMENT REGIME...............................................................................8

IV. MARKET ANALYSIS..................................................................................16

V. FINANCIAL ANALYSIS.................................................................................21

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I. OVERVIEW OF THE COMPANY

East Steel Pvt. Ltd. Co. was established in 25/10/2006 by two

shareholders with a paid up capital of 100,000,000. The company is
registered at the Ethiopian Investment Agency under investment
license no., EIA-IP 11776/06 to engage in manufacturing of steel
products. The two shareholders with a total paid up capital of
100,000,000 have divided into 10,000 shares with par value of 10,000
(ten thousand) per share.

Details of the shareholders and their share composition are at the time
of establishment is explained in the following table.

Shareholder’s composition at the time of Establishment

Total Percentage
Shareholder’s Name No Shares Par Value
Value (%)
Mr. Lu Qiyuan 5,100 100,000.00 51,000,000 51%

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Libo-Sisay Joint Investment 4,900 10,000.00 49,000,000 49%

PLC

TOTAL 10,000 10,000.00 100,000,0 100%

00

However, as per the minutes of the shareholders meeting held on May

2008, Libo-Sisay Joint Investment PVT Ltd. Co has sold 2,450 of its
share to Mr. Li Peihua and the remaining 2,450 of its share to Mr. Lu
Qizhong,. based on an agreement of shares transfer concluded
between itself and Mr. Li Peihua and Mr. Lu Qizhong. As a result, the
shares of the company divided amongst the three Chinese individuals
(Mr. Lu Qiyan 5,100 shares; Mr. Li Peihua 2,450 shares, and Mr. Lu
Qizhong 2,450 shares).

Again in the shareholders meeting held on November 15 th 2012, Mr. Lu

Qiyuan declared that he intends to transfer 5,000 of his shares to
Jiangsu Hua Jinyuan Investment Co., at the existing par value of Birr
10,000 per share with the total amount of 50,000,000 by sale and
retain the remaining 100 shares only. Similarly, the other two
shareholders Mr. Lu Qizhong and Mr. Li Peihua has transferred the
shares of 2450 each (4900) at the existing par value by sale to Jiangsu
Hua Jinyuan Investment Co., Ltd.

Presently, the paid-up capital is raise to Birr 279.5 million.

Name of Nationali No. of Par Total (Birr) Percenta

Shareholders ty share Value ge

Jiangsu Hua Jinyuan Chinese 27,678 10,000 276,780,000 99%

Investment Co., Ltd .00

Mr. Lu Qiyuan Chinese 279 10,000 2,790,000.0 1%

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0

Total Paid up capital 27,957 279,570,00 100%

0

Mr. Lu Qiyuan is the president of Jangsu Qiyuan Group which is large-

scale and diversified production company located in Jangsu Province of
China. The Group owns subsidiaries such as Zhangjiangang Zhongyuan
Pipe-Making Co. Ltd., Jiangsu Zhonggang Metallurgy Equipment
Technology Co. Ltd., Zhangjiagang Zhongxin Steel Sheet Co. Ltd. and
Zhangjiagang Zhongjia Steel Co. Ltd etc. Hence, East Steel PLC Birr is
fully owned by JIANGSU HUAJINYUAN INVESTMENT CO, LTD of China

East Steel PLC is located in Eastern Industry Zone in Dukem town,

Oromia region about 35 kilometres from Addis Ababa produces
deformed reinforcement bars in sizes ranging from 8-32 mm. The
Factory has annual production capacity of 1,300,000 which is 300,000
ton in the old factory and 1,000,000 ton in the new factory.

At present the factory have a total of 150 employees. East Steel PLC is
lead by highly experienced management team each with a substantial
practical experience in running/ managing manufacturing operations in
general and metal industries in particular.

II. ANALYSIS OF THE BUSINESS ENVIRONMENT

Ethiopia offers a politically stable and secure environment for
investors. Generous incentives provided by the government such as
tax holidays, exception from custom duties and full repatriation of
profits, dividends, principal and interest payments on external loans
create a favorable operating environment. In particular investors in
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basic metals and engineering industries are entailed to the incentives
offered, which is a major encouragement for potential investors.

The country’s economy has experienced strong economic growth over

the past ten years and is forecasted to become the third fastest
growing economy in the world by 2015. Hence, it can be concluded
that the large population size and rapid urbanization coupled with
robust economic growth will create a huge local demand for metal
products. Ethiopia is also geographically positioned to provide good
access to African, European, Middle Eastern and Asian export markets.
The country also enjoys Duty Free and Quota Free (DFQF) privilege
extended by international markets of USA (AGOA), EU (EBA), China,
India, Japan and Korea.

The country has a large workforce and due to the priority given by the
government to the education sector, Ethiopia can avail skilled and
semi-skilled labor forces that are needed for industrialization in general
and pulp and paper industries in particular at very competitive cost
compared to similar developing countries.

The fast improving ICT infrastructures in the country will favorably

influence the operational efficiency of manufacturing industries.

The infrastructure development program now underway is greatly

improving the country’s infrastructure capacity in terms of access to
road, power, transportation and telecommunications. Ethiopia’s
connections to global markets are also being significantly upgraded
with new, high-speed rail and road corridors under construction. For
international trade, this will position Ethiopian industries closer to fully
modern seaport facilities (Djibouti), on a trade route accounting for
30% of global container traffic and connecting East, South, and West
Asia to Europe and the Americas, a position that has historically been a
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natural advantage for Ethiopia. Moreover, various plans of the
Government have set targets for further improvements in the areas of
infrastructure.

Accordingly, it can be concluded that Ethiopia is ideal for

manufacturing investment in general and basic metals and engineering
industries such as the envisaged expansion project in particular.

External business environments affect the operations of the envisaged

project. A prior review of the situations would help to foresee factors
that may affect the project and pave the way to make preparations
ahead. Accordingly, analysis of business environments and their
impacts as related to the activity of the envisaged project are briefly
discussed below.

Since the installation of a federal democratic government in 1992,

Ethiopia has built a politically stable, secure and peaceful working
environment. Due to the extensive reform undertaken significant
progress has been achieved in good governance & public service
delivery, in ensuring transparency of operation, efficiency and
accountability. According to Investment Guide to Ethiopia:
Opportunities and Conditions: which was published jointly by UNCTAD
and ICC, Ethiopia offers a stable political and economic environment as
well as security; exceptional climate; almost complete absence of
routine corruption; and continuously improving public service delivery,
which makes the country potentially an ideal destination for
investment.

Security in Ethiopia has been ranked 55th out of 148 countries by the
World Economic Forum (Global Competitiveness Report, 2013-2014),
well above most of its regional peers such as South Africa (109 th),
Kenya (131st), and Nigeria (142nd). In fact, Ethiopia ranked 36th and 38th
globally in business costs of crime and violence and organized crime.

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More specifically, even though Ethiopia is a large and very diverse
country, the political environment is characterized by very little crime
and disorder. Since Ethiopia is one of the less developed countries with
the lowest levels of corruption, it can claim to offer one of the cleanest
business climates in the developing world. Thus, the publication cited
above describes Ethiopia as "Safe, peaceful, stable and very nearly
free of corruption". Ethiopia is also a signatory of the United Nations
Convention against Corruption.

The present government has adapted a long-term overall economic

development strategy that is the Agricultural Development Led
Industrialization (ADLI). As the name implies agriculture development
is chosen to act as the springboard for the country’s overall
development.

ADLI is a two-pronged strategy incorporating, on one side, the external

sector (export -led part) and, on the other, the internal sector which
shows the forward and the backward-linkages between agriculture and
industry. The base of the strategy is that agriculture will supply
commodities for exports; domestic food supply and industrial input and
expand market for domestic manufactures.

In order to achieve the objectives of ADLI, industrial sector

development strategy was also adopted in July 2003. The fundamental
principles of the strategy include: private sector led industrialization,
development of export oriented industries, strengthening the capacity
of existing industries to be competitive at the national, regional and
international levels and investment promotion and facilitation with
increased emphasis on foreign investment. Utilizing to the extent
possible, labour intensive technologies with a view to creating
employment, generating incomes and alleviating poverty.

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Moreover, the economic development strategy and policy landscape of
the country has entered a new phase with the launching of a new five-
year development plan i.e. the Growth and Transformation Plan (2011-
2015). The plan envisages the transformation of the country’s
economy from agrarian to industrial. Furthermore, realizing that basic
metal and engineering industry is the engine for industrial
development, the government has given high priority for the sub
sector and to this end it has established Metal Industries Development
Institute to support and facilitate the growth of the sub sector.

The Ethiopian Association of Basic Metals and Engineering Industries

has also been established , with the objectives of promoting the rapid
modernization of the Ethiopian Metal and Engineering industry by
fostering closer cooperation between and among the members of the
industry, the academe, and the government and by serving as
catalyst in consolidating their efforts and in mobilizing available
resources. The Association has been exerting various efforts to find
and alleviate the problems that challenge the local Metal and
Engineering industry. Accordingly, the existence of the Association is
an opportunity for East Steel PLC especially as a platform for
collectively lobbying for an improved business environment.

III. INVESTMENT REGIME

Ethiopia’s investment Code provides incentives for development related investments.
Other than those exclusively reserved for domestic investors the Ethiopian government
reviews investment proposals in non discriminatory manner. The screening process is not
regarded as an impediment to investment. Hence, laws and regulations with regard to
licensing, credit, and land allocation are generally positive for investment. The
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government has also put forward various incentives to encourage private investment.
Accordingly, the following incentives are granted to investors.

III.1. FISCAL INCENTIVES

a) Customs Duty

Applicable to both domestic and foreign investors engaged in eligible new

enterprises or expansion projects the following exemption from customs duty are
provided;

 100% exemption from the payment of customs duties and other taxes
levied on imports is granted to all capital goods, and
 Exemption from the payment of customs duties and other taxes for
imported spare parts worth up to 15% of the total value of the imported
investment capital goods,

An investor granted with a customs duty exemption will be allowed to import capital
goods duty free indefinitely if his investment is in manufacturing and agriculture and for
five years if his investment is in other eligible areas.

Moreover, an investor entitled to a duty-free privilege who buys capital goods or

construction materials from local manufacturing industries shall be refunded the
customs duty paid for raw materials or components used as inputs for the production of
such goods. Furthermore, investment capital goods imported without the payment of
custom duties and other taxes levied on imports may be transferred to another investor
enjoying similar privileges. Basic metals and engineering industries such as the envisaged
project are included in the areas of investment eligible for exemption of customs duty.

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b) Income Tax Exemption

Depending on the specific activity and the location of the project investors are entitled
to income tax exemptions for a period ranging between 1 and 9 years. Investment
projects located in Addis Ababa and special zones of Oromia surrounding Addis Ababa
are entitled to income tax exemptions for a period 1 up to 5 years while investors
located in other areas are entitled to an exemptions for a period 2 up to 6 years.

In addition, any investor who establishes a new enterprise in Gambella;

Benshangul/ Gumuz; Afar (except in areas within 15 kilometers right and left of
the Awash River); Somali; Guji and Borena Zones (in Oromia); or South Omo
Zone, Segen (Derashe, Amaro, Konso and Burji), Bench-Maji Zone, Sheka Zone,
Dawro Zone, Keffa Zone, Konta and Basketo Special Woredas (in Southern
Nations, Nationalities and Peoples Region) is entitled to an income tax deduction for
three consecutive years after the expiry of the income tax exemption period specified
above.

Investors who export at least 60 percent of their products or services, or supply these to
an exporter, will also be exempted from the payment of income tax for an additional 2
years.

Apart from location the criterions used for deciding what income tax exemption will be
provided for a particular project are source of raw material (level of local resource
utilization), foreign currency earning potential (export), level of import substitution,
employment creation level of opportunity and magnitude of investment cost.

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Therefore, the envisaged expansion project will be entailed for a 3 to 5 years income tax
exemption, which is a major enticement for an investor, since income tax exemption will
highly contribute to the reduction of the investment‘s payback period.

c) Export Incentives

Fiscal incentives available to all exporters include: With the exception of a few products
(e.g. semi-processed hides and skins), exception from export tax, duty drawback scheme,
voucher scheme and bonded factory and manufacturing warehouse schemes.

d) Loss carry forward

Business enterprises that suffer losses during the income tax exemption period can carry
forward.

III.2. Non-Fiscal Incentives

Non- fiscal incentives are given to all investors who produce fully or partially exported
products and include import of machinery and equipment necessary for their investment
projects through suppliers’ credit, retaining and deposit in a bank account up to 20
percent of their foreign exchange earnings, franco valuta import of raw materials
and export credit guarantee scheme.

a. Remittance of capital

A foreign investor has the right to make remittances out of Ethiopia in convertible foreign
currency including profits and dividends, principals and interest payments on external
loans, payments related to technology transfer agreements, proceeds from the sale or

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liquidation of an enterprise and proceeds from the sale or transfer of shares or
partial ownership of an enterprise to a domestic investor.

b. Guarantee to Investors

Guarantees provided to investors and Ethiopia`s membership status in international

organizations which relate to this issue are:

 The Investment Proclamation provides investment guarantee against measures

of expropriation and nationalization that may only occur for public interest and
in compliance with the requirement of the law. The Government guarantees to
provide adequate compensation corresponding to the prevailing market value of
property and such payment shall be effected promptly;
 Foreign investors can freely remit profits, dividends, principal and interest on
foreign loans, fees related to technology transfer and proceeds from the
liquidation of a business;
 Foreign companies do not face any discrimination with respect to tax treatment,
license, import or export policies, and tariffs.
 Ethiopia is a member of the World Bank-affiliated Multilateral Investment
Guarantee Agency (MIGA), which issues guarantees against non-commercial
risks to enterprises that invest in signatory countries;
 Ethiopia is being concluding bilateral investment promotion and protection
agreements with a number of developed and developing countries.
 Ethiopia has signed the World Bank treaty of “International Convention on
Settlement of Investment Disputes (ICSID)” between states and nationals of
other states;
 Ethiopia has also an observer status in the World Trade Organization (WTO).

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c. Economic Incentives

The International Monetary Fund (IMF) ranks Ethiopia as among the five fastest growing
economies in the world. After a decade of continuous expansion (during which real GDP
growth averaged 10.8% per annum), in 2013/14 the Ethiopia economy has grown for
11th consecutive year registering 10.3% growth rate. All of the economy’s main sectors
performed well. Agriculture (which represents 40.2% of GDP) grew by 5.4%, industry
(14% of GDP) expanded by 21.2% and services (46.2% of GDP) rose by 11.9%.

Moreover, with a target of reaching middle income nation status in 2025, the positive
performance of the Ethiopian economy is expected to continue in the future. As a result,
local demand for metal products such as rebar is expected to increase substantially as
economic expansion continues.

d. Socio-cultural

Ethiopia’s current population of 115 million, Africa’s second highest, provides for a large
domestic market. The Central Statistical Agency of Ethiopia projected the country's
population to be over 106 million by the year 2020 and nearly 130 million by the year
2030. In 1984, the number of urban centers in Ethiopia, with a population 2000 and
above, was 312. This number grew to 534 in 1994 (CSA 1994 census). Today, the
number of urban centers estimated to be more than 924. In 1967 the urban population of
Ethiopia accounted only to 7.2 percent to the total population of the country (CSA, 1967).
Over the period between the next two censuses, the proportion grew to 11 percent (CSA,
1984) and 14.63% (CSA 1994). During 2012 the share of urban population has further
grown to 16.75%. Ethiopia’s urban growth rate of 4.0% is not the highest in Africa, but
it is much higher than the 3.2 average for the continent and the same as the average for
least developed countries (UNFPA, 2007).

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One of the features of Ethiopia`s demographic characteristics is that a large number of the
population join the national workforce each year. According to Growth and
Transformation Plan (GTP), the ratio of the population of working age to the total
population is about 54% and estimates are that each year additional 1.2 million people
join the national work force. Provided that the additional workforce receive the support
necessary to be productive, the country`s workforce plays a significant role in increased
economic growth and development.

In this regard, due to the priority given by the government to the education sector, which
is the basis for human resource development, the sector has shown a remarkable
achievement at all levels. Furthermore, as part of the government’s effort to create a
skilled labor force, the Technical and Vocational Education and Training (TVET)
program is given high priority.

The above points discussed reveal that the country can avail skilled and semi-skilled
labour forces that are needed for industrialization in general and metal industries in
particular. Moreover, due to the abundant work force availability, the cost of the labor
force is very competitive compared to the labor cost of Asian countries like China and
India and many other African countries like Kenya, Uganda, and Egypt.

e. Technology

The advancement of science and technology in the world and the spread of same in the
country will favorably influence the operational efficiency of metal industries. The spread
of information and technology and the availability of internet services, the ability to
conduct virtual conferences, the possibility of processing and distribution of data using
computer hardware and software, telecommunications, and digital electronics will create
an opportunity for metal industries to become more effective. In short, the possibility for
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transforming the efficiency of metal industries into higher level through the utilization of
IT is more feasible today than any other time before.

Ethiopia’s ICT infrastructure is showing marked improvements. Currently, all regional

cities and towns are connected by direct microwave links, and have automatic telephone
and cellular phone services. International links are maintained via satellite earth stations
and fiber optics, providing telephone, telex, fax, internet, television, digital data
transmission, pre-and post-paid cellular phones and coin box services. Furthermore, the
country is currently engaged in a major transformation work of Next Generation Network
(NGN) projects to create a world class ICT infrastructure.

f. Availability of Infrastructure

In general, availability of adequate and efficient infrastructure services is a chief factor

that determines the transaction costs of a business, certain level of infrastructure
development is a necessary condition for a country’s manufacturing sector growth.
Inadequate supply of basic infrastructure services discourages the development of the
manufacturing sector including basic metal industries.

In Ethiopia, owning to the series of Road Sector Development Programs, which is started
in 1997 the stock of roads in the country has increased significantly. For example, the
road length, excluding Woreda roads, has increased from 26.6 thousand km in 1997 to
53.14 thousand km in 2011; which means the length of roads has doubled compared from
a decade and half ago.

The Ethiopian Airports Enterprise (EAE) owns and operates 18 airports. The Enterprise
has embarked on upgrading of the existing airports infrastructure facilities and its related

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systems. EAE plans to operate a total of 21 airports across the nation by the end of 2015
fiscal year.

Air transport is an important part of Ethiopia's transport network. Ethiopian Airline has
gained a very good reputation internationally in its 68 years of active services. As of May
2014, the carrier served 79 international and 18 domestic passenger destinations.
Regarding Ethiopian cargo services, it operates over 40 cargo destinations spread across
Africa, Europe, Asia and the Middle East via its hub in Addis Ababa, and another cargo
hub at Liege.
Currently Ethiopia has a limited rail service. However, realizing the cost effectiveness
and the importance of railway transport the government has identified eight railway
corridors for study; design and subsequent implementation, the total length of which is
about 4,744 km. A total of 2,300 km of railway has been planned for construction in the
GTP period, and EPC contractors have commenced construction of the Addis Ababa –
Djibouti railway corridor.
In order to ensure efficient, cost effective and reliable import and export movement of
cargo to and from the sea ports of neighboring countries, the government has established
the Ethiopian Shipping and Logistics Services Enterprise (ESLSE). The Enterprise is
currently operating two dry ports which are located at Modjo and Semera, 73 km and 588
km from the capital, respectively.

The ESLSE provides Coastal and International Marine and Internal Water Transport
services from/to Djibouti Port, through over 40 ports across the globe in the Gulf area and
around the Indian Sub Continent, China, Korea, Japan, Singapore, South Africa and
Indonesia.

Ethiopia has achieved a remarkable growth in electric power generating capacity,

construction of power transmission lines and accessibility of electricity in the past few
years. Accordingly, by the end of 2010 the country`s power generating capacity has
reached 2000 MW, which was only 714 MW during year 2005. At the end of the GTP
period (2015), the power generation capacity of the country is planned to increase to
10,000 MW. As a result, the country’s electricity coverage is assumed to grow from 41%
in 2010 to 75% in 2015.
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g. Access to export market

Ethiopia situated at the cross-roads of Africa and the Middle East is geographically well-
positioned and accessible to wide and growing markets. Easy access to Middle East and
Asia through the port of Djibouti and close proximity to Europe also enable Ethiopian
exports. The country also enjoys Duty Free and Quota Free (DFQF) privilege extended
by international markets of USA (AGOA), EU (EBA), China, India, Japan and Korea.
Moreover, membership to Common Market for Eastern and Southern Africa (COMESA)
offers great potential market for Ethiopian export products in 19 African countries.

From the above analyses it can be concluded that Ethiopia offers a politically stable and
secure environment for investors. Generous incentives provided by the government such
as tax holidays, exception from custom duties and full repatriation of profits, dividends,
principal and interest payments on external loans create a favorable operating
environment. In particular investors in basic metals and engineering industries are
entailed to the incentives offered, which is a major encouragement for potential investors.

The country’s economy has experienced strong economic growth over the past ten years
and the strong economic growth is forecasted to continue. Hence, it can be concluded that
the large population size and rapid urbanization coupled with robust economic growth
will create a huge local demand for construction inputs such as rebar. Ethiopia is also
geographically positioned to provide good access to African and Middle Eastern markets.
The country also enjoys Duty Free and Quota Free privilege extended by a number of
export markets.

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The country has a large workforce and due to the priority given by the government to the
education sector, Ethiopia can avail skilled and semi-skilled labour forces that are needed
for industrialization in general and metal industries in particular at very competitive cost
compared to similar developing countries.

The fast improving ICT infrastructures in the country will favorably influence the
operational efficiency of manufacturing industries.

The infrastructure development program now underway is greatly improving the

country’s infrastructure capacity in terms of access to road, power, transportation and
telecommunications. Ethiopia’s connections to global markets are also being significantly
upgraded with new, high-speed rail and road corridors under construction. For
international trade, this will position Ethiopian industries closer to fully modern seaport
facilities (Djibouti), on a trade route accounting for 30% of global container traffic and
connecting East, South, and West Asia to Europe and the Americas, a position that has
historically been a natural advantage for Ethiopia. Moreover, various plans of the
Government have set targets for further improvements in the areas of infrastructure.

Accordingly, it can be concluded that Ethiopia is ideal for manufacturing investment in

general and basic metals industries such as the envisaged expansion project in particular.

IV. MARKET ANALYSIS

The Ethiopian market for reinforcement bar (rebar) is supplied both from domestic
production and imports. Local production of rebar is characterized by a growth trend.
Local production which was 10,773 tons in year 2004 has increased to 280,688 tons in
year 2014, registering an average annual growth rate 44.66%. During the same period
import of the product has increased from 103,772 tons to 328,247 tons.

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Total supply or apparent consumption of rebar has been characterized by a noticeable

growth trend, registering an average annual growth rate of 35% during the last seven
years.

Marketing is an essential role of every business organization and marketing activities

must be performed for the survival of every business organization. Although many
factors affect an organization’s marketing strategy, all marketing decision-making can be
classified into four strategy elements, sometimes referred to as the marketing mix or the
four P’s: Product, price, place (distribution) and promotion. While these four factors are
important individually, their real significance lies in the mix, the unique way they are
combined into a careful plan or strategy. The combination of these four factors is the
foundation of any marketing plan.

a. Product Quality

Product quality has two dimensions, i.e., level and consistency. Level means the producer
must first choose a quality level that will be acceptable in the target market and in a level
that comply with the quality of competing products. Consistency refers to the consistent
delivering of ones established quality through strict quality control measures.

Accordingly, the envisaged factory should acquire modern machineries and safe guarded
production process with a system of optimally combined machine operations and control
of them by qualified and trained technicians. Besides, quality control should be given top
priority specially in selecting of raw material, grade and process control so that the
factory could achieve its aims through producing the leading quality products.
Consequently, the quality policy of the envisaged plant should be;

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 To manufacture high quality products

 To meet customers requirement and satisfaction and

 To meet regulatory requirement

The envisaged factory shall fulfill the above quality policy through;

 Adopting state of the art technology

 Periodically assessing customers and regulatory requirement and upgrading

products and manufacturing process

 Implementing ISO 9001 : 2000

 Adopting and implementing Quality management System adhering to

international standards

 Employing the best available personnel and training them periodically to update
the skill and knowledge

b. Pricing

Pricing a product is an important and critical activity since it is the major factor in
determining revenue. If a lower price is fixed, it will affect the profitability of the
company, and if a higher price is fixed, the product will not be able to stand in market
competition and may be forced out of the market. Therefore, the right price has to be
fixed.

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In general, price setting is done by selecting one of the two frequently used pricing
approaches. The simplest method is cost-based approach (Cost-plus pricing), which
involves adding a standard mark-up to the cost of the product, and competition based
approach (going-rate pricing), which bases its price largely on competitors’ prices.

In the local market for rebar the major suppliers, comprising local and foreign
manufacturers, are offering similar products to the market, with no threat of competition
from substitutes. Basically imported and locally produced reinforcement bars have
similar dimensional and sectional properties, though few complaints exist about quality
of the imported ones especially from countries such as China being poor. In general they
are not differentiated along lines of quality and other features. In a situation like this the
market becomes a battleground of major contenders, price being their main weapon. The
buyers are highly sensitive to price changes. Thus the seller that offers lower price to
these products would command a large share of the market.

The current retail price of imported rebar is higher than the locally produced rebar, which
is mainly due to quality of the products

C. distribution

Distribution refers to the distribution of the product to the consumers by the producer
while channel of distribution is the network of middlemen through whom the products
flows till it finally reaches to the hands of the actual users or consumers.

Channel of distribution varies in its form and length from consumer goods to industrial
goods and within one class of goods; it varies from product to product. For a consumer
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market a retailer is essential, whereas in the industrial market the retailer can be
eliminated. For a perishable commodity, the producer prefers few and controlled levels of
distribution, while for durable and standardized goods a longer and diversified channel
may be necessary. Size and average frequency of customer’s orders also influence the
channel decision.

The following are the main alternative distribution channels commonly used by
producers to reach consumers.

 Direct sale to consumers:

- Manufacturer Consumer

 Indirect sale through the medium of third party:

- Manufacturer Wholesale Retailer Consumer

- Manufacturer Agent Wholesaler Retailer Consumer

- Manufacturer Retailer Consumer

 A combination of both direct and indirect sale.

An ideal distribution system has economic benefits for both the manufacturer and the
consumer and it involves the manufacturer or the intermediaries offering the right
product, in the ‘right quantities’ at the ‘right price’ at the ‘right time’ with the ‘right
appeal’.

Accordingly, for the envisaged factory, its product is an intermediate product used by the
construction sector; however, geographical distribution of end users is widely scattered
throughout the country since construction activities are under taken in every corner of the
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country. Accordingly, by taking the nature of the products and the characteristics of the
end users a combination both direct distribution to end users (for bulk purchasers) and
indirect distribution (using agents) is selected as the most appropriate distribution channel
for the envisaged project.

e. Promotion

Market promotion is an important part of the marketing mix, as it is required to create

and increase consumer awareness, knowledge and readiness to buy through media
communications ( advertising ) and through special offers to trade and / or consumers
(sales promotion). However, it is important to realize that, on its own; market promotion
will not replace selling, change long-term trends, or build long-term customer loyalty. It
has to be supported by quality and distribution efficiency.

The envisaged factory is recommended to aggressively advertise its product using mainly
TV advertisements. Along with this the company should prepare and distribute calendars,
pamphlets as well as participate in exhibitions and bazaars. Moreover, in a competitive
market, trade promotion should be made to persuade or to make a product attractive for
end users. Such trade promotional tools include; credit and discount with the volume of
products sold etc. The envisaged factory is recommended to offer discounts with the
volume of product bought and provide credit facilities.

f. Product Mix

The major factor considered for selecting product mix is market demand. The import
figures compiled from the Ethiopian Customs Authority are of little use to determine the
various sizes of reinforcement bars available in the Ethiopian market and to differentiate
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those sizes that are fast selling in the market. To overcome this shortcoming, a visit was
made to important intermediaries and to wholesalers/retailers. The discussions focused
mainly on marketability of products, marketing infrastructure, product prices and quality,
marketing arrangement with potential buyers (bulk purchase) and their market position
visa-vise potential competitors.

According to the information gathered during this visit the reinforcement bars being sold
in the market range from a diameter of 6mm to 32mm. Their demand entirely depends on
the volume and type of construction activities being undertaken in the country at some
given point in time. The larger sizes, ranging from Ø20 to Ø32, are usually demanded
when heavy construction activities such as high rise building, bridges and dams
constructions are being undertaken. The smaller sizes that fall within the range of 6 to
18 find their market in the area of light construction activities.

Among the smaller size groups, the fastest selling sizes include size 12, 10, 14 and
8 in order of importance. The least demanded in terms of quantity among the group is
size 6. But its share in terms of the overall market can never be underestimated.

The fast selling sizes of the larger group includes size 20 and 25, followed by size
28. The remaining sizes in this group have relatively smaller share.

V. FINANCIAL ANALYSIS

Basic Assumptions

 The company has two lines namely the old line and the new line.
 In the old line only 8mm and 10mm rebar would be produced

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 In the new line 12, 14, 16,20,24,28 and 32 rebar, and [Link] 6 diameters wire
road would be produced.
 The old line has a capacity of producing 240,000 tons of rebar
 The new line has a capacity of producing 1,000,000 tons of rebar and wire rod.
 However, due to limited supply of raw material, only 5% and 10% of machine
capacity will be utilized in the 1 st year in the old and new line respectively, and
additional 5% would be included per year.
 Hence, the capacity utilization and the production program is summarized here
below;
Capacity Utilization

Year Capacity Utilization

Old Line New Line

1st year 5% 10%

2nd year 10% 15%

3rd year 15% 20%

Production Program

Old Line

Full capacity is 240,000

Product Proportion 1st year 2nd year 3rd year

(5% capacity) (10% capacity) (15% capacity)

8 mm rebar 60% 7,200 14,400 21,600

10 mm rebar 40% 4,800 9,600 14,400

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Total 100% 12,000 24,000 36,000

New Line

Full capacity is 1,000,000

Product Proportion 1st year 2nd year 3rd year

(10% capacity) (15% capacity) (20% capacity)

12 mm rebar 20% 20,000 30,000 40,000

14 mm rebar 2% 2,000 3,000 4,000

16mm rebar 10% 10,000 15,000 20,000

20 mm rebar 30% 30,000 45,000 60,000

24 mm rebar 2% 2,000 3,000 4,000

28 mm rebar 20% 20,000 30,000 40,000

32 mm rebar 6% 6,000 9,000 12,000

5.5 wire road 5% 5,000 7,500 10,000

6 wire rod 5% 5,000 7,500 10,000

Total 100% 100,000 150,000 200,000

Price of re-bar/ton

Rebar Size Price

8-24 mm 35,000

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28 & 32 mm 40,000

Wire rod 36,000

V.1. Revenue Projection

Assumption

 Price remain constant for all three years while capacity utilization increase by 5%
each year.

Revenue from Old Line

Year I Revenue

Product Quantity Unit Price Total Revenue

8 and 10 rebar 12,000 35,000 420,000,000

Year II Revenue

Product Quantity Unit Price Total Revenue

8 and 10 rebar 24,000 36,750 882,000,000

Year III- Revenue

Product Quantity Unit Price Total Revenue

8 and 10 rebar 36,000 38,587 1,389,150,000

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Revenue From New Line

Year I Revenue

Product Quantity Unit Price Total Revenue

12-24mm rebar 64,000 35,000 2,240,000,000

28 & 32 mm rebar 26,000 40,000 1,040,000,000

Wire rod 10,000 36,000 360,000,000

Total 100,000 3,640,000,000

Year II Revenue

Product Quantity Unit Price Total Revenue

12-24mm rebar 96,000 36,750 3,528,000,000

28 & 32 mm rebar 39,000 42,000 1,638,000,000

Wire rod 15,000 37,800 567,000,000

Total 150,000 5,733,000,000

Year III- Revenue

Product Quantity Unit Price Total Revenue

12-24mm rebar 128,000 38,587 4,939,136,000

28 & 23 mm rebar 52,000 44,100 2,293,200,000

Wire rod 20,000 39,690 793,800,000

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Total 200,000 8,026,136,000

Summery of Revenue

Old Line

Description Year 1 Year 2 Year 3

Total Revenue 420,000,000 882,000,000 1,389,150,000

New Line

Description Year 1 Year 2 Year 3

Total Revenue 3,640,000,000 5,733,000,000 8,026,136,000

V.2. Projection of Costs

Direct Cost

Steel Billet

 The unit cost of billet is Birr 26,086 per ton.

 Cost of Billet is assumed to be increased at 5% per year.

Cost of steel billet

Old Line

Description Year 1 Year 2 Year 3

Quantity of production 12,000 24,000 36,000

Cost of Billet 26,893 28,238 29,650

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Total cost of Billet from 322,716,000 677,712,000 1,067,400,000

old line

New Line

Description Year 1 Year 2 Year 3

Quantity of production 100,000 150,000 200,000

Cost of Billet 26,893 28,238 29,650

Total cost of Billet from 2,689,300,000 4,235,700,000 5,930,000,000

new line

Coal

 To produce one ton of rebar and wire road there is a need of 0.15 ton of coal
 The cost of one ton of coal is Birr 7,100 per ton
 The cost of coal is assumed to raise 5% per year.

Cost of Coal

Old Line

Description Year 1 Year 2 Year 3

Quantity of production 12,000 24,000 36,000

Required quantity of coal 1,800 3,600 5,400

Unit cost of coal 7,100 7,455 7,828

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Total cost of coal from 12,780,000 26,838,000 42,271,200

old line

New Line

Description Year 1 Year 2 Year 3

Quantity of production 100,000 150,000 200,000

Required quantity of coal 15,000 22,500 30,000

Unit cost of coal 7,100 7,455 7,828

Total cost of coal from 106,500,000 167,737,500 234,840,000

new line

Direct Labor

 The average cost of direct labor for producing of rebar and wire rod is Birr
1,500/ton.
 Cost of labor is assumed to rise by 5% per year.

Cost of Direct Labor

Old Line

Description Year 1 Year 2 Year 3

Quantity of production 12,000 24,000 36,000

Unit cost of labor 1,500 1,575 1,654

Total cost of Direct 18,000,000 37,800,000 59,544,000

labor from old line

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New Line

Description Year 1 Year 2 Year 3

Quantity of production 100,000 150,000 200,000

Unit cost of labor 1,500 1,575 1,654

Total cost of Direct 150,000,000 236,250,000 330,800,000

labor from new line

Summary of Direct Costs

Old Line

Description Year 1 Year 2 Year 3

Billet 322,716,000 677,712,000 1,067,400,000

Coal 12,780,000 26,838,000 42,271,200

Direct Labor 18,000,000 37,800,000 59,544,000

Total 353,496,000 742,350,000 1,169,215,200

New Line

Description Year 1 Year 2 Year 3

Billet 2,689,300,000 4,235,700,000 5,930,000,000

Coal 106,500,000 167,737,500 234,840,000

Direct Labor 150,000,000 236,250,000 330,800,000

Total 2,945,800,000 4,639,687,500 6,495,640,000

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Other Costs

 Selling and administrative costs (including financial costs) are assumed to be 1%

of revenue.
 Depreciation straight line method

Income Statement Projection

Projected Income Statement

Old Line

Description Year 1 Year 2 Year 3

Revenue 420,000,000 882,000,000 1,389,150,000

Direct costs 353,496,000 742,350,000 1,169,215,200

Gross Profit 66,504,000 139,650,000 219,934,800

Selling and 4,200,000 8,820,000 13,891,500

administrative
expense

Depreciation expense 6,814,482 6,814,482 6,814,482

Net profit before 55,489,518 124,015,518 199,228,818

taxation

Profit Tax 16,646,855 37,204,655 59,768,645

Net Profit after Tax 38,842,663 86,810,863 139,460,173

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New Line

NB; There tax holiday for all years

Description Year 1 Year 2 Year 3

Revenue 3,640,000,000 5,733,000,000 8,026,136,000

Direct costs 2,945,800,000 4,639,687,500 6,495,640,000

Gross Profit 694,200,000 1,093,312,500 1,530,496,000

Selling and 36,400,000 57,330,000 80,261,360

administrative
expense

Depreciation expense 27,257,928 27,257,928 27,257,928

Net profit before 630,542,072 1,008,724,572 1,422,976,712

taxation

Profit Tax (Tax

holiday)

Net Profit after Tax 630,542,072 1,008,724,572 1,422,976,712

Consolidated Income Statement for both lines

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Description Year 1 Year 2 Year 3

Revenue 4,060,000,000 6,615,000,000 9,415,286,000

Direct costs 3,299,296,000 5,382,037,500 7,664,855,200

Gross Profit 760,704,000 1,232,962,500 1,750,430,800

Selling and 40,600,000 66,150,000 94,152,860

administrative
expense

Depreciation expense 34,072,410 34,072,410 34,072,410

Net profit before 686,031,590 1,132,740,090 1,622,205,530

taxation

Profit Tax 16,646,855 37,204,655 59,768,645

Net Profit after Tax 669,384,735 1,095,535,435 1,562,436,885

Cash Flow Projection

Cash Flow Statement

Description Year 1 Year 2 Year 3

Beginning Balance 703,457,145 1,833,064,990

Net Profit after Tax 669,384,735 1,095,535,435 1,562,436,885

Add: Depreciation 34,072,410 34,072,410 34,072,410

Net cash 703,457,145 1,833,064,990 3,429,574,285

Inflow/outflow/

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Working capital Requirements

Working Capital Requirement

Both lines, MDC COT Gross Working

capital
Description Year I Costs (B) (C) Requirement

(A) =360/B = A/C

Billet 3,012,016,000 150 days 2.4 1,255,006,667

Coal 119,280,000 120 days 3 39,760,000

Direct Labor 168,000,000 30 days 12 14,000,000

Total 3,299,296,000 1,308,766,667

Net working capital requirement

Net Working capital requirement = Gross working capital – net working capital as per the
audited financial statement of year December 31 , 2019

Gross working capital = 1,308,766,667

Net working capital of December 31, 2019 = 1,727,004,219 (current Asset) -

892,194,220 (current liability) = 834,809,999

Net Working capital requirement = 1,159,193,333-834,809,000 = 473,956,668

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