114.

PROFILE ON ARGON GAS

114-2

TABLE OF CONTENTS
PAGE

I.

I.

SUMMARY

114-3

II.

PRODUCT DESCRIPTION & APPLICATION

114-4

III.

MARKET STUDY AND PLANT CAPACITY

A. MARKET STUDY
B. PLANT CAPACITY & PRODUCTION PROGRAMME

114-4
114-4
114-7

IV.

MATERIALS AND INPUTS

A. RAW MATERIALS
B. UTILITIES

114-7
114-7
114-8

V.

TECHNOLOGY & ENGINEERING

114-9

A. TECHNOLOGY
B. ENGINEERING

114-9
114-9

VI.

MANPOWER & TRAINING REQUIREMENT

A. MANPOWER REQUIREMENT
B. TRAINING REQUIREMENT

114-12
114-12
114-13

VII.

FINANCIAL ANLYSIS
A. TOTAL INITIAL INVESTMENT COST
B. PRODUCTION COST
C. FINANCIAL EVALUATION
D. ECONOMIC BENEFITS

114-14
114-14
114-15
114-16
114-18

SUMMARY

This profile envisages the establishment of a plant for the production of argon gas

with

a capacity of 114 tonnes per annum. Argon gas is mainly used as inert gas shield in arc
welding; furnace blazing; plasma jet torches (with hydrogen); electric and specialized
light bulbs(neon, fluorescent, sodium vapor, etc.); titanium and zirconium refining;
flushing molten metals (steel)to remove dissolved gases; and inert gas or atmosphere in
miscellaneous application.

114-3
The major raw material for the production of pure argon is crude argon gas produced as by
product from high quality oxygen production process.
The present demand for the proposed product is estimated at 94 tonnes per annum. The
demand is expected to reach at 245 tonnes by the year 2018.
The total investment requirement is estimated at Birr 8.22 million, out of which Birr 1.39
million is required for plant and machinery. The plant will create employment
opportunities for 17 persons.
The project is financially viable with an internal rate of return (IRR) of 21.87 % and a net
present value (NPV) of Birr 4.94 million, discounted at 8.5%.
The establishment of such factory will have a foreign exchange saving effect to the
country by substituting the current imports. The project will have a forward linkage effect
with the manufacturing, metallurgy and electric bulb production industries. It will also
create a backward linkage with oxygen manufacturing plants.

114-4
II.

PRODUCT DESCRIPTION AND APPLICATION

Argon is one of the noble gases, because it does not easily react with other elements.
Argon is produced commercially by the frictional distillation of liquid air.
It is used to fill electric light bulbs. Argon is also used in neon lamp, in
electric arc technology, in gas lasers in arc welding, furnace blazing,
titanium and zirconium refining.
III.

MARKET STUDY AND PLANT CAPACITY

A.

MARKET STUDY

1.

Past Supply and Present Demand

Argon is one of the noble gases, because it does not easily react with other elements.
Argon is produced commercially by the frictional distillation of liquid air. It is used to
fill electric light bulbs. Argon is also used in neon lamp, in electric arc technology, in gas
lasers, in arc welding, furnace blasing, titanium and zirconium refining.
Argon gas is not locally produced and the countrys demand is entirely met through
import. Import of argon gas during the period 1998-2006 is provided in Table 3.1.
Table 3.1
IMPORT OF ARGON GAS (KG)
Year
Year
1998
1999
2000
2001
2002
2003
2004
2005

Import
18,540
400
22,589
6,495
26,785
21,436
33,659
31,017

114-5
2006
94,562
Source:- Ethiopian Custom Authority.
As could be seen from Table 3.1, import of argon gas has been generally rising during the
past nine years although there were fluctuations in some years. The average level of
import during 1998-1999 was about 9,470 kg. During the period 2000-2001 it increased
to an average level of 14,542 kg. By the years 2002-2003 and 2004-2005 it increased to
a yearly average of 24,110 kg and 32,338, respectively. A sharp increase of supply is
observed during 2006 which amounts to 94,567 kg. Compared to the average of the two
previous years, i.e. 2004-2005, it is higher than by nearly three times.
The sharp increase in import volume during year 2006 may be explained by the addition
of new user plants and factories in to the economy generating new additional demand.
The opening of new metallurgy plants and other users are the likely major originators of
the increased demand.
Since import of the product has been generally raising in the past nine years the imported
quantity during year 2006 is conservatively assumed to reflect the current, year 2008,
demand. Hence current effective demand is set at 94,562 kg.
2.

Projected Demand

The demand for argon gas will be influenced by the development of the user industries.
By considering the growth of the manufacturing sector demand for argon gas is projected
to grow by 10% per annum (see Table 3.2).

114-6
Table 3.2
PROJECTED DEMAND FOR ARGON GAS (KG)
Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018

Projected Demand
104,018
114,420
125,862
138,448
152,293
167,522
184,275
202,702
222,972
245,269

Demand for argon gas will grow from 104,018 kg in the year 2009 to 152,293 kg and
245,269 kg by the years 2013 and 2018, respectively.
3.

Pricing and Distribution

The average CIF price of argon gas during 2007 was about Birr 26.00 per kg. Allowing
35% for taxes, inland transport and other expenses a factory gate price of Birr 35.1 per kg
is recommended.
The product can be supplied directly to the end user industries.

114-7
B.

PLANT CAPACITY AND PRODUCTION PROGRAMME

1.

Plant Capacity

The market study conducted on the demand of argon gas has shown that there is no local
producer and the country's requirement is totally met through import. Basing on the
market study and growth rate of the product users the proposed plant capacity for the
envisaged plant is 114,420 kg per annum, working 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.
Sr.
No.
1
2

Product
Capacity utilization rate (%)
Argon gas (kg)

IV.

MATERIALS AND INPUTS

A.

RAW MATERIAL

Year of Production
1
2
3-10
80
91,536

90
102,978

100
114,420

The major raw material for the production of pure argon is crude argon gas produced as by
product from high quality oxygen production process. The cost of crude argon gas which
will be bought from local oxygen processing plant is estimated at Birr 1,155,642.

Table 4.1

114-8
ANNUAL REQUIREMENT OF RAW MATERIAL & COST AT FULL CAPACITY
Sr.

Description

Unit of

No.
1

Measure
Tonnes

Crude argon gas

Quantity

Unit Cost

Cost In '000

715,125

(Birr)
1.616

(Birr)
1,155.642

Total

B.

1,155.642

UTILITIES

Utilities required for manufacturing argon gas include electric power and water. The annual
requirement of electricity and water is estimated to be 125,000 kWh and 5,500 m 3,
respectively. Accordingly, the annual cost of water and electricity when the plant is
operating at full capacity will be Birr 59,200 and Birr 17,875, respectively.
Table 4.2
ANNUAL REQUIREMENT OF UTILITIES AND COST
Sr.
No.
1
2

V.

Description

Qty.

Cost in 000

kWh

125,000

Birr
59.200

m3

5,500

Electricity
Water
Total

TECHNOLOGY AND ENGINEERING

A. TECHNOLOGY
1.

Unit of
Measure

Process Description

17.875
77.075

114-9
Crude argon gas is produced in conjunction with the manufacture of high purity oxygen
using cryogenic distillation of air. From crude argon gas the remaining non argon
components (small amount of nitrogen and hydrogen) removed through further
distillation in a pure argon distillation column. The production process has no adverse
environmental impact.
2.

Source of Technology

The address of a company in India that is engaged in the manufacturing of cryogenic gas
generator is given below:HYD PL.Co. Pvt.Ltd
Building No. 48, III Floor, Navyung Market
GHazyabad, Uttar prades-201001, India
B.
1.

ENGINEERING
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 1,390,000, out of
which Birr 1,251,000 will be required in foreign currency.

114-10
Table 5.1
MACHINERY & EQUIPMENT REQUIREMENT AND COST

Cost in Birr000

Sr.

Description

No.
1
2
3
4
5

1.

Compressor
Distiller double column type
Heat exchanger
Gas tanker
Other accessories
Grand Total

Qty.
2
1 set
2
1
set

FC

LC

Total

187.65
750.60
312.75
1,251.00

80.00
59.00
139.00

187.65
750.60
312.75
80.00
59.00
1,390.00

Land, Building and Civil Works

The total land requirement for the envisaged plant is estimated at 2,000 m 2, out of this
550 m2 is built-up area. Out of the total built up area, 400 m 2 will be used for production
facility, 80m2 for store of raw and finished product and the remaining 70 m 2 will be used
for office building. Cost of building construction with a rate of Birr 2,400 per m 2 amounts
to Birr 1,320,000.
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.

114-11
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 Citys 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 Citys Investment Authority. However,
if the land request is above 5,000 m 2 the request is evaluated by the Citys 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 /m2 in Akakai-Kalti and Birr
341/ m2 in Lebu and recently the citys 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.

114-12

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

Scored Point
Above 75%
From 50 - 75%
From 25 - 49%

Grace
Period
5 Years
5 Years
4 Years

Payment
Completion
Period
30 Years
28 Years
25 Years

Down
Payment
10%
10%
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 17 employees. The estimated
annual cost of manpower is Birr 252,000. The detail of which is shown in Table 6.1.
Table 6.1
MANPOWER REQUIREMENT AND ESTIMATED ANNUAL LABOUR COST

114-13

Sr.
No.
1
2
3
4
5

Description
Manager
Administration + Finance Head
Secretary
Sales and purchase Head
Production Supervisors

Req.

Monthly

Annual Salary

No.
1
1
1
1
1

Salary (Birr)
3,000
2,500
900
2,500
1,800

(Birr)
36,000
30,000
10,800
30,000
21,600

Chemist

1,000

12,000

Operators

1,200

14,400

Technicians

1,200

14,400

Laborers

1050

12,600

10

Store keeper

600

7,200

11

Guard

700

12

Driver
Sub-Total

1
17

350

8,400
4,200

Employees benefit 25 %
Grand Total
B.

201,600
50,400
252,000

TRAINING REQUIREMENT

During erection and commissioning by experts of the machinery supplier on-job training
will take place. The cost of training is estimated at Birr 30,000.

114-14
VII.

FINANCIAL ANALYSIS

The financial analysis of the argon gas 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

The total investment cost of the project including working capital is estimated at
8.22 million, of which 15 per cent will be required in foreign currency.
The major breakdown of the total initial investment cost is shown in Table 7.1.

Birr

114-15
Table 7.1
INITIAL INVESTMENT COST ( 000 Birr)
Sr.
No.

Cost Items

Local
Cost

Foreign
Cost

Total
Cost

Land lease value

4,152.00

4,152.00

Building and Civil Work

1,320.00

1,320.00

Plant Machinery and Equipment

1,251.00

1,390.00

139.0
100.00

100.00

Office Furniture and Equipment

Vehicle

450.00

450.00

Pre-production Expenditure*

580.72

580.72

Working Capital

233.57

233.57

Total Investment cost

6,975.29 1,251.00

8,226.29

* N.B Pre-production expenditure includes interest during construction ( Birr 450.72

thousand), training ( Birr 30,000) 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 2.39
million (see Table 7.2).

The raw material cost accounts for 48.21 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 22.63 %, 12.54% and 5.05 %
respectively. The remaining 11.58 % is the share of utility, repair and maintenance, labour
overhead, financial cost and other administration cost.

114-16
Table 7.2
ANNUAL PRODUCTION COST AT FULL CAPACITY ('000 BIRR)
Items
Raw Material and Inputs
Utilities
Maintenance and repair
Labour direct
Labour overheads
Administration Costs
Land lease cost
Total Operating Costs
Depreciation
Cost of Finance

Cost

1,155.64
77.08

48.21
3.22

69.50
120.96

2.90
5.05

50.40
80.64

2.10
3.36

1,554.22
542.60

64.83

300.52

12.54

2,397.34

100

22.63

Total Production Cost

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
1.40 million during the life of the project. Moreover, at the end of the project life the
accumulated cash flow amounts to Birr 11.31 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

114-17
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

23 %

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
projects 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

114-18
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 21.87 %
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 4.94 million which is acceptable.
D.

ECONOMIC BENEFITS

The project can create employment for 17 persons. In addition to supply of the domestic
needs, the project will generate Birr 2.80 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 have a forward linkage effect with the
manufacturing, metallurgy and electric bulb production industries. It will also create a
backward linkage with oxygen producing plants.