69.

PROFILE ON PRODUCTION OF JUTE BAGS

69-2

TABLE OF CONTENTS

PAGE

I.

SUMMARY

69-3

II.

PRODUCT DESCRIPTION & APPLICATION

69-3

III.

MARKET STUDY AND PLANT CAPACITY A. MARKET STUDY B. PLANT CAPACITY & PRODUCTION PROGRAMME

69-4 69-4 69-8

IV.

RAW MATERIALS AND INPUTS A. RAW & AUXILIARY MATERIALS B. UTILITIES

69-8 69-8 69-9

V.

TECHNOLOGY & ENGINEERING A. TECHNOLOGY B. ENGINEERING

69-10 69-10 69-14

VI.

MANPOWER & TRAINING REQUIREMENT A. MANPOWER REQUIREMENT B. TRAINING REQUIREMENT

69-16 69-16 69-16

VII.

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

69-18 69-18 69-19 69-20 69-21

69-3 I. SUMMARY

This profile envisages the establishment of a plant for the production of jute bags with a capacity of 5 million pieces per annum.

The present demand for the proposed product is estimated at 5,430 tonnes per annum. The demand is expected to reach at 9,173 tonnes by the year 2016 .

The plant will create employment opportunities for 74 persons.

The total investment requirement is estimated at Birr 8.21 million, out of which Birr 1.22 million is required for plant and machinery.

The project is financially viable with an internal rate of return (IRR) of present value (NPV) of Birr 8.89 million discounted at 8.5%.

33 % and a net

II.

PRODUCT DESCRIPTION AND APPLICATION

Jute bags are manufactured from jute yarn and are used for packing a wide range of industrial and agricultural goods such as grains, oil seeds, salt sugar etc. The products have a great demand in industrial and agricultural sectors for packing and wrapping of manufactured and agricultural products.

69-4 III. MARKET STUDY AND PLANT CAPACITY

A.

MARKET STUDY

1.

Past Supply and Present Demand

Jute bags are biodegrable containers made from plant fibre called jute. They are usually used for storing and holding. Heavy duty jute bags or sacks are popular for packaging agricultural commodities.

Eventhough jute bags are replaced by synthetic materials some applications take advantage of jutes biodegrable nature, where synthetics would be unsuitable. Jute

shopping bags and carriers are increasingly replacing plastic non-woven as ecofriendly alternatives.

Jute bags are mainly used to pack sugar, grain, coffee, cotton and other agricultural products, which are packed in weight ranging from 50 to 100 kg. Jute bags used in the agro-based products treated with vegetable oils to destroy the harmful effect of hydrocarbons are also called hydrocarbon free bags. Due to their biodegradable nature jute bag is becoming and eco friendly alternative.

The supply of jute bags is almost met through domestic production. The two jute bag producing factories supply for the last nine years was on average 5,430 tonnes per annum. ( See Table 3.1.)

69-5 Table 3.1 SUPPLY OF JUTE SACKS IN TONNES

Year 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Total 9,206 8,194 5,114 5,729 5,981 5,709 3,996 3,315 5,163

Local 6,418 7,649 4,981 5,708 5,981 5,691 3,960 3,315 5,163 N.A

Import 2,788 545 133 21 18 36 45

Source: CSA Annual Survey of Manufacturing Industry Customs Authority.

The least square estimate for the domestic production of the jute bags indicates a negative trend as follows:

Y=

-334.68 4X + 7,103

The negative trend is due to the substitute product of PP sacks which are increasingly substituting grain and flour sacks. In addition to this shift of demand from natural sacks to synthetics there is also a raw material supply delay and production interruption due to working capital problems as the raw material, jute is imported from Bangladesh. The demand shift is explained by the very wide gap of the unit price of jute bag which is more than eight birr as against two Birr for PP sacks. Therefore the current effective demand is expected to be the average supply of the past nine years at 5,430 tonnes.

69-6 2. Projected Demand

The demand for jute bags will be dependent on those products which are using natural fibre bags for their suitability of packaging agro based products like coffee and cotton. With a growing concern for the environment and ecofriendliness of jute sacks the demand in the long run is believed to be returning back.

The past nine years show a declining supply of jute bags due to the abundant substitute supply of pp bags manufactured locally. Even though this trend is expected to continue, those products which are packed only in jute sacks are also expected to demand more jute bags. One of these products, the major Ethiopian export commodity, coffee export is growing significantly. The average annual growth rate achieved in coffee export for the last ten years was 6%. Further, the least square estimate of the ten years coffee export reveals an annual growth of 6,892 tonnes. Coffee export is presented in Table 3.2.

Table 3.2 COFFEE EXPORT (TONNES)

Year 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Average

Export 118,784 115,025 109,079 118,911 88,662 123,433 135,548 156,648 150,393 181,799 131,055

Growth Rate %

-3 -5 9 -25 39 10 16 -4 21 6

Source: Customs Authority.

69-7 Thus demand estimation of jute bags is expected to grow at 6%. Projected demand for jute sacks is presented in Table 3.3.

Table 3.3 PROJECTED DEMAND FOR JUTE SACK (TONNES)

Year 2008 2009 2010 2011 2012 2013 2014 2015 2016

Projected Demand 5,755 6,101 6,467 6,855 7,266 7,702 8,164 8,654 9,173

3.

Pricing and Distribution

The current price of 60kg coffee sack is Birr 8/ piece. Therefore, assuming margin for wholesalers and distributors a factory get price of Birr 5/ piece is adopted.

Most jute sack customers are agro based institutions which apply sacks to pack their products. Therefore the distribution of the product will be coordinated in line with each institutional demand and product seasonality.

69-8 B. PLANT CAPACITY AND PRODUCTION PROGRAMME

1.

Plant Capacity

Based on the demand projection of jute bags indicated in the market study, the envisaged plant will have an annual production capacity of 5 million pieces of jute bags. The plant will operate two shifts, 8 hours each shift and for 300 days a year.

2.

Production Programme

The jute bags producing plant will start operation at a lower production capacity to allow time for market penetration and skill development of workers. Thus, production will start at 75% of installed capacity during the first year of operation, and then will grow to 85% and 100% of full capacity in the second year, and third year and then after. The details of production programme is shown in Table 3.4 below.

Table 3.4 PRODUCTION PROGRAMME

Year Annual production (million pieces) Capacity utilization (%)

1 3.75 75

2 4.25 85

3 and above 5.0 100

IV.

MATERIALS AND INPUTS

A.

RAW AND AUXILIARY MATERIALS

The major raw material required for jute bag production is jute yarn. produced locally, and therefore it has to be imported from abroad.

Jute yarn is not

69-9 Auxiliary materials include oils, chemicals and other required inputs. requirement and cost of raw and auxiliary materials shown in Table 4.1 below. Annual

Table 4.1 ANNUAL REQUIREMENT OF RAW AND AUXILIARY MATERIALS

No.

Description

Qty LC

Cost (000 Birr) FC TC

A. Raw Material 1 Jute yarn (tons) B. Auxiliary Materials 1 2 3 Oils Other inputs (chemicals, etc) FOB price Customs, Insurance, Bank charges costs CIF Landed Cost 150 20,535 20,685 material handling Req Req 150 50.0 10.0 20535 50.0 10.0 20535 150 6825 20475 20475

B.

UTILITIES

Inputs required for the plant include electricity and water. Total power requirement is 40 kW (or about 200,000 kWh) and annual water consumption is estimated to be 2500 m3. At the rate of Birr 0.474 per kWh and Birr 10.0 per m3, the total annual expenditure on utilities at full capacity production is Birr 119800.

69-10 V. TECHNOLOGY AND ENGINEERING

A.

TECHNOLOGY

1.

Process Description

The process of manufacture of jute bags essentially involves the following operations.

a)

Weaving of the Hessian from the yarn

b)

Cutting of the Hessian into required sizes by heavy duty cutter

c)

Stitching by electrically operated stitching machines

d)

Testing

e)

Pressing

f)

Packing and forwarding

Weaving Fundamentals

The classical method of weaving is essentially the insertion of a continuous length of weft yarn from a shuttle which travels to and fro across the warp sheet in the loom and leaves behind a trail of weft (pick) at each passage. Weaving involves three primary actions and two secondary ones. These are briefly as below:-

Primary Action

The three primary actions are shedding, picking and beating up. performed in strict rotation in a loom.

They must be

69-11

i)

Shedding:-

To form any weave structure all warp threads under which a particular pick has to lie in ultimate cloth are raised during the shuttle passage while all threads with the same pick has to pass over powered. Thus for each pick inserted, the individual containing the total required ends in the weavers warp. It may be noted that all the individual threads from any single back beam are approximately evenly distributed across the width of the finished warp. The upper limit to the number of ends on back beams is determined

largely by the size of the creel in which the cones of yarn are held for making the beam. A creel capacity of between 500 and 512 cones is very common. The warp length of a back when the sheet from all beams in a set have been later combined during the warp sizing operation which follows beaming.

Indirect Warping

This system consists of winding the warp in separate width way sections, each section being laid side by side on the horizontal barrel of a special beaming machine. This method is suited to the preparation of continuous filament warps.

Warp Sizing

The subject of warp sizing is of complex in nature and is strictly outside the scope of this report. However, the following should serve as some initial guidelines on this aspect of weaving. For successful weaving of most fabrics the warp threads require a protective coating of an adhesive film referred to generally as a size paste. This coating enables the threads to with stand the abrasive action of weaving which largely takes place during shedding i.e. when the threads are drawn to and over or against the surface of parts such as healed eyes and read, etc. without a coating of sizes. Many threads, particularly of single yarns would quickly become seriously abraded and would break thus making satisfactory weaving impossible.

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Sizing Material

Traditionally size materials consists of an adhesive in the form of a natural or modified natural starch such as ago maize tapioca, farina etc. The adhesive help to bind the surface fibers together. It also helps to lay flat any projecting surface fibres or other perfect yarn should not exceed 20% if the lowest quality yarn were used.

The use of low quality yarns inevitably leads to higher breakage rates and consequently to an increase in the number of operative hours needed to produce a given quantity of cloth.

However, the type of loom used does not first order effect on the amount of time in the repairing of weaving break either warp or weft. At the lowest level of yarn quality consistent with fabric covered by this report one weaver might reasonably be expected to tend two non-auto warp threads that are raised or lowered as dictated by the weave plan. The actions of raising or lowering the warp threads in this way is known as shedding while the sheet opening so formed is called the shed.

ii)

Picking

The action of passing the shuttle through the shed is picking.

iii)

Beating Up

Finally after the insertion of each brick, the pick of weft in itself has to be pushed forward by a reed (a type of closed comb through which all of the warp threads are drawn) to a point adjacent to the previous pick, known as the fell where this cloth is formed. This third action is called beating up.

69-13 Secondary Action:

In addition to the primary actions two secondary actions are necessary. However, the instant at which they are performed is at the discretion of the weaver in the case of simple hand looms. On the other hand strict control and timing in relation to primary motions is required for power looms.

i)

Taking up

This action involves the taking up of woven cloth as weaving proceeds so that the fell is maintained in the same position.

ii)

Letting off

This action involves the letting off the further warp from a beam at the above of the loom to replace that woven into cloth.

Woven structures in the most simple form of woven structure, known as plain weave a pick of weft passes under and over alternate warp ends from selvedge. The next pick does the same but in the reverse fitting order. Thus a plain weave repeats on two picks. Simple variations in the order in which the ends and picks interlace produce numerous weaves which are known widely by name such as twills sat in mat weaves, etc. The majority of such weaves can be elaborated and extended to that they repeat on many ends and picks. But there was often little to be gained in cases where fancy weave effects are required. Consequently, the great majority of woven fabrics consists of the smallest

repeat corresponding to the basic weave so that it can be woven on looms equipped with either simple (treadle operated) or mechanized (cam operated) shedding motions.

69-14 2. Source of Technology

Address of Machinery Supplier is given below: Shanghai Small Enterprises Trade Development Service Centre International Cooperation Division Shanghai 200032 Fax: (008621) 642201814

B.

ENGINEERING

Machinery and equipment required for jute bags manufacturing plant are given in Table 5.1. Table 5.1 LIST OF MACHINERY AND EQUIPMENT No. 1 2 3 4 5 6 Description Power jute loom Winding machine Heavy duty cutter Stitching machine Pressing machines Tools and auxiliaries FOB price Customs, Insurance, Bank charges, materials handling CIF Landed Cost Unit Price 10 80,000 2 55,000 2 25,000 3 20,000 2 20,000 Reqd Qty Cost (000 Birr) LC FC TC 800 800 110 110 50 50 60 60 40 40 10 10 1070 1070 150 150 150 1,070 1,220

2.

Land, Building and Civil Works

The total land area required for the envisaged plant is 2500 m2, of which the built-up area will be 1500 m2.

69-15 At a land lease rate of Birr 1.0 per m2, and for a period of 80 years, and building cost of Birr 1500 per m2, the total expenditure on land, building and civil works will be Birr 2.45 million.

3.

Proposed Location

Location of a plant is determined on the basis of proximity to raw materials, availability of infrastructure and distance to potential market areas. Potential woredas selected for the establishment of jute bags producing plant are Badawacho, Aleta and Dale. Considering fair distribution of the projects among SNNPRS weredas, the most It is therefore suggested that jute bags

appropriate wereda selected is Badawacho. producing plant be established in shone town.

VI.

MANPOWER AND TRAINING REQUIREMENT

A.

MANPOWER REQUIREMENT

The plant requires manpower both for production and administrative work. The details of manpower requirement including monthly salary and annual expenditure is given in Table 6.1 below.

B.

TRAINING REQUIREMENT

The skill of jute yarn weaving is well developed in the country since there is a plant engaged in jute bag production. However, machinery operators will have to be given training for two weeks in Ethiopian Fibre Factory located in Akaki, Addis Ababa. A total of Birr 20,000 is allotted to train plant operators and technicians.

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Table 7.1 MANPOWER REQUIREMENT AND LABOUR COST (BIRR)

No.

Job Title

Req. No.

Monthly Salary

Annual Wages

A. Administration 1 2 3 4 5 6 7 8 9 10 Plant manager Secretary Accountant Personnel officer Salesman Purchaser Store man Cashier Clerk General services Sub-total B. Production 1 2 3 4 5 6 7 Production supervisor Shift foreman Operators Laborer Mechanics Electricians Production Clerk Sub-total Workers benefit (25% BS) Total 1 2 34 10 4 4 2 57 74 1500 1200 700 350 800 800 500 18000 28800 285600 42000 38400 38400 12000 463200 153900 769500 1 2 1 1 1 1 1 1 2 6 17 2000 700 1200 1000 1000 1000 1000 800 600 350 24000 16800 14400 12000 12000 12000 12000 9600 14400 25200 152400

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VII.

FINANCIAL ANALYSIS

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

Construction period Source of finance

1 year 30 % equity 70 % loan

Tax holidays Bank interest Discount cash flow Accounts receivable Raw material local Work in progress Finished products Cash in hand Accounts payable

3 years 8.5 % 8.5% 30 days 30 days 2 days 30 days 5 days 30 days

A.

TOTAL INITIAL INVESTMENT COST

The total investment cost of the project including working capital is estimated at 8.21 million, of which 14 per cent will be required in foreign currency.

The major breakdown of the total initial investment cost is shown in Table 7.1.

69-18 Table 7.1 INITIAL INVESTMENT COST

Sr. No. 1 2 3 4 5 6 7 Cost Items Land lease value Building and Civil Work Plant Machinery and Equipment Office Furniture and Equipment Vehicle Pre-production Expenditure* Working Capital Total Investment cost Foreign Share

Total Cost (000 Birr) 200.0 2,250.0 1,220.0 75.0 200.0 436.5 3,833.7 8,215.2 14

* N.B Pre-production expenditure includes interest during construction ( Birr 286.52 thousand ) training (Birr 20 thousand ) and Birr 130 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

25.56

million (see Table 7.2). The material and utility cost accounts for 92.19 per cent, while repair and maintenance take 0.77 per cent of the production cost.

69-19

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

Items Raw Material and Inputs Utilities Maintenance and repair Labour direct Factory overheads Administration Costs Total Operating Costs Depreciation Cost of Finance Total Production Cost

Cost 20,685.00 119.8 174 617.1 149.96 152.4 21,898.26 312 356.85 22,567.11

% 91.66 0.53 0.77 2.73 0.66 0.68 97.04 1.38 1.58 100

C.

FINANCIAL EVALUATION

1.

Profitability

According to the projected income statement, the project will start generating profit in the first year of operation. Important ratios such as profit to total sales, net profit to equity (Return on equity) and net profit plus interest on total investment (return on total investment) show an increasing trend during the life-time of the project.

The income statement and the other indicators of profitability show that the project is viable.

69-20

2.

Break-even Analysis

The break-even point of the project including cost of finance when it starts to operate at full capacity ( year ) is estimated by using income statement projection.

BE =

Fixed Cost Sales Variable Cost

18 %

3.

Pay Back Period

The investment cost and income statement projection are used to project the pay-back period. The projects initial investment will be fully recovered within 4 years.

4.

Internal Rate of Return and Net Present Value

Based on the cash flow statement, the calculated IRR of the project is 33 % and the net present value at 8.5 % discount rate is Birr 8.89 million.

D.

ECONOMIC BENEFITS

The project can create employment for 74 persons.

In addition to supply of the

domestic needs, the project will generate Birr 5.58 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.