46.

PROFILE ON TOBACCO LEAF PROCESSING

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TABLE OF CONTENTS

PAGE

I.

SUMMARY

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II.

PRODUCT DESCRIPTION & APPLICATION

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III.

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

46-3 46-3 46-6

IV.

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

46-7 46-7 46-8

V.

TECHNOLOGY & ENGINEERING A. TECHNOLOGY B. ENGINEERING

46-9 46-9 46-11

VI.

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

46-12 46-12 46-13

VII.

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

46-14 46-14 46-15 46-16 46-17

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I.

SUMMARY

This profile envisages the establishment of a plant for the processing of with a capacity of 4000 tonnes per annum.

tobacco leafs

The present demand for the proposed product is estimated at 4 million tonnes per annum. The demand is expected to reach at 6.3 million tonnes by the year 2020.

The plant will create employment opportunities for 59 persons.

The total investment requirement is estimated at Birr 14.34 million, out of which Birr 990,900 is required for plant and machinery. The project is financially viable with an internal rate of return (IRR) of 15 % and a net present value (NPV) of Birr 6.34 million, discounted at 8.5 %.

II.

PRODUCT DESCRIPTION AND APPLICATION

Tobacco is a plant grown commonly for its leaves and stems, which are rolled into cigars, shredded for use in cigarettes and pipes, processed for chewing, or ground into suff (a fine powder that is inhaled through the nose). Tobacco is also the source of nicotine, an additive drug that is also the basis for many insecticides.

III.

MARKET STUDY AND PLANT CAPACITY

A.

MARKET STUDY

1.

Past supply and Present Demand

Tobacco is a plant grown commonly for its leaves and stems, which are rolled into cigars, shredded for use in cigarettes and pipes, processed for chewing, or ground into suff (a

46-4 fine powder that is inhaled through the nose). Tobacco is also the source of nicotine, an additive drug that is also the basis for many insecticides.

In estimating the current demand for tobacco the consumption side is considered. Accordingly, data from CSAs 1999/2000 Household Income, Consumption and Expenditure survey was analyzed. Table 3.2 depicts the average amount of cigarette consumed by different expenditure in the country.

Table 3.2 CONSUMPTION OF CIGARETTE BY INCOME GROUP ( 1999/2000)

Income (Birr)

No. of Persons

Per Capita Consumption (gm)

Total Consumption (KG) 7 5,855 30,041 75,388 118,260 195,527 401,533 280,593 513,931 169,307 58,447 196,692 737,736 2,783,310.20

<600 600-999 1000-1399 1400-1999 2000-2599 2600-3399 3400-4199 4200-5399 5400-6599 6600-8999 9000-12599 12600-16199 16200-19999 20000< Total

146,344 405,135 836,468 2,503,435 3,589,919 5,913,004 6,983,109 9,560,317 7,583,587 8,289,216 4,455,446 1,123,972 521,729 777,382 52,689,063

12 21 20 28 42 37 62 38 52 377 949

46-5 As can be seen from Table 3.2, given a total population of 52,689,068 at the time the survey was conducted, the per capita consumption of cigarette is computed to be 52.83 gram. Accordingly, considering the current (2007) population size which is 77,127,000 the total consumption is estimated at 4,074.25 tonnes.

2.

Projected Demand

The demand for tobacco is influenced mainly by urbanization and income. Assuming modest growth in income, a growth rate of 3.45% (i.e., an average of the total and the urban population growth rates) is considered in projecting the demand for the product. (See Table 3.3 )

Table 3.3 PROJECTED DEMAND FOR TOBACCO

Projected Demand Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 ( Tonne) 4,214.81 4,360.22 4,510.65 4,666.27 4,827.25 4,993.79 5,166.08 5,344.31 5,528.69 5,719.43 5,916.75 6,120.88 6,332.05

46-6 3. Pricing Distribution

Considering the current price for the product a factory get price of Birr 8/ kg is recommended for the envisaged plant. The product can be directly supplied to National Tobacco Enterprise (NTE).

B.

PLANT CAPACITY & PRODUCTION PROGRAMME

1.

Plant Capacity

The market study of tobacco leaf processing presented above indicates that the demand for processed tobacco in 2008 will be about 4215 tonnes. The demand will grow to

about 5,344 tonnes and 6,332 tonnes by the year 2015 and 2020, respectively. Accordingly, the envisaged tobacco leaf processing plant will have production capacity of 4,000 tonnes per annum. days a year. The plant will operate single shift 8 hours a day for 300

2.

Production Programme

At the initial stage of production it is natural to come across situations like inefficiency of operators, unexpected stoppages, possible shortcomings of tobacco leaf supply, etc. This would mean that time is required for skill development of workers and adequate market penetration. Hence, it is more appropriate to start operation at 75% of plant capacity in the first year, and then increase percentage capacity utilization to 85% and 100% in the 2nd and 3rd year of plant operation. Production build-up and capacity utilization is shown in Table 3.4 below.

46-7 Table 3.4 PRODUCTION PROGRAMME Year Capacity utilization % Production (tonnes) 1 75 3,000 2 85 3,400 3 and above 100 4,000

IV.

MATERIALS AND INPUTS

A.

RAW AND AUXILIARY MATERIALS

The basic raw material the processing plant requires is flue-cured tobacco leaves.

The

basic sources of supply for this material are the growing / purchasing stations at Awassa and Wolaita. It is also intended that other new stations will be established that will grow and cure tobacco leaves. The processing plant will also be located at an appropriate site along the Awassa-Wolaita district that provides easy access to suppliers / growers of the raw material. The project under study foresees the installation of curing barns as part of the processing plant. Therefore, harvested tobacco leaves are the direct raw material for the processing plant.

The leaves are delivered in 30 kg bales, wrapped with Hessian. The bales are tagged with labels specifying the grade, weight, date of delivery and source. The most important

aspects influencing the quality of leaf delivered to the processing plant are curing and grading. To this end, the processing plant will provide technical assistance to tobacco

leaf growers and suppliers to maintain the quality and standard of flue-cured tobacco leaves.

There are always losses associated with harvesting, delivery in bales to the processing plant and further passing to the cigarette factory. Losses from harvesting on the farm

through various operations at the stations including curing, grading and baling is estimated to be 9%. Losses due to handling from station baling through leaf processing

46-8 upto delivery to the cigarette factory is about 3%. Unavoidable green leaf processing and redrying shrinkage amounts to 9%. The total losses will then be 21%. Thus, the total weight receivable at the cigarette factory will be 78%. Cigarette making entails its own losses, estimated to be 2%. Thus, the output of a cigarette plant is about 76% as compared to the input. To produce 4,000 tonnes of tobacco, the input material must be well over 5,265 tonnes.

Auxiliary materials include filters, wrapping paper, labels, cigarette packets, cartons and other inputs. Details for raw and auxiliary materials and related costs are given in Table 4.1 below. Table 4.1 RAW AND AUXILIARY MATERIALS REQUIREMENT AND COST AT FULL CAPACITY

Sr. No.

Description

Qty LC

Cost (000 Birr) FC TC

A. Raw Material 1 Harvested raw tobacco leaf (tonnes) Sub-total B. Auxiliary Materials 1 Filters, wrapping papers, labels, cigarette packets, carton, Hessian and other inputs Sub-total Total 26,325 1,350 1,350 1,350 27,675 As reqd 1,350 1,350 5,265 26,325 26,325 26,325 26,325

B.

UTILITIES

The most importand utility items required by the processing plant are electric power, steam, water and compressed air.

46-9 Electric power is needed to run the various machinery and equipment in the processing plant, as well as for lighting in all buildings and the compound. The annual requirement is estimated to be 350,000 kWh, and at the rate of Birr 0.474 per kWh, total expenditure on electrical energy will be Birr 165,900.

Steam is required by the conditioning cylinders and the dryers to condition and dry whole leaves, strips and stems. Two boiler units (one standby) with steam generation capacity of 1500 kg/hr each are sufficient to supply the steam demand. They are oil fired, and fuel oil consumption at full capacity is 50,000 litres. At the rate of Birr 5.41, the annual expenditure will be Birr 270,500. Annual water requirement is estimated to be 20,000 m3, and at the rate of Birr 10 per m2, the total annual expenditure will be Birr 200,000. Thus, the total annual expenditure on utility items will be Birr 636,400.

V.

TECHNOLOGY AND ENGINEERING

A.

TECHNOLOGY

1.

Production Process

Traditionally flue-cured tobacco leaf is threshed to separate the lamina from the stem. After blending the threshed leaf is further processed and directly passed to the cigarette making machines to be rolled into cigarettes.

This method of leaf processing, however, is not in line with current international practices. In almost all well recognized leaf growing countries, flue cured leaves are threshed, well packed and stored for maturity in well equipped processing plants before delivery into cigarette making plants.

46-10 A typical flue- cured processing plant incorporates the following operations:Conitioning the leaf Sifting out sand and small scraps Picking and inspecting the leaf Threshing Separating the stem from lamina after threshing Blending and building Redrying to ensure a correct moisture content level for prolonged storage, and Pressing and packing into bales or cases.

The pressed and packed bales are inputs to the cigarette making department. Here, the bales are unpacked, and threshed and cured tobacco leaves are fed into milling machine where they are down sized to standard specifications suitable for rolling into cigarette papers. Filters are applied on to rolled cigarettes. Then, they are packed and labled and dispatched for market.

2.

Source of Technology

Address of machinery supplier for tobacco leaf processing plant is given below: JohnL.Seaton & Co. Ltd 7 Waterside Business Park Living Stone Road Hessele, North Humberside Hu13 OEG United Kingdom Phone: +44 1482 579700 Fax: +44 1482 647313 FPS Wesite:http://www..croda.com/seatons

46-11 B. 1. ENGINEERING Machinery and Equipment

The required machinery and equipment required for tobacco leaf processing plant is given in Table 5.1 below. Table 5.1 MACHINERY AND EQUIPMENT REQUIRED FOR TOBACCO LEAF PROCESSING PLANT AND COST Sr. No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Description Auto feed equipment Conditioning cylinder Sand reel Picking band Silos (stain less steel) Threshing line (equipment) Search band Sieves (for cleaning, sizing) Stem redryer Lamina redryer Presses (for lamina, stem) Conveyors Curing barns (with hand presses) Milling equipment (for tobacco leaves) Cigarette making machine Boilers (one stand-by) Packing equipment Classifier & pneumatic elevator Auxiliary equipment FOB price Freight, Insurance, customs, bank charges, material handling costs CIF Landed Cost Qty (No.) 3 2 1 1 4 4 stages 1 6 1 1 Req REq Unit 1 1 2 1 Req Req Cost (000 Birr) LC FC TC 105 105 60 60 15 15 16 16 120 120 1,400 1,400 15 15 80 80 15 15 15 15 150 150 600 600 450 450 150 150 1,500 1,500 240 240 135 135 1,200 1,200 110 110 7,366 7,366 850 850 850 7,366 8,216

46-12 2. Land, Building and Civil Works

Tobacco leaves processing plant requires land for storage of fresh tobacco leaves, pressed and baled flue cured tobacco leaves, stores for finished product, for buildings of tobacco leaves processing plant and cigarette making unit, for office and general purpose buildings, for pathways and vehicle parking lots, and additional area for future expansion. Accordingly, the total land area required for the envisaged plant is estimated to be 10,000 m2, of which 2000 m2 will be built-up area. At a unit building cost of Birr 2000, the total investment on buildings will be Birr 4 million. The land lease value at the rate of Birr 1.0 per m2, and for 80 years, will be Birr 800,000. Thus, the total initial investment on land, building and civil works will be Birr 4.8 million.

3.

Proposed Location

Location of a plant is determined on the basis of proximity to local raw materials, infrastructure and distance to market outlets. The study identifies four woredas namely Cheha, Abeshenge, Damot Galle and Damot Woyde as potential locations of source of raw material. Of these, Damot Woyda woreda is selected as appropriate woreda Bedassa town will

considering distribution of projects among SNNPRS woredas. therefore, be appropriate town for establishing the plant.

VI. A.

MANPOWER AND TRAINING REQUIREMENT MANPOWER REQUIREMENT

The details of administrative and production workers required by tobacco leaves processing plant are shown in Table 6.1.

46-13 B. TRAINING REQUIREMENT

Training is required for workers who are engaged on major processing equipment. The training programe can be carried out in one of the tobacco curing plants in the country, and in Addis Ababa cigarette factory. One month training time is adequate to upgrade the requisite skills of workers. A total of Birr 50,000 is allotted for the training program.

Table 6.1 MANPOWER REQUIREMENT AND LABOUR COST Sr. No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 1 2 3 4 5 Job Title A. Administration Plant manager Executive secretary Secretary Administration & finance Purchasing head Sales man Stores hand Clerk Cashier Accountant Time keeper Messenger General services Sub-total B. Production Production supervisor Skilled workers Unskilled workers Technicians Chemist Sub-total Workers benefit (25% BS) Total Req. No. 1 1 2 1 1 1 1 1 1 1 2 2 6 21 1 22 10 4 1 38 59 Monthly Salary (Birr) 2,500 800 600 1,500 1,000 1,000 800 500 600 800 600 300 300 Annual Expenditure (Birr) 30,000 9,600 1,440 18,000 12,000 12,000 9,600 6,000 7,200 96,000 14,400 7,200 21,600

1,500 700 300 800 1,000

18,000 184,800 36,000 39,400 12,000 290,200 115,450 577,250

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VII.

FINANCIAL ANALYSIS

The financial analysis of the tobacco processing

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 Raw material, import Work in progress Finished products Cash in hand Accounts payable

5 years 8.5 % 8.5% 30 days 5 days 90 days 7 days 30 days 10 days 30 days

A.

TOTAL INITIAL INVESTMENT COST

The total investment cost of the project including working capital is estimated at Birr 14.34 million, of which 19 per cent will be required in foreign currency.

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

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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) 800.0 4,000.0 990.9 75.0 225.0 505.5 7,752.1 14,348.5 19

* N.B Pre-production expenditure includes interest during construction ( Birr 355.47 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 30.16 million (see Table 7.2). The material and utility cost accounts for 93.86 per cent, while repair and maintenance take 0.68 per cent of the production cost.

46-16 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 27,675.00 636.4 205.4 346.35 115.45 230.9 29,209.50 421.59 532.91 30,164.00

% 91.75 2.11 0.68 1.15 0.38 0.77 96.84 1.40 1.77 100

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.

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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

30 %

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 8 years.

4.

Internal Rate of Return and Net Present Value

Based on the cash flow statement, the calculated IRR of the project is 15 % and the net present value at 8.5 % discount rate is Birr 6.34 million.

D.

ECONOMIC BENEFITS

The project can create employment for 59 persons. In addition to supply of the domestic needs, the project will generate Birr 5.11 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.