38.

PROFILE ON CAMEL BACK STRIP

 38 - 2

TABLE OF CONTENTS

PAGE

I. SUMMARY 38-3

II. PRODUCT DESCRIPTION & APPLICATION 38-3

III. MARKET STUDY AND PLANT CAPACITY 38-4

A. MARKET STUDY 38-4
B. PLANT CAPACITY & PRODUCTION PROGRAMME 38-6

IV. RAW MATERIALS AND INPUTS 38-6

A. RAW & AUXILIARY MATERIALS 38-6
B. UTILITIES 38-7

V. TECHNOLOGY & ENGINEERING 38-8

A. TECHNOLOGY 38-8
B. ENGINEERING 38-9

VI. MANPOWER & TRAINING REQUIREMENT 38-12

A. MANPOWER REQUIREMENT 38-12
B. TRAINING REQUIREMENT 38-13

VII. FINANCIAL ANLYSIS 38-13

A. TOTAL INITIAL INVESTMENT COST 38-14
B. PRODUCTION COST 38-15
C. FINANCIAL EVALUATION 38-16
D. ECONOMIC BENEFITS 38-18
 38 - 3

I. SUMMARY

This profile envisages the establishment of a plant for the production of camel back strip
with a capacity of 85 tonnes per annum. Camel back strip is a thick treaded pad of
rubber which is used for the treading of worn out tires by applying adhesive solution and
putting it on the top of old tires and curing with the help of steam.

The major raw material required is natural rubber which has to be imported during the
initial years of the project. In the medium term natural rubber will be available locally
from the project under implementation in SNNPR.

The present demand for the proposed product is estimated at 68 tonnes per annum. The
demand is expected to reach at 114 tonnes by the year 2017.

The total investment requirement is estimated at about Birr 5.95 million, out of which
Birr 2.4 million is required for plant and machinery. The plant will create employment
opportunities for 18 persons.

The project is financially viable with an internal rate of return (IRR) of 27.86 % and a net
present value (NPV) of Birr 5.68 million, discounted at 8.5%.

The project will have a forward linkage effect with the tire re-treading companies. The
establishment of such factory will have a foreign exchange saving effect to the country by
substituting the current imports.

II. PRODUCT DESCRIPTION & APPLICATION

Camel back strip is uncured re-tread rubber in crescent shape, available in various widths
and depths according to size and type of tire being rethreaded. Camel back strip is a thick
treaded pad of rubber which is used for the treading of worn out tires by applying
adhesive solution and putting it on the top of old tires and curing with the help of steam.
 38 - 4

Tire re-treading is a new technology that get wide popularity due to its low cost and
positive effect on the environment.

III. MARKET STUDY AND PLANT CAPACITY

A. MARKET STUDY

1. Past Supply and Present Demand

The country's requirement of camel back strip is entirely met from import. The major
suppliers of camel back strip to Ethiopia are Brazil, India, Italy and Malaysia. Import of
camel back strip in the past seven years (2000-2006) is given in Table 3.1.

Table 3.1
IMPORT OF CAMEL BACK STRIP (TONNES)

Year Import
2000 10.0
2001 69.9
2002 61.1
2003 57.0
2004 143.6
2005 43.5
2006 17.0

Source:- Ethiopian Customs Authority.

Table 3.1 reveals that import of camel back strip during the period 2001-2003 ranged
from 57 tonnes to about 70 tonnes. A sharp increase of import has been registered during
year 2004 which stood at 143.6 tonnes. During the recent two years, i.e., 2005 and 2006,
the imported quantity has declined to 43.5 tonnes and 17 tonnes, respectively. The
reason for such huge difference from year to year is due to stock carry over from periods
in which import was very high. Due to absence of a trend in the import data, the average
of the recent three years, i.e., 2004 to 2006 is considered to reflect the current demand.
Hence, the current demand for the product is estimated at 68 tonnes.
 38 - 5

2. Projected Demand

Camel back strip is used for the treading of worn out tires. Tire re-treading has got wide
popularity due to its low cost and positive effect on the environment. Hence, the demand
for the product is rising with the increase of the number of vehicles and environmental
awareness. The average growth rate of vehicle stock in Ethiopia in the past years was
more than 5%. A growth rate of 5% is hence, used to project demand for camel back
strip (see Table 3.2).

Table 3.2
PROJECTED DEMAND FOR CAMEL BACK STRIP (TONNES)

Year Projected Demand

2008 71.4
2009 75.0
2010 78.7
2011 82.7
2012 86.8
2013 93.7
2014 98.4
2015 103.3
2016 108.5
2017 114.0

3. Pricing and Distribution

Based on the average import price of the recent two years, a factory-gate price of Birr
53,000 per tonne is recommended.

The product can be sold directly to the existing tire re-treading enterprises in the country.
 38 - 6

B. PLANT CAPACITY & PRODUCTION PROGRAMME

1. Plant Capacity

Based on the market study and economies of scale, the production capacity of the
envisaged plant is proposed to be 85 tonnes of camel back strip based on 300 working
days per annum and single shifts of 8 hours per day.

2. Production Programme

Table 4.1 indicates the production programme of the project. At the initial stage of
production, the project may require some years to penetrate the market and develop skill
in operation. Therefore, in the first and second year of production the capacity utilization
rate will be 70% and 90%, respectively. In the third year and onwards, full capacity
production shall be attained.

Table 3.3
PRODUCTION PROGRAMME

Production Year
Product 1 2 3-15
Camel back strip (tonnes) 59.5 76.5 85
Capacity Utilization Rate (%) 70 90 100

IV. MATERIALS AND INPUTS

A. RAW & AUXILIARY MATERIALS

The major raw & auxiliary materials for the production of camel back strip are natural
rubber, carbon black, zinc oxide, stearic acid, softener, sulphur, anti oxidant and
accelerator. The auxiliary materials are banker oil, softener and others. All the raw
 38 - 7

materials are to be imported in the current condition of the country but there a good start
in the production of natural rubber in the Guraferda woreda of SNNPRS by the National
Nucleus project for natural rubber production. Annual requirements of both raw and
auxiliary materials are given in Table 4.2.

Table 4.2
RAW AND AUXILIARY MATERIAL REQUIREMENT AND COST (TONNES)

Sr. Cost in Birr (‘000)

Description
No. Qty. FC LC TC
1 Natural rubber
57 1,198,500 211,500 1,410,000
2 Carbon black
25.6 190,400 33,600 224,000
3 Zinc oxide
1.7 37,570 6,630 44,200
4 Stearic acid
1.14 11,821.8 2,086.2 13,908
5 Accelerator
0.5 19,125 3375 22,500
6 Softener
1.7 3,612.5 637.5 4,250
7 Sulphur
1.56 3,712.8 655.2 4,368
8 Anti oxidant
0.85 32,512.5 5,737.5 38,250
Grand Total 1,497,255 264,221.4 1,761,476

B. UTILITIES

Major utilities of the project are electricity and water, and their annual requirement and
cost is indicated in Table 4.2.
 38 - 8

Table 4.2

UTILITIES REQUIRMENT AND COST

Utilities Unit Qty. Cost (Birr)

Electrical Energy kWh 200,000 94,720
Water m3 5,000 16,250
Total 110,970

V. TECHNOLOGY AND ENGINEERING

A. TECHNOLOGY

1. Process Production

The manufacturing process of camel back strip can be classified into two stages, mixing
and Extruding process

In mixing process the crude and synthetic rubber are weighed and masticated. Mixing
takes place in an open mill with a fixed volume for prescribed time. The mill makes the
rubber quite homogeneous and even. The grain structure is refined.

The homogeneous mixture of rubber, so obtained is put into the extruders. Extruding is a
device where rubber is formed into long length like flats with the help of dies, fixed on
the mouth of extruder. The extruder has screw, which pushes out the rubber through the
die.

The treads so taken out from the die are rolled on reels, by putting polyethane paper in
between the tread rubber. Finally the finished products are inspected and stored.

The production process involves mixing and forming. So, it does not have any adverse
impact on environment.
 38 - 9

2. Source of Technology

The technical data, technology, machinery and equipment can be obtained from the
following companies:
Ashoka Machinen Fabrics(India)
Baldev Nagar, Ambala city
Ambala 134007, Haryana, India
Phone: 91 171 2540038\ 6535038
Fax: 91 171 2540038
E mail: mailto:[email protected], [email protected]

2. Erie Mill and Press Co., Inc.

953 East 12th Street
P.O. Box 6349
Erie, PA 16512
United States of America

Telephone: (814) 454-1581

Fax: (814) 454-7913

B. ENGINEERING

1. Machinery & Equipment

The list of machinery and equipment is indicated in Table 5.1. The total cost of
machinery is estimated at Birr 2.4 million, out of which Birr 2.04 million is required in
foreign currency.
 38 - 10

Table 5.1
MACHINERY AND EQUIPMENT REQUIREMENT AND COST

Sr. Description Qty. Cost(‘000 Birr)

No.
LC FC TC
1 Open mill 1 144 816 960
2 Extruding 2
machine 90 510 600
3 Cutting machine 1 72 408 480
4 Curing machine 1 36 204 240
5 Dies Ls 18 102 120
Total 360 2,040 2,400

2. Land, Building and Civil Works

The total area of the project is about 800 m2, out of which the built-up area will be 300
m2. A building with underground, ground and first floor for store, production hall and
office, respectively covering an area of 300 m2 will be constructed. Assuming
construction rate of Birr 2,300 per m2, the total cost of construction is estimated to be Birr
690,000.
According to the Federal Legislation on the Lease Holding of Urban Land (Proclamation
No 272/2002) in principle, urban land permit by lease is on auction or negotiation basis,
however, the time and condition of applying the proclamation shall be determined by the
concerned regional or city government depending on the level of development.

The legislation has also set the maximum on lease period and the payment of lease prices.
The lease period ranges from 99 years for education, cultural research health, sport,
NGO , religious and residential area to 80 years for industry and 70 years for trade while
the lease payment period ranges from 10 years to 60 years based on the towns grade and
type of investment.

Moreover, advance payment of lease based on the type of investment ranges from 5% to
10%.The lease price is payable after the grace period annually. For those that pay the
entire amount of the lease will receive 0.5% discount from the total lease value and those
 38 - 11

that pay in installments will be charged interest based on the prevailing interest rate of
banks. Moreover, based on the type of investment, two to seven years grace period shall
also be provided.

However, the Federal Legislation on the Lease Holding of Urban Land apart from setting
the maximum has conferred on regional and city governments the power to issue
regulations on the exact terms based on the development level of each region.

In Addis Ababa the City’s Land Administration and Development Authority is directly
responsible in dealing with matters concerning land. However, regarding the
manufacturing sector, industrial zone preparation is one of the strategic intervention
measures adopted by the City Administration for the promotion of the sector and all
manufacturing projects are assumed to be located in the developed industrial zones.

Regarding land allocation of industrial zones if the land requirement of the project is
blow 5000 m2 the land lease request is evaluated and decided upon by the Industrial Zone
Development and Coordination Committee of the City’s Investment Authority. However,
if the land request is above 5,000 m2 the request is evaluated by the City’s Investment
Authority and passed with recommendation to the Land Development and
Administration Authority for decision, while the lease price is the same for both cases.

The land lease price in the industrial zones varies from one place to the other. For
example, a land was allocated with a lease price of Birr 284 /m 2 in Akakai-Kalti and Birr
341/ m2 in Lebu and recently the city’s Investment Agency has proposed a lease price of
Birr 346 per m2 for all industrial zones.

Accordingly, in order to estimate the land lease cost of the project profiles it is assumed
that all manufacturing projects will be located in the industrial zones. Therefore, for the
this profile since it is a manufacturing project a land lease rate of Birr 346 per m 2 is
adopted.

On the other hand, some of the investment incentives arranged by the Addis Ababa City
Administration on lease payment for industrial projects are granting longer grace period
 38 - 12

and extending the lease payment period. The criterions are creation of job opportunity,
foreign exchange saving, investment capital and land utilization tendency etc.
Accordingly, Table 5.2 shows incentives for lease payment.

Table 5.2
INCENTIVES FOR LEASE PAYMENT OF INDUSTRIAL PROJECTS

Payment
Grace Completion Down
Scored Point Period Period Payment
Above 75% 5 Years 30 Years 10%
From 50 - 75% 5 Years 28 Years 10%
From 25 - 49% 4 Years 25 Years 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 16.60 million of which 10% or Birr 1,660,800 will be paid in advance.
The remaining Birr 14.95 million will be paid in equal installments with in 28 years, i.e.,
Birr 533,829 annually.

VI. MANPOWER AND TRAINING REQUIREMENT

A. MANPOWER REQUIREMENT

The list of manpower and labour cost are indicated in Table 6.1. The total annual labour
cost is estimated at Birr 290, 250.
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Table 6.1

MANPOWER REQUIRMENT AND LABROUR COST

Sr. Req. Salary Annual Salary

Description
No No. Monthly (Birr) (Birr)
1 General manager 1 3,000 36,000
2 Secretary 1 900 10,800
3 Production head 1 2,300 27,600
4 Chemist 1 1,500 18,000
5 Accountant 1 1,500 18,000
7 Sales/purchase person 1 1,500 18,000
8 Supervisor 1 3,000 36,000
9 Technician operators 3 2,100 25,200
10 Assistant operators 3 1,500 18,000
11 Store keeper 1 500 6,000
12 Driver 1 500 6,000
13 Guard 3 1,050 12,600

Sub-Total 18 232,200

Employees benefit (25%

of basic salary) 58,050

Total 18 290,250

B. TRAINING REQUIRMENT

It is recommended that production workers shall be given on-the-job training for one
month which may take place during plant erection and commissioning. The total cost of
training is therefore estimated at Birr 30,000.

VII. FINANCIAL ANALYSIS

The financial analysis of the camel back strip project is based on the data presented in
the previous chapters and the following assumptions:-
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Construction period 1 year

Source of finance 30 % equity
70 % loan
Tax holidays 2 years
Bank interest 8.5%
Discount cash flow 8.5%
Accounts receivable 30 days
Raw material local 30 days
Raw material import 90 days
Work in progress 1 days
Finished products 30 days
Cash in hand 5 days
Accounts payable 30 days
Repair and maintenance 5% of machinery cost

A. TOTAL INITIAL INVESTMENT COST

The total investment cost of the project including working capital is estimated at Birr
5.95 million, of which 34 per cent will be required in foreign currency.

The major breakdown of the total initial investment cost is shown in Table 7.1.
 38 - 15

Table 7.1
INITIAL INVESTMENT COST ( ‘000 Birr)

Sr. Cost Items Local Foreign Total

Cost Cost Cost
No.
1 Land lease value 1,660.80 - 1,660.80
2 Building and Civil Work 690.00 - 690.00
3 Plant Machinery and Equipment 360.00 2,040.00 2,400.00
4 Office Furniture and Equipment 100.00 - 100.00
5 Vehicle 250.00 - 250.00
6 Pre-production Expenditure* 514.63 - 514.63
7 Working Capital 339.86 - 339.86
  Total Investment Cost 3,915.29 2,040.00 5,955.29

* N.B Pre-production expenditure includes interest during construction ( Birr 334.63

thousand, training (Birr 30 thousand ) and Birr 150 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 3.04
million (see Table 7.2). The raw material cost accounts for 57.89 per cent of the
production cost. The other major components of the production cost are depreciation,
financial cost and direct labour which account for 14.90%, 10.08% and 4.58%
respectively. The remaining 12.55 % is the share of utility, repair and maintenance,
labour overhead and other administration cost.
 38 - 16

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

Items Cost %
Raw Material and Inputs
1,761.48 57.89
Utilities 110.97 3.65
Maintenance and repair
120.00 3.94
Labour direct 139.32 4.58
Labour overheads
58.05 1.91
Administration Costs 92.88 3.05
Land lease cost
- -
Total Operating Costs 2,282.70 75.01
Depreciation 453.54 14.90
Cost of Finance 306.78 10.08
Total Production Cost
3,043.02 100

C. FINANCIAL EVALUATION

1. Profitability

Based on the projected profit and loss statement, the project will generate a profit through
out its operation life. Annual net profit after tax will grow from Birr 696.63 thousand to
Birr 1.04 million during the life of the project. Moreover, at the end of the project life the
accumulated cash flow amounts to Birr 9.6 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
relevant data, the most important ratios such as return on sales which is computed by
 38 - 17

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
project’s initial investment will be fully recovered within 4 years.

5. Internal Rate of Return

The internal rate of return (IRR) is the annualized effective compounded return rate that
can be earned on the invested capital, i.e., the yield on the investment. Put another way,
the internal rate of return for an investment is the discount rate that makes the net present
value of the investment's income stream total to zero. It is an indicator of the efficiency or
quality of an investment. A project is a good investment proposition if its IRR is greater
than the rate of return that could be earned by alternate investments or putting the money
 38 - 18

in a bank account. Accordingly, the IRR of this porject is computed to be 27.86 %

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 5.68 million which is acceptable.

D. ECONOMIC BENEFITS

The project can create employment for 18 persons. In addition to supply of the domestic
needs, the project will generate Birr 2.97 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.