21. PROFILE ON PRODUCTION OF COTTON

SEED OIL

TABLE OF CONTENTS

PAGE

I. SUMMARY 21-3

II. PRODUCT DESCRIPTION & APPLICATION 21-3

III. MARKET STUDY AND PLANT CAPACITY 21-4

A. MARKET STUDY 21-4

B. PLANT CAPACITY & PRODUCTION PROGRAMME 21-6

IV. MATERIALS AND INPUTS 21-7

A. RAW MATERIALS 21-7

B. UTILITIES 21-8

V. TECHNOLOGY & ENGINEERING 21-9

A. TECHNOLOGY 21-9

B. ENGINEERING 21-10

VI. MANPOWER & TRAINING REQUIREMENT 21-12

A. MANPOWER REQUIREMENT 21-12

B. TRAINING REQUIREMENT 21-12

VII. FINANCIAL ANALYSIS 21-13

A. TOTAL INITIAL INVESTMENT COST 21-13

B. PRODUCTION COST 21-14

C. FINANCIAL EVALUATION 21-15

D. ECONOMIC BENEFITS 21-16

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I. SUMMARY

This profile envisages the establishment of a plant for the production of cotton seed oil

with a capacity of 4,128 tonnes per annum.

The present demand for the proposed product is estimated at 59,313 tonnes per annum.

The demand is expected to reach at 184,350 tonnes by the year 2020.

The plant will create employment opportunities for 51 persons.

The total investment requirement is estimated at Birr 45.26 million, out of which Birr 33

million is required for plant and machinery.

The project is financially viable with an internal rate of return (IRR) of 33 % and a net

present value (NPV) of Birr 48.18 million discounted at 8.5%.

II. PRODUCT DESCRIPTION AND APPLICATION

Cotton seed oil is derived from the seeds of various species of cotton that are grown

primarily for their fibres. The oil and protein contents of the seeds vary with the variety

and agroclimatic conditions. Some varieties may have up to 25% oil content.

Refined cotton seed oil is used mainly for edible purposes such as salad and cooking oils,

shortening, margarine and to a lesser extent in the packing of fish and cured meat. Low

grade oil is used in the manufacture of soaps, lubricants and protective coatings.

The by-product of the proposed plant is expeller cake which is used for animal feed.

Cotton seed oil is a resource based product that will substitute the imported vegetable oil.

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III. MARKET STUDY AND PLANT CAPACITY

A. MARKET STUDY

1. Past Supply and Present Demand

Cotton seed is one of the varieties of oil rich seeds used for cooking and food

manufacturing. As compared with animal fats, most vegetable oils are considered more

desirable dietary ingredients. Nigger seed, sesame seed and linseed are export oil seeds

having more value in the international market as compared with the local edible oil

market. Therefore, most edible oil mills in Ethiopia use cotton seed and rape seed as their

raw material.

Even though the supply of edible oil is met through both domestic and imported products

the market is quite dominated by imports. During the period 2000-2005, the highest

market share local production could capture was 26% of the total supply which was

attained in 2003, while the average for the period of analyses was 15% (see Table 3.1).

Table 3.1

SUPPLY OF EDIBLE OIL IN TONNES

Year Domestic** %

Share

Import* %

Share

Total

2000 6579 8.50 70,789 91.5 77,368

2001 6,637 21.12 24,785 78.9 31,422

2002 8,329 19.59 34,196 80.4 42,525

2003 7,993 26.40 22,283 73.6 30,276

2004 8,027 6.18 121,812 93.8 129,839

2005 6,931 7.79 82,014 92.2 88,945

AVERAGE 7,416 15 59,313 85 66,729

Source : * External Trade Statistics.

** Statistical Abstract, CSA.

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As can be seen from Table 3.1, domestic production of edible oil was fluctuating from

year to year around a mean figure of 7,416 tonnes. On the other hand, import of edible

oil has shown a substantial increase during the recent two years, i.e., year 2004 and 2005.

The import level which was in the range of 22,283 tonnes and 34,196 tonnes during the

year 2001-2003 has increased to 121,812 tonnes and 82,014 tonnes during 2004 and

2005, respectively.

Total apparent consumption (total supply) during the past six years ranged from 30,276

tonnes (2003) to 129,839 tonnes (2004). The mean apparent consumption during the

period of analyses was 66,729 tonnes, and this amount is considered to represent current

effective demand. The current unsatisfied demand which excludes local production

(about 7,416 tonnes) would, thus, be 59,313 tonnes.

2. Projected Demand

The demand for edible oil is directly related with food consumption or growth in standard

of living and population. Food consumption of families increases with growth in income.

Since in poorest countries like Ethiopia most of the people are undernourished due to the

lowest level of per capita income, the growth in income for families will result in growth

in consumption of edible oil and food. Thus, the demand for edible oil is projected with a

slight modification of GDP growth rate attained in 2004 or 10 %. The projected demand

for edible oil is presented in Table 3.2.

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Table 3.2

PROJECTED DEMAND FOR EDIBLE OIL (TONNES)

Year Projected Demand

2008 58,740

2009 64,614

2010 71,075

2011 78,183

2012 86,001

2013 94,601

2014 104,061

2015 114,468

2016 125,914

2017 138,506

2018 152,357

2019 167,592

2020 184,351

3. Pricing and Distribution

The current retail price of domestic edible oil per liter is Birr 12. The recommended price

for the envisaged project is Birr 7. Since edible oil should be available in the nearest

retail shop for households; to the consumer's convenience, intensive distribution through

delivery to the retailers as well as its own shops in selected centers is recommended.

B. PLANT CAPACITY AND PRODUCTION PROGRAMME

1. Plant Capacity

The annual production capacity of the envisaged plant is 4,128 tonnes of refined oil and

11,000 tonnes of expeller cake, based on 300 working days and 3 shifts per day.

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2. Production Programme

Considering the gradual development of processing skill and marketing of the products,

the rate of capacity utilization during the 1st and 2nd year of production will be 70 and

85%, respectively. Full capacity will be attained in the third year and then after. Table

3.3 shows the production program of the proposed project.

Table 3.3

PRODUCTION PROGRAMME

Sr.

No.

Production Production Year

1 2 3-10

1 Cotton seed oil (tonnes) 2889.6 3508.8 4128

2 Expeller cake (tonnes) 7700 9350 11,000

3 Capacity utilization rate (%) 70 85 100

IV. MATERIAL AND INPUTS

A. RAW MATERIALS

The principal raw materials and inputs are cotton seed, caustic soda & bleaching earth.

Cotton seed can be obtained from cotton ginning plants operating in the region or other

parts of the country. Caustic soda and bleaching earth are also obtained locally. The

annual requirement and cost of these inputs are indicated in Table 4.1. The total annual

cost of raw material is estimated at Birr 7,282,200.

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Table 4.1

ANNUAL RAW MATERIAL REQUIREMENT & COST

Sr.

No.

Materials Qty Cost (‘000 Birr)

(Tonnes) LC FC TC

1 Cotton seed 22,800 6,840 6,840

2 Caustic soda 18 108 108

3 Bleaching earth 90 180 180

4 Replacement of drums

(75% packed in drums

and 10% replacement)

1,550 154.8 154.8

Total 7,102.8 180 7,282.2

B. UTILITIES

Electricity, furnace oil and water are utilities of the proposed project. Table 4.2 indicates

the annual utilities requirement and cost at full capacity. Process water shall be supplied

by submersible pumps installed by the project.

Table 4.2

ANNUAL UTILITIES REQUIREMENT & COST

Sr.

No.

Utility Unit Qty Cost

(‘000 Birr)

1 Electricity kWh 2,700,000 1279.8

2 Furnace oil Tonne 360 1,947.6

3 Water m3 2,000 20

Total 3,247.4

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V. TECHNOLOGY AND ENGINEERING

A. TECHNOLOGY

1. Process Description

Edible oil processing is classified in two groups: crude and refined oil production.

Cotton seed first conveyed to the cleaning unit in which magnetic separators, vibratory

screens & pneumatic cleaners are involved. The clean seed then enters the delinting

section where the lint is removed from the seed and then cleaned and bailed. The

delinted cotton seed “black seed”, is further conveyed to the decortication unit in which

the husk is removed by decorticators and screening machines. The meat with about 10%

husk enters to the pressing unit.

Before the seed is pressed, it shall be conditioned in the cooker with steam. Conditioning

has the following functions:

a) Rupture the oil cells by the action of heat and moisture making oil readily

available for extraction

b) Increase the fluidity of oil by increasing the temperature of ‘meat’ and oil,

c) Coagulates the protein portion of meat and

d) Dries the meat to a moisture content suitable for extraction

The cooked meat is then pressed to produce crude oil which shall be screened and filtered

before entering the refinery unit.

In the refinery, there exist three major operations: neutralization, bleaching and

deodorization. In the neutralizer, the free fatty acid content of crude oil shall be lowered

by adding caustic soda. The colour of oil shall be controlled in the bleacher using

bleaching earth. Finally the components of oil which are responsible for the odour are

removed by the deodorization process. The final refined oil is then dispatched for sales.

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2. Source of Technology

The technology of cotton oil processing can be acquired form different suppliers. For

example, the following company may be required for quotation.

Plot No. 2 Dhormajuan Industrial Estate

Gokuldham Main Road

Rajkot – 360004, Gujarat

India

Fax: 91281 2366010

B. ENGINEERING

1. Machinery and Equipment

The list of machinery and equipment is indicated in Table 5.1. The total cost of

machinery is estimated at Birr 33 million of which Birr 27.5 million is required in foreign

currency.

Table 5.1

LIST OF MACHINERY AND EQUIPMENT

Sr.No.

Description Qty.(No)

1 Cotton seed cleaning unit 12 Decortications unit 13 Press section

- Press- Screen & filter

1

4 Refinery- Neutralizer- Washer- Bleacher- Deodorizer

1

5 Boiler 16 Submersible pump 17 Cooling towers 18 Laboratory equipment Set9 Barrel Washing unit

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2. Land, Building & Civil Works

The total area of the project is 10,000 m2 of which 3200 m2 is a built-up area. The cost

of building is estimated at Birr 6.4 million. The lease value of land is about Birr

800,000, at a rate of 1 Birr per m2 for 80 years.

3. Proposed Location

The major cotton – growing areas are found in Gamogoffa and South Omo, around

Abaya & Chamo Basin below 1400m. For its proximity to the raw material source and

market, availability of infrastructure, Arbaminch is selected to be the best location for the

envisaged project.

VI. MANPOWER AND TRAINING REQUIREMENT

A. MANPOWER REQUIREMENT

The envisaged project required 51 employees. The list of manpower and annual labor

cost are indicated in Table 6.1. The total annual cost of labour is estimated at Birr

592,500.

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Table 6.1

MANPOWER REQUIREMENT & LABOUR COST

Sr.No.

Manpower Req.No.

Monthly Salary (Birr)

Annual Salary (Birr)

1 General manager 1 3,500 42,0002 Secretary 1 800 9,6003 Sales and marketing officers 2 3,000 36,0004 Accountant 1 2,000 24,0005 Production & tech. head 1 2,500 30,0006 Clerk 1 400 4,8007 Mechanic 3 4,500 54,0008 Purchaser 1 1,000 12,0009 Driver 1 800 9,60010 Operators 12 8,400 100,80011 Ass. Operators 9 3,600 43,20012 Labourers 12 3,600 43,20013 Laboratory technicians 3 4,500 13,50014 Guards 3 900 10,800

Sub-total 51 39,500 474,000Benefit (25% BS) 9,875 118,500Grand total 49375 592500

B. TRAINING REQUIREMENT

On-the-job training shall be carried out during plant erection and commissioning by

experts of machinery supplier. The total cost of training is estimated at Birr 50,000.

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VII. FINANCIAL ANALYSIS

The financial analysis of the cotton seed oil 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 5 years

Bank interest 8%

Discount cash flow 8.5%

Accounts receivable 30 days

Raw material local 30 days

Work in progress 2 days

Finished products 30 days

Cash in hand 5 days

Accounts payable 30 days

A. TOTAL INITIAL INVESTMENT COST

The total investment cost of the project including working capital is estimated at Birr

42.26 million, of which 51 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.   Total Cost

No. Cost Items (‘000 Birr)

1 Land lease value 800.0

2 Building and Civil Work 6,400.0

3 Plant Machinery and Equipment 33,000.0

4 Office Furniture and Equipment 100.0

5 Vehicle 200.0

6 Pre-production Expenditure* 2,625.6

7 Working Capital 2,136.6

Total Investment Cost 45,262.2

Foreign Share 51

* N.B Pre-production expenditure includes interest during construction ( Birr 2.47 million) 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 16.89

million (see Table 7.2). The material and utility cost accounts for 62.31 per cent, while

repair and maintenance take 0.74 per cent of the production cost.

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Table 7.2

ANNUAL PRODUCTION COST AT FULL CAPACITY ('000 BIRR)

Items Cost %

Raw Material and Inputs 7,282.20 43.09

Utilities 3247.4 19.22

Maintenance and repair 125 0.74

Labour direct 284.4 1.68

Factory overheads 94.8 0.56

Administration Costs 189.6 1.12

Total Operating Costs 11,223.40 66.42

Depreciation 3700 21.90

Cost of Finance 1974.99 11.69

Total Production Cost 16,898.39 100

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 3) is estimated by using income statement projection.

BE = Fixed Cost = 33 %

Sales – Variable Cost

3. Pay Back Period

The investment cost and income statement projection are used to project the pay-back

period. The project’s initial investment will be fully recovered within 3 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 48.18 million.

D. ECONOMIC BENEFITS

The project can create employment for 51 persons. In addition to supply of the domestic

needs, the project will generate Birr 27.37 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 import of vegetable oil.

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