139.

PROFILE ON PINE OIL

139-2

TABLE OF CONTENTS
PAGE
I.

SUMMARY

139-3

II.

PRODUCT DESCRIPTION & APPLICATION

139-3

III.

MARKET STUDY AND PLANT CAPACITY

A. MARKET STUDY
B. PLANT CAPACITY & PRODUCTION PROGRAMME

139-5
139-5
139-8

IV.

MATERIALS AND INPUTS

A. RAW & AUXILIARY MATERIALS
B. UTILITIES

139-9
139-9
139-10

V.

TECHNOLOGY & ENGINEERING

139-11

A. TECHNOLOGY
B. ENGINEERING

139-11
139-12

MANPOWER & TRAINING REQUIREMENT

A. MANPOWER REQUIREMENT
B. TRAINING REQUIREMENT

139-15
139-15
139-15

VI.

VII.

I.

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

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

139-16
139-17
139-18
139-19
139-21

pine oil

with a capacity of 300 tonnes per annum. The envisaged plant will also produce 1,430
tonnes of rosin as a by product. Pine oil is an essential ingredient of a number of
perfumes, disinfectants, deodorants, etc. It is also used in polishes, insecticides, cattle
spray, as raw material for the production of perfumery grade menthol terpineol and
camphorates, as a wetting agent in textile and paper industry.
The major raw material is pine wood, which is found in the country.

139-3

The present demand for the proposed product is estimated at 3,779 tonnes per annum.
The demand is expected to reach at 8,948 tonnes by the year 2018.
The total investment requirement is estimated at Birr 12.46 million, out of which Birr 6.5
million is required

for plant and machinery. The plant will create employment

opportunities for 42 persons.

The project is financially viable with an internal rate of return (IRR) of 20.83 % and a net
present value (NPV) of Birr 8.07 million, discounted at 8.5%.
The project has a backward linkage with the forestry sector and a forward linkage with
the aforementioned end-users. The project will have foreign exchange earning effect
through exporting its products to the world market.
II.

PRODUCT DESCRIPTION AND APPLICATION

Pine oil is obtained from pine oleoresin (sometimes called as gum oleoresin or crude
turpentine) which in turn is made from pine trees by a process called tapping.
Pine oleoresin contains about 20% spirits of turpentine (turpentine oil), 65% rosin (resin),
5 to 10% water, some bark and dust, etc.
In this project profile, the pine oleoresin (mixture of turpentine oil and resin (rosin)) is
considered as raw material to produce turpentine oil and co-product rosin (resin). The
turpentine oil is further processed into pine oil. Therefore, the products and co-products
of the envisaged project are:
a)

Turpentine oil (sprits of turpentine),

b)

Rosin, and

c)

Pine oil.

139-4
Turpentine oil (sprits of turpentine) is used as a thinning material in the paint and varnish
industry, as a solvent for rubber, to manufacture printing cloth, water proofing
compounds, leather dressings, many pharmaceuticals and large number of other
chemicals.
Rosin, on the other hand, is used for preparing paints and varnished, polishes, waxes,
soaps, oil cloth, linoleum, sealing wax, printing ink, roofing and floor covering,
adhesives, plastics, rubber, wood preservatives, disinfectants, drugs and various
chemicals. Rosin is used in the paper industry for sitting, i.e. for imparting luster and
weight and hindering absorption of ink or moisture. Rosin oil finds its use in the
manufacture of greases, lubricants and solvents. A quite familiar use of rosin is in
gymnasium floors to prevent slipping especially for basket ball games.
Pine oil is used as an input in paint and varnish industry, as frothing agent in the
floatation of ores and in metal polishes and solvents.

139-5
III.

MARKET STUDY AND PLANT CAPACITY

A.

MARKET STUDY

1.

Past Supply and Present Demand

Pine oil is used as disinfectant and deodorant, for the flotation of lead and zinc ores, and
in the manufacture of terpin hydrates and terpin products. It is also used in laundering.
As the local end users of the product are in the early stage of development, the demand
for the product in the local market is not very high. However, the limited quantity
required in the local market is satisfied through import (seeTable 3.1.).
Table 3.1
IMPORT OF PINE OIL AND OTHER TURMERIC OILS
Year
Import (kg)
Value (Birr)
2001
1,686
44,398
2002
121
8,292
2003
2004
1,196
34,576
2005
337
5,933
2006
1,945
46,090
Source: - Ethiopian Customs Authority.
As could be seen from Table 3.1, the highest level of import was registered during 2006
which amounts to 1,945 k.g. In the remaining years the annual import ranged from 121
kg to 1,686 kg. Effective demand for the domestic market for the year 2006 is estimated
at about 1,160 kg by taking the recent three years (2004-2006) average.
To arrive at the current (year 2008) effective demand, the average growth of the
manufacturing sector in the past few years has been considered. By taking 10% annual
growth rate, the current demand is, thus, estimated at 1,405 kg.

139-6
Pine oil has also a huge demand in the international market. At present, China and
Portugal dominate the world production of pine oil.

China's annual production is

estimated at 200,000 to 250,000 tonnes while Portugal produces about 90,000 tonnes.
Other producers include U.S.A, Spain, Mexico, France, India, Malaysia, Russia, Poland
and Honduras. The U.S.A and Russia mainly produce for domestic consumption.
The worlds total annual average import/export of pine oil during the period 2000-2005
was around 330,000 tonnes. The annual average growth rate of import /export during the
same period was 7%. The major pine oil importing countries are over 100. The major
importing countries include Japan, Germany, UK, France, the Netherlands, Italy,
Belgium, Australia, Austria, Canada, Columbia and Switzerland.

From the African

continent South Africa, Zaire and Nigeria are among the major importing countries.
In estimating the export potential for pine oil produced in Ethiopia the average level of
2000-2005 global import and the registered growth rate is considered. Accordingly
taking 330,000 tonnes as the demand for 2005 and applying a 7% growth rate, the current
global demand is estimated at 377,817 tonnes. As a new entrant to the world market,
demand for pine oil produced in Ethiopia is assumed to have a share of 1%. Hence, the
export potential is estimated at 3,778 tonnes.
Based on the above analysis, the total current effective demand (domestic and export) for
pine oil to be produced in Ethiopia is estimated at 3,779 tonnes.
2.

Projected Demand

In projecting the domestic and export demand for pine oil, the forecasted growth rate of
the domestic manufacturing sector and the historical growth rate of import/export has
been considered. According to the Plan for Accelerated and Sustained Development to
End Poverty (2005/06-2009/10), an annual average growth rate of 11.5% is set for the
industrial sector. World import/export during 2000-2005 has registered an annual growth

139-7
rate of 7%. Taking the average of the two factors, the demand for pine oil is projected on
an annual growth rate of 9% (see Table 3.2).
Table 3.2
PROJECTED DEMAND FOR PINE OIL (TONNES)
Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
3.

Projected Demand
4,119
4,490
4,894
5,334
5,814
6,338
6,908
7,530
8,207
8,949

Pricing and Distribution

To determine the selling price, FOB prices of Indonesian pine oil is considered. During
2005 Indonesian FOB price was USD 1,459 per tonne. As a new entrant, USD 1,400
(Birr 13,580) per tonne is recommended for the envisaged plant. Regarding rosin based
on the import data a factory gate price of Birr 16,250 per tonne is taken for sales revenue
projection.

The product can be directly sold to the user industries in the domestic market. For the
export market direct sale to end-user or an agent can be utilized.
B.

PLANT CAPACITY AND PRODUCTION PROGRAMME

1.

Plant capacity

139-8
The plant capacity for the production of pine oil and rosin is determined based on the
market study, minimum economies of scale and the capital requirement of the project.
Therefore, the capacity of the envisaged plant is 300 tonnes of pine oil based on 300
working days and three shifts per day. The plant also produces 1430 tonnes of rosin as a
by product.
2.

Production Programme

The production program of the project is indicated in Table 3.3. At the initial stage of
production, the project may require some years to penetrate the market and develop skill
in production and maintenance.

Therefore, in the first, second and third year of

production, the capacity utilization rate will be 60%, 75% and 90%, respectively. In the
fourth year and then after the plant will operate at full capacity.
Table 3.3
PRODUCTION PROGRAMME
Sr.
No.
1
2

Product
Rosin (tonnes)
Pine oil (tonnes)
Capacity utilization Rate (%)

1
858
180
60

Production Year
2
3

4-10

1073
225
75

1430
300
100

1287
270
90

139-9
IV.

MATERIAL AND INPUTS

A.

RAW AND AUXILIARY MATERIALS

Table 4.1 shows the annual raw and auxiliary materials requirement and cost. The total
annual cost of raw material is estimated at Birr 7,757,000. To produce turpentine and
rosin, pine oleoresin would be required. In addition, for the production of pine oil from
turpentine; sulfuric acid, caustic soda and acetone are major inputs. Pine oleoresine can
be sourced from SNNPRS, Gambella and Benishangul region where the pine tree is
abundantly available, Caustic soda from Zeway, Sulfuric acid from Awash Melkasa and
acetone will be imported.
Pine oleoresin is supposed to be purchased from owners of pine trees after harvesting by
tapping.
To estimate the raw material requirement of the project the following assumptions have
been made.
a)

A pine tree can deliver on average 2.75 kg of pine oleoresin.

b)

Pine oleoresin contains about 20% turpentine, and 65% rosin.

c)

About 1.433 kg of turpentine is required to produce 1 kg of pine oil.

139-10
Table 4.1
RAW AND AUXILIARY MATERIALS REQUIREMENT & COST (AT FULL
CAPACITY, TONNES)
Sr.

Materials

No.
1
2
3
4

B.

Pine oleoresin
Sulfuric Acid
Caustic soda
Acetone
Grand Total

Qty
2,200
64
64
13.3

Cost (000 Birr)

LC
FC
TC
6,600
384
640
7,624

133
133

6,600
384
640
133
7,757

UTILITIES

Electricity, furnace oil and water are the principal utilities of the project. The annual
utility requirement and its cost are indicated in Table 4.2.The total annual cost of utilities
is estimated at Birr 1,472,580.
Table 4.2
ANNUAL UTILITIES REQUIREMENT AND COST
Sr.
No.
1
2
3

Utility
Electricity
Furnace oil
Water

Unit of
Measure
kWh
Lt
m3

Total

V.

TECHNOLOGY AND ENGINEERING

A.

TECHNOLOGY

Qty
800,000
500,000
50,000

Cost (000
Birr)
142.08
116.8
162.5
1,472.580

139-11
1.

Process Description

a)

Turpentine and Rosin Production Unit

Pine oleoresin is first washed and cleared and then charged into the stainless steel batch
stills to evaporate the turpentine. The stills are internally heated by passing live steam
through spirally coiled pipes. The vapor which contains water and turpentine enters to
the condenser and then separated by decantation. The hot molten residue that remains in
the still constitutes the rosin.
b)

Pine Oil Production Unit

Pine oil is produced by the action of sulfuric acid on turpentine. The by- products of the
reaction are D. D. turpentine and pine tar which are also useful products to fetch good
market price.
Turpentine is fed to a lead lined reactor fitted with stirrer and heating arrangements.
Dilute sulfuric acid is slowly added and temperature is raised to 40-50 oC, with continued
stirring. In addition, acetone is added with sulfuric acid.
The end of reaction is checked by noting specific gravity of the product. When it reached
to the level of 0.87, the product is removed from the reactor and washed with water and
diluted caustic soda to remove last traces of free acid. The solution is then distilled in a
still fitted with condenser to recover acetone. After the recovery of acetone, the solution
is steam distilled to separate trepan alcohols from other reaction products and unreacted
turpentine oils.
The production of pine oil does not have any adverse impact on environment.

2.

Source of Technology

139-12
Several machinery suppliers can be requested for their offer. Among them, the following
supplier of plant machinery can be contacted.
Doshi Engineering Works
Mogra Village Road, Andheri, Mumbai,
Maharashtra-400 069 India
Phone: + (91) -22-28360802
B.

ENGINEERING

1.

Machinery and Equipment

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

The total cost of

machinery & equipment is estimated at Birr 6.5 million, of which Birr 5.25 million is
required in foreign currency.
Table 5.1
MACHINERY & EQUIPMENT REQUIREMENT AND COST
Sr.
No.
1
2
3
4
5
6
7
8
9
10
11
12
2.

Description

Qty

Receiving tank
1
Washing tank
1
Evaporator (ss)
1
Condenser (for turpentine)
1
Receiver (for turpentine)
1
Lead lined reaction vessel
1
Lead lined washing tank
1
Neutralizing tanks
2
Distillation unit
1unit
(complete with steam coils,
reboiler and condenser)
Steam boiler
1
Storage tanks
3
Submersible pump
1
Grand Total
Land, Building and Civil Works

LC
26,325
29,250
92,625
78,000
27,300
141,375
48,750
131,625
136,500
165,750
78,000
19,500
975,000

Cost(Birr)
FC
149,175
165,750
524,875
442,000
154,700
801,125
276,250
745,875
773,500
939,250
442,000
110,500
5,525,000

TC
175,500
195,000
617,500
520,000
182,000
942,500
325,000
877,500
910,000
1,105,000
520,000
130,000
6,500,000

139-13
The total land required by the project is about 1,000 m 2. Out of which 700 m2 is a built-up
area. Of which 450m2 areas is allotted for production facilities, 150m2 for stores of raw
material and finished product and 100m2 for office building. The cost of building is
estimated at Birr 1,400,000, considering a construction cost rate of Birr 2,000 per m 2 on
average by assuming a building type of Ega sheet roof, steel structure with no wall and
concrete floor for factory and CIS roof, plastic tiles, plastered and painted finish, metal
doors and windows for offices.
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
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

139-14
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.
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

139-15

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

Payment
Completion
Period
30 Years
28 Years
25 Years

Grace
Period
5 Years
5 Years
4 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 20.76 million of which 10% or Birr 2,076,000 will be paid in advance.
The remaining Birr 18.68 million will be paid in equal installments with in 28 years, i.e.,
Birr 667,286 annually.

VI.

MANPOWER AND TRAINING REQUIREMENT

A.

MANPOWER REQUIREMENT

The list of manpower and the annual labour cost is indicated in Table 6.1. The total
annual labour cost is estimated at Birr 474,750.
B.

TRAINING REQUIREMENT

On-the-job training of production operators, chemists, electricians and mechanics will

take place by the experts of machinery supplier for about one month on the operation,
maintenance of machineries and product quality. The cost of training is estimated at Birr
50,000.
Table 6.1
MANPOWER REQUIREMENT & ANNUAL LABOUR COST

139-16

Sr.
No.
1
2
3
4
5
6
7
8
9
10
11
12
13
14

VII.

Description
General manager
Secretary
Purchaser
Sales officer
Accountant
Personnel
Store keeper
Production an technic head
Operators
Labourers
Electrician
Mechanic
Chemist
Guards
Sub-total
Benefits (25% of BS)
Total

Req.

Monthly

No.
1
1
1
1
1
1
2
1
9
12
3
3
3
3
42

Salary (Birr)
3,000
800
1,500
1,500
1,500
1,500
1,200
2,500
6,300
3,600
1,800
1,800
3,600
1050

42

Annual Salary
(Birr)
36,000
9,600
18,000
18,000
18,000
18,000
14,400
30,000
75,600
43,200
21,600
21,600
43,200
12,600
379,800
94,950
474,750

FINANCIAL ANALYSIS

The financial analysis of the pine 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

2 years

Bank interest

8.5%

Discount cash flow

8.5%

Accounts receivable

30 days

Raw material local

30 days

139-17
Raw Material import

90 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
12.46 million, of which 44 per cent will be required in foreign currency.
The major breakdown of the total initial investment cost is shown in Table 7.1.

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

Cost Items

Local
Cost

Foreign
Cost

Total
Cost

Land lease value

2,076.00

2,076.00

Building and Civil Work

1,400.00

1,400.00

139-18
3

Plant Machinery and Equipment

5,525.00

6,500.00

975.0
100.00

100.00

Office Furniture and Equipment

Vehicle

450.00

450.00

Pre-production Expenditure*

797.93

797.93

Working Capital

1,140.75

1,140.75

Total Investment cost

6,939.68 5,525.00

12,464.68

* N.B Pre-production expenditure includes interest during construction ( Birr 647.93

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 11.38
million (see Table 7.2).

The raw material cost accounts for 68.16 per cent of the

production cost. The other major components of the production cost are utility
depreciation and financial cost which account for

12.94%, 7.47% and 4.54%

respectively. The remaining 7.39 % is the share of direct labour, repair and maintenance,
labour over head and other administration cost.

139-19
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

7,757.00
1,472.58

68.16
12.94

325.00
227.88

2.86
2.00

94.95
136.73

0.83
1.20

10,014.14
850.00

87.99

516.91

4.54

11,381.05

100

7.47

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 768.19 thousand to
Birr 2.01 million during the life of the project. Moreover, at the end of the project life the
accumulated cash flow amounts to Birr 18.83 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

139-20
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

22 %

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 5 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

139-21
in a bank account. Accordingly, the IRR of this porject is computed to be 20.83 %
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 8.07 million which is acceptable.
D.

ECONOMIC BENEFITS

The project can create employment for 42 persons.

In addition to supply of the

domestic needs, the project will generate Birr 4.92 million in terms of tax revenue. The
project will have foreign exchange earning effect through exporting its products to the
world market. Through supplying its products it will create a forward linkage effect with
the manufacturing sector.