69. PROFILE ON PRODUCTION OF JUTE

BAGS

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TABLE OF CONTENTS

PAGE

I. SUMMARY 69-3

II. PRODUCT DESCRIPTION & APPLICATION 69-3

III. MARKET STUDY AND PLANT CAPACITY 69-4

A. MARKET STUDY 69-4

B. PLANT CAPACITY & PRODUCTION PROGRAMME 69-8

IV. RAW MATERIALS AND INPUTS 69-8

A. RAW & AUXILIARY MATERIALS 69-8

B. UTILITIES 69-9

V. TECHNOLOGY & ENGINEERING 69-10

A. TECHNOLOGY 69-10

B. ENGINEERING 69-14

VI. MANPOWER & TRAINING REQUIREMENT 69-16

A. MANPOWER REQUIREMENT 69-16

B. TRAINING REQUIREMENT 69-16

VII. FINANCIAL ANALYSIS 69-18

A. TOTAL INITIAL INVESTMENT COST 69-18

B. PRODUCTION COST 69-19

C. FINANCIAL EVALUATION 69-20

D. ECONOMIC BENEFITS 69-21

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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 33 % and a net

present value (NPV) of Birr 8.89 million discounted at 8.5%.

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.

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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 jute’s 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.)

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Table 3.1

SUPPL Y OF JUTE SACKS IN TONNES

Year Total Local Import

1997 9,206 6,418 2,788

1998 8,194 7,649 545

1999 5,114 4,981 133

2000 5,729 5,708 21

2001 5,981 5,981 -

2002 5,709 5,691 18

2003 3,996 3,960 36

2004 3,315 3,315 -

2005 5,163 5,163 -

2006 N.A 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.

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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 E XPORT (T ONNES)

Year Export Growth Rate %

1997 118,784

1998 115,025 -3

1999 109,079 -5

2000 118,911 9

2001 88,662 -25

2002 123,433 39

2003 135,548 10

2004 156,648 16

2005 150,393 -4

2006 181,799 21

Average 131,055 6

Source: Customs Authority.

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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

PROJECT ED DEMAND FOR J UTE S ACK (TONNES)

Year Projected Demand

2008 5,755

2009 6,101

2010 6,467

2011 6,855

2012 7,266

2013 7,702

2014 8,164

2015 8,654

2016 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.

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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 1 2 3 and above

Annual production (million pieces) 3.75 4.25 5.0

Capacity utilization (%) 75 85 100

IV. MATERIALS AND INPUTS

A. RAW AND AUXILIARY MATERIALS

The major raw material required for jute bag production is jute yarn. Jute yarn is not

produced locally, and therefore it has to be imported from abroad.

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Auxiliary materials include oils, chemicals and other required inputs. Annual

requirement and cost of raw and auxiliary materials shown in Table 4.1 below.

Table 4.1

ANNUAL REQUIRE MENT OF RAW AND AUXI LIARY MATE RI ALS

No. Description Qty Cost (‘000 Birr)

LC FC TC

A. Raw Materi a l

1 Jute yarn (tons) 6825 - 20475 20475

B. Auxilia r y Mate r i als

1 Oils Req - 50.0 50.0

2 Other inputs (chemicals, etc) Req - 10.0 10.0

3 FOB price - 20535 20535

Customs, Insurance, Bank

charges material handling

costs

150 - 150

CIF Landed Cost 150 20,535 20,685

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.

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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. They must be

performed in strict rotation in a loom.

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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.

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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.

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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 EQ UIPMENT

No. Description Qty Unit

Price

Cost (‘000 Birr)

LC FC TC

1 Power jute loom 10 80,000 - 800 800

2 Winding machine 2 55,000 - 110 110

3 Heavy duty cutter 2 25,000 - 50 50

4 Stitching machine 3 20,000 - 60 60

5 Pressing machines 2 20,000 - 40 40

6 Tools and auxiliaries Reqd - - 10 10

FOB price 1070 1070

Customs, Insurance, Bank

charges, materials handling

150 - 150

CIF Landed Cost 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.

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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

appropriate wereda selected is Badawacho. It is therefore suggested that jute bags

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 LA BO UR CO S T (BIRR)

No. Job Title Req.

No.

Monthly

Salary

Annual Wages

A. Administration

1 Plant manager 1 2000 24000

2 Secretary 2 700 16800

3 Accountant 1 1200 14400

4 Personnel officer 1 1000 12000

5 Salesman 1 1000 12000

6 Purchaser 1 1000 12000

7 Store man 1 1000 12000

8 Cashier 1 800 9600

9 Clerk 2 600 14400

10 General services 6 350 25200

Sub-total 17 - 152400

B. Production

1 Production supervisor 1 1500 18000

2 Shift foreman 2 1200 28800

3 Operators 34 700 285600

4 Laborer 10 350 42000

5 Mechanics 4 800 38400

6 Electricians 4 800 38400

7 Production Clerk 2 500 12000

Sub-total 57 - 463200

Workers’ benefit (25% BS) - - 153900

Total 74 - 769500

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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 1 year

Source of finance 30 % equity

70 % loan

Tax holidays 3 years

Bank interest 8.5 %

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 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.

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Table 7.1

INITIAL I NVES TME NT COST

Sr.

No. Cost Items

Total Cost

(‘000 Birr)

1 Land lease value 200.0

2 Building and Civil Work 2,250.0

3 Plant Machinery and Equipment 1,220.0

4 Office Furniture and Equipment 75.0

5 Vehicle 200.0

6 Pre-production Expenditure* 436.5

7 Working Capital 3,833.7

Total Investment cost 8,215.2

Foreign Share 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.

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Table 7.2

ANNUAL PRODUCTION COST AT FULL CAPACITY ('000 BIRR)

Items Cost %

Raw Material and Inputs 20,685.00 91.66

Utilities 119.8 0.53

Maintenance and repair 174 0.77

Labour direct 617.1 2.73

Factory overheads 149.96 0.66

Administration Costs 152.4 0.68

Total Operating Costs 21,898.26 97.04

Depreciation 312 1.38

Cost of Finance 356.85 1.58

Total Production Cost 22,567.11 100

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 = 18 %

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 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.