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Opportunity Analysis of New Business Venture MKTM033, Assignment 1 – PJ1 Tutor: Dr. Jack Lovell

Opportunity Analysis of New Business Venture

MKTM033, Assignment 1 PJ1

Tutor: Dr. Jack Lovell

Word Count: 2010 words

RESEARCH TOPIC

Research report to critically evaluate a new biomass multi-fuel pellet business idea.

By:

Student No.

Contents

Introduction

2

Business Details

2

Industry & Market Analysis

2

Products/Service

2

Market Segmentation

3

Target Market

4

Industry Attractiveness Analysis (Porter's Five Forces)

4

Market Potential

5

Location and Site

6

Current and Projected Demand Analysis for Biomass Products:

6

Survey Based on Questionnaire

6

Technical Feasibility

7

TECHNICAL SPECIFICATION WITH LIST OF EQUIPMENTS

7

Financial Model

9

Cost of the project:

10

Means of Finance

11

Estimation of Annual Profit

11

References

12

Appendix

13

Questionnaire

13

Introduction

In a country like India, 540 million tons of crop and plantation residues production are promised, a major part of which is wasted, or inefficiently utilized. Moderate appraisals demonstrate that even with the present usage example of these deposits and by utilizing just the surplus biomass materials, assessed at around 150 million tons, around 17,000 MW of appropriated power could be produced (IREDA, 2006). Wood and different biomass combustibles can be burned for heat, used to produce power, or processed into liquid fuels.

Business Details

According to Thabane et al., (2010) a feasibility study is sometimes called a „proof of concept study‟ .Hence, a great approach to begin a feasibility study is to give a depiction of the business idea. This study aide is for a new biomass multi-fuel pellet plant with a production capacity of 2 ton per/hour in Bikaner (Rajasthan, India) which would be operated to create profits. The business of the biomass multi-fuel pellet would be to: Procure agriculture waste/residues or wood chips, by-items and other feedstock. Also to produce and bundle biomass pellets and to market, offer and deliver pellets to the customers (Sultana, 2010).

This business seems to be interesting in light of two main considerations. The main is the steady increase in the expense of fossil fuels and instability in price of fuel, and the second is the expanded consideration given to the negative impacts of utilizing fossil fuels, for example, oil and gas on the environment Rout et al. (2008). Different variables that support the case for pellets is that they are a fuel which can be produced locally, from nearby wood and biomass materials. An affordable fuel can be produced & distributed locally which will create employment opportunities & will also minimise the carbon footprint (McKendry,

2002).

The unique selling price of pellet can be considered as the viable part of biomass use in developing countries like India, multi-fuel pellets are a source of cheap fuel for cooking, heating & power generation (Bhattacharya et al., 2002). Also, many customers can‟t afford price of substitutes of pellet fuel & presently the producers producing pellets are limited or have a small capacity of pellet production in India.

Industry & Market Analysis

Products/Service

The product of a multi-fuel pellet company would be an energy product which will be used for burning or gasification purpose to create heat. It could be utilized alone or mixed with different fuels available. The pellets have less than 10-11 % moisture content, low ash & dust, they are uniform in size. They are perfect substitute for other fuels like coal, natural gas. The final product pellet standard is premium or standard which can be determined with the help of Figure 1 presented below:

Figure 1: North American Standard (Pellets Fuels Institute) Source: CBCL (2008) Market Segmentation The three

Figure 1: North American Standard (Pellets Fuels Institute)

Source: CBCL (2008)

Market Segmentation

The three major markets which use biomass pellets are:

Industry
Industry
Individual Use
Individual
Use
Biomass Pellet
Biomass
Pellet
Institutional & Commercial
Institutional
&
Commercial

Figure: 2 Market Segmentation

Source: Self Developed

Individual users use biomass pellet heaters & stoves to meet their heating & cooking requirements. Institutional & Commercial users can give space heating, water heating, and process heat. The heat produced can be provided to buildings, such as institutional (e.g. schools, hospitals, sports complex), commercial (e.g. shops, warehouses, offices) & Industry users need ample amount of heat for boilers & other machineries installed (Castillo et al., 2010).

Target Market

The target market will be also same as our market segmentation because there is substantial demand of pellets in all the three segments of market. But gradually if the demand increases in the individual market then the focus will be to sell more pellets to individual markets because they have less bargaining power as compared to other segments of the market which will be described in detail underneath in the “buyer power” point.

Industry Attractiveness Analysis (Porter's Five Forces)

Porter's five forces is a model that examine five components which focus the present and future appeal of an industry. Every component contributes negative or positive to the overall engaging quality of a specific industry. These five forces influence the flow of the business and also play a key part in forming of strategic choices. Profitability factor fluctuates broadly between as well as inside industries. Profitability of an organization entering the business is not necessarily determined by the measure of attractiveness. In unattractive industries, there are profitable companies & in attractive industries there are failure industries. The ability to sustain competitive advantage is the key of success for an organisation (Grundy, 2006).

The multi-fuel pellet industry is as of now reasonably appealing based on the analysis of supplier power, buyer power, barriers to entry, substitutes, and industry competition presented. The visual representation (Figure 3) of the fiver forces underneath is trailed by a definite examination of every component and its segments.

Suppliers

Farmers

Saw mills

Waste suppliers

Barriers to Entry

Moderate capital Requirement

Huge Sunk Cost

 Moderate capital Requirement  Huge Sunk Cost Rivalry  Compete on cost  Raw material
 Moderate capital Requirement  Huge Sunk Cost Rivalry  Compete on cost  Raw material

Rivalry

Compete on cost

Raw material & Location advantages

Markets is localized

Market is growing

 Markets is localized  Market is growing Buyer Power  Individual  Institutional &

Buyer Power

Individual

Institutional &

Commercial

Industry

 Institutional & Commercial  Industry Substitutes  Natural Gas  Electricity 

Substitutes

Natural Gas

Electricity

Other Biomass Pellets

Other Fuels

Figure: 3 Michael Porter‟s Five Force

Source: Based on (Porter, 1985)

Rivalry

This is first & new industry in Bikaner (Rajasthan) and rivalry doesn‟t exist within Bikaner. In domestic markets overall Rajasthan state, rivalry is localised as there is ban on import as well as export of pellets in India. The plant have access to low electricity rates, government rebates on renewable energy scheme in Rajasthan (IREDA, 2006), availability of cheap raw material & low delivery rates which will benefit the organisation by higher profits. The rivalry in pellet industry is mainly based on cost, but the cost of transportation creates competitive dynamics (Urbanowski, 2005).

Barriers to Entry

While interest and capital cost to enter the pellet business are normally just 10- 15% of the cost of goods sold, various components exist that may stop competitors from entering this industry. These components that debilitate new entries in pellet market make the business more alluring for the current market players. Development and Start-up Costs in addition to the cost of capital needed to start a pellet plant, High Exit Costs Once assembled, the operation is, to a vast degree, a sunk expense. Since the feedstock can't be economically transported to faraway places (Sultana et al., 2010).

Buyer Power

Individual buyers who buy in small quantities generally buy through pellet resellers & they don‟t have much negotiation power. Commercial buyers who buy vast amounts of mass pellets are better able to negotiate prices downward. Industrial buyers buy in very large quantities of pellets & that too very often so they are able to negotiate in the best manner (Castillo et al., 2010).

Suppliers

A significant part of the competitive advantage in the pellet business is increased through the capacity of an organization to procure inputs at a lower expense than competitors (Roos et al., 1999). All in all, suppliers are more in correlation to pellet makers and have moderate to high control over the pellet business. The main inputs are the feed stock, wood chips & other agriculture waste.

Threat of Substitutes

The pellet business has developed generally as a substitute of other fossil fuels like natural gas, coal, electricity. The business has dislodged just a little part of the current fossil fuel market, and is stand out of the option renewable energizes being utilized and considered (McKendry, 2002).

Market Potential

Based on our analysis Urbanowski (2005), the pellet plant opportunity is attractive because of the following:

Strength: Pellets can be made from practically any biomass material including straws, grasses, and energy crops etc. which are available within 50 km of radius, so it‟s cheaper to produce them, Reduction in fuel cost, Environment friendly as it reduces carbon footprint.

Opportunities: Higher energy and resource security for a developing country like India, Biomass potential is high in the Indian market, possibility of expansion of market outside the state of Rajasthan.

Threats: Time duration is short for straw harvest, Low level of automation in Indian agriculture industry is an issue for harvest, drying and densification of pellet, Entry of new players in the pellet business sector of Rajasthan (India).

Location and Site

Around 10 acres of land in industrial area zone is a pre-requisite for a pellet plant, raw material, dryer and pellet stock keeping warehouse. Suitable feedstock accessibility is the most basic achievement element of a pellet plant. An area close to sawmills, agriculture waste supplier would keep transportation expenses to minimum. The area chose is Bikaner (Rajasthan) has gigantic potential in manifestation of Juli-flora, mustard husk, rice husk and other farming deposits for the biomass fuel from close-by areas & have surplus bushes groundnut stalk of around 101573 tons. Likewise a ton of sawmills are set in Bikaner (Rajasthan) & close-by zones. There is ample availability of land in Bikaner Industrial Area for the plant setup.

Current and Projected Demand Analysis for Biomass Products:

Wang et al. (2009) have mentioned that there is a developing business sector for biofuels in the generation of pellets for residential purposes, since biomass pellets can be utilized as a part of fluidized bed combustion & great furnaces while offering benefits , for example, simple stock keeping and transport, dust pollution is low and higher heating qualities.

Rhen et al. (2007) mentioned that, the pellets offer the same benefits for optimization and automation as the petroleum determined fuels, however with higher burning productivity and a lower measure of ignition deposits. Also, utilizing LPG for cooking is basic practice in the commercial segment in India. Till now, there have been no other fuel option which is available easily in India and there is a solid reliance on LPG.

There is immense potential of pellet stoves in India. As per Peksa-Blanchard et al., (2007) the Asian region is evaluated to be the greatest worldwide energy customers by 2030, in the meantime the Asian area has the largest biomass availability all over the world. It is reasonable to expect that Asia will turn into a significant player of the biomass market and hence the pellet market.

Results Based on Questionnaire

Questionnaire results show that the most common reason behind buyers to buy supplemental heating appliances is looking to save money on heating expenses. Probably, this inspiration would drive buyer's choices whether to utilize their supplemental heating appliance or their conventional heater on any given day. Especially if customers don‟t like operating or paying for maintenance of pellet

appliance, customers may decide to stop using their pellet appliance except when the cost of using pellets are worth it & they are saving money by using it.

Customer's price sensitivity can be required to influence their choices in regards to which fuel to use in their multi-fuel pellet stove or appliance. In the event that agriculture biomass pellets are seen to be a superior worth than wood pellets, then customers are more prone to buy agriculture biomass pellets and, all different elements being equivalent, shoppers would incline toward the most minimal value biomass pellets.

Producers of multi-fuel pellet may decide to utilize least expensive accessible raw material for pellet production but keeping in mind the quality factor because some of the customers prefer better grade of pellet as well. One reason may be that buyers favour the low ash or powder blazing pellet. The above result excludes the part of the retailer in creating interest or demand for a specific item in a market, however the logical point is this: Because buyers are price sensitive, having the capacity to compete in the market on the basis of price factor may be vital to the reasonability of a multi-fuel biomass pellet organization.

Technical Feasibility

The figure 4 below describes about the process or operation of biomass pelletizing:

about the process or operation of biomass pelletizing: Figure 4: Biomass pelletizing operation Source: Sudhagar

Figure 4: Biomass pelletizing operation

Source: Sudhagar (2005)

TECHNICAL SPECIFICATION WITH LIST OF EQUIPMENTS

A brief technical specification of 2 ton/ per hour pellet plant with the required list of equipment is provided in the table underneath which is available from a pellet machine supplier in Ahmedabad (India).

SR.

 

MODEL

 

NO.

Particulars

NO.

 

TECHNICALS

 

MATERIAL

   

PREPERATION

SECTION

   

BZY

 

1

In feed Belt conveyer

1160/6

B

= 0.6 m , L = 6.0 m

2

Chipper suitable for wood

HM- 20

Diamter : 550 mm,

   

BZY

 

3

Belt conveyer

1160/12

B

= 0.6 m , L = 12.0 m

   

BZY

 

4

Belt conveyer

1160/12

B

= 0.6 m , L = 12.0 m

5

chip Silo

BLC 2735

Volume = 35 cbm

   

BZY

 

6

Belt conveyer

1160/8

B=0.6 m , L = 8 m

7

Hammer mill

BHJ 90

Diameter: 800 mm 2.5 tons / hour.

SR.

 

MODEL

 

NO.

Particulars

NO.

 

TECHNICALS

 

MATERIAL DRYING SECTION

   

1

Flakes air Conveying

MQS5- 54

Cyclone done by supplier.

2

Dust recovery system

   

3

Wet Flake bin

BLC 2620

Volume = 20 cbm

   

BZY

 

4

Belt conveyer

1160/13

B= 0.6 m , L = 13.0 m

 

Flash tube dryer with hot air.

FT 200 -

 

5

H

 

1.5 tons / hour

   

BZY

 

6

Belt conveyer

1160/15

B=0.6 m , L 15 m

7

Feeding silo

BLC 2620

With three discharge screw

8

Material feeding screw

HY - 300

D = 300 mm, L =4.0

m

9

Vertical bunker

 

Feeding design for two

     

mill

10

Quantity mixer

 

Equal quantity supply to mill

11

Quantity batcher

 

For mixing water

12

Pellet mill

HMG 1.5 A

Standard machine from Europe

13

Pellet conveyer

BLC

B

= 0.3 m , L = 6

1130/6

meter

14

Bucket elevator

BYC 200

B = 200 mm

15

Pellet cooling tower

HMG 300

For cooling pellet

16

Pellet screen

HMG 301

For removing impurity

17

Dust collection system

 

Stationary dust collector

 

Belt conveyer for packing

BLC

 

17

1145/12

B

= 0.45 m, L = 12m

18

Packing system with silo

 

As per design 10 CBM

Financial Model

Financing is the most significant factor in the setup of a pellet plant and its returns or profits. Usually, the investment in the plant and pellet plant size are in direct ratio. See the figure underneath for a detailed & better understanding.

Figure: 3 Pelleting Cost versus Plant Size Source: Sudhagar (2005) The above graph represents the

Figure: 3 Pelleting Cost versus Plant Size

Source: Sudhagar (2005)

The above graph represents the impact of these economies of scale. Maybe the values indicated are not exact for multi-fuel pellet plants in Bikaner (Rajasthan), however the curve shape the sensation of declining expenses every ton as the capacity of production increases is unquestionably genuine. Also, it is significant, as well (Sudhagar, 2005).

As keeping in mind the current demand of pellet in India a 2 ton per hour plant is recommended. So we can draw a 2 ton/ h pellet plant cost sheet here (based in India):

Cost of the project:

Factors

Amount (INR)

Land for the plant (10 acres)

50,00,000

Site Development

10,00,000

Plant & Machinery (5 machines)

1,50,00,000

Building

84,00,000

Electrification

8,50,000

Misc. Fixed Assets

1,50,000

Preliminary Expenses

15,20,000

Freight Cost (approx.)

0

Working Capital

43,00,000

Provision for Contingencies

2,80,000

Total Cost

3,55,00,000

Means of Finance

Particulars

INR (Crore)

Promoters Contribution

1.55

Term Loan From Bank / Financial Institutions

2.00

Total

3.55

Estimation of Annual Profit

Particulars

Estimation (INR)

Sales ( 5 machines * 2 ton/hr * 14 hours/day * 300 days/year = 42000 tons/year)

34 crore ($ 150)

Raw Material

17 crore (Rs 4/kg)

Labour expenses (15 labour 2 shifts)

20

lakhs

Packaging Cost of pellet

1.6

crore

Warehouse cost

80

lakhs

Electricity

1.75

crore

Depreciation (span of 5 years)

30

lakhs

Repair & Maintenance

15

lakhs

Administration Expenses

50

lakhs

Financial charges (15 %)

50

lakhs

Selling & Distribution

7 crore

Insurance

1 crore

Gross Profit

3.2

crore

Corporate Tax (25 %)

80

lakhs

Net Profit

2.40

crore

References

Bhattacharya, S.C. and Salam, P.A. 2002. Low greenhouse gas biomass options for cooking in the developing countries. Biomass and Bioenergy. Vol. 22, pp 305-317.

Castillo, A., Panoutsou, C., & Bauen, A. (2010). D2. 1 Report on biomass

market segments within the transport, heat & electricity-CHP sectors for EU27 & Member States.

CBCL. (2008). Wood Chip and Woodpellet plant feasibility report.

Grundy, T. (2006). Rethinking and reinventing Michael Porter's five forces model. Strategic Change, 15(5), 213-229.

Indian Renewable Energy Development Agency (IREDA) (2006). IREDA News Vol. 3, No. 4, October-December 2006, Vol. 4, No. 1, January-March

2007.

Mani, Sudhagar, A Systems Analysis of Biomass Densification Process. University of British Columbia, September 2005.

McKendry, P. (2002). Energy production from biomass (part 3):

gasification technologies. Bioresource technology, 83(1), 55-63.

Porter, M. E., & Millar, V. E. (1985). How information gives you competitive advantage.

Rhen, C., Ohman, M., Gref, R., Wasterlund, I., 2007. Effect of raw material composition in woody biomass pellets on combustion characteristics. Biomass Bioenerg. 31, 6672

Roos, A., et al (1999). Critical factors to bioenergy implementation. Biomass and Bioenergy, 17(2), 113-126.

Rout, U. K., Akimoto, K., Sano, F., Oda, J., Homma, T., & Tomoda, T. (2008). Impact assessment of the increase in fossil fuel prices on the global energy system, with and without CO 2 concentration stabilization. Energy Policy, 36(9), 3477-3484.

Sultana, A. et al (2010). Development of agri-pellet production cost and optimum size. Bioresource Technology, 101(14), 5609-5621.

Thabane et al. (2010). A tutorial on pilot studies: the what, why and how. BMC medical research methodology, 10(1), 1.

Urbanowski, E. (2005). Strategic analysis of a pellet fuel opportunity in Northwest British Columbia (Doctoral dissertation, Faculty of Business Administration-Simon Fraser University).

Wang, C., Wang, F., Yang, Q., Liang, R., 2009. Thermo-gravimetric studies of the behavior of wheat straw with added coal during combustion. Biomass Bioenerg. 33, 5056.

Appendix

Questionnaire

1. What is the best description of your use of biomass pellets now or in the near future?

Individual or residential purpose

Commercial or Institutional purpose

Industrial purpose

Other

2. How much quantity of pellet you require every month for your heating requirement?

1-5 ton

5-10 ton

More than 10 ton

Don‟t Know

3. What‟s your annual fuel bill per annum? (if known)

4. What type of pellets will you prefer to use?

Wood Pellets

Agriculture Pellets

Multi-Fuel Pellets

5. What is the main reason for considering biomass fuel?

Saving Money

Reducing Co2 emission

Other Please Specify:

6. What is main preference standard when you buy pellets?

Minimum Cost

Quality Standard

Both of them

Other Please Specify:

7. Do you prefer to have low ash content pellet even if it cost you more?

Yes

No

Reason:

8. Do you encounter any problems while using pellets?

Yes

No

Reason: