1.

PROFILE ON MARGARINE PRODUCTION

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TABLE OF CONTENTS
PAGE
I. SUMMARY 1-3

II. PRODCUT DESCRIPTION AND APPLICATION 1-3

III. MARKET STUDY AND PLANT CAPACITY 1-4

A. MARKET STUDY 1-4

B. PLANT CAPACITY AND PRODUCTION PROGRAMME 1-7

IV. MATERIALS AND INPUTS 1-7

A. MATERILAS 1-7
B. UTILITIES 1-9

V. TECHNOLOGY AND ENGINEERING 1-9

A. TECHNOLOGY 1-9
B. ENGINEERING 1-10

VI. MANPOWER AND TRAINING REQUIREMENT 1-11

A. MANPOWER REQUIREMENT 1-11

B. TRAINING REQUIREMENT 1-12

VII. FINANCIAL ANALYSIS 1-12

A. TOTAL INITITAL INVESTMENT COST 1-13
B. PRODUCTION COST 1-13
C. FINANCIAL EVALUATION 1-14
D. ECONOMIC BENEFITS 1-15
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I. SUMMARY

This profile envisages the establishment of a plant for the production of 100 tonnes of
margarine per annum.

The present demand for the proposed product is estimated at about 200 tonnes per
annum. The demand is expected to grow from 220 tonnes to 566 tonnes in year 2002 and
2011, respectively.

The plant will create employment opportunities for 26 persons.

The total investment requirement is estimated at Birr 2,027 million, out of which Birr
669.65 thousand is for plant and machinery.

The project is financially viable with an internal rate of return (IRR) of 17.64 % and a net
present value (NPV) of Birr 792.5 thousand, discounted at 10.5%.

II. PRODUCTION DESCRIPTION AND APPLICATION

Margarine is a butter-like product obtained by mixing vegetable and animal fats with or
without milk. The product is widely used as a table spread in bakeries, pastries and as
ingredient in various food preparations, shortenings, basic input in baked products.
Margarine is prepared from liquid oils and fats. It has many uses in food preparations.
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III. MARKET STUDY AND PLANT CAPACITY

A. MARKET STUDY

1. Current Demand and Supply

The degree of self – sufficiency in butter for cooking is declining as a result of a rapid
increase in population in both the rural and urban areas of the country. This state of
affairs in turn has raised demand for and price of butter and hence the consequent need
for sustainable substitutes to satisfy the additional fat requirements in the country.

With respect to margarine for cooking purposes, the determinant factors for its demand
are price of butter, consumption habit of consumers as well as income of consumers.

As at present, import is the only source of supply. The specified imports of the product
between the years 1989/90 and 1989/99 are presented in Table 3.1.

Table 3.1
IMPORTS OF MARGARINE (TONNES)

Year Quantity
1989/90 429
1990/91 1
1991/92 74
1992/93 5
1993/94 42
1994/95 122
1995/96 193
1996/97 231
1997/98 126
1998/99 212
Source: Central Statistics Authority, Statistical Abstracts of various years.
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In general, margarine consumption in Ethiopia (be it margarine for cooking or table
margarine) is not popularized for the simple reason that especially with respect to
margarine for cooking, people are accustomed to using cow butter since time
immemorial. In fact, many of them have a negative attitude to wards margarine by
viewing it as something that causes constipation when consumed.

According to the 1998 Central Statistics Authority, Revised Report on the 1995/96
Household Income, Consumption and Expenditure Survey the average per capita
consumption of the whole country is 3 gm and that of urban area is 14 gm.

It can be observed from Table 3.1 that imports of margarine averaged only about 110
tonnes a year during the period 1989/90 to 1993/94. However, a relatively higher
quantity and imports of more or less stable figures have been made in the years 1994/95-
1998/99 which averaged nearly 180 tonnes a year.

Since yearly import figures of the most recent years show a relatively stable volume, it
can be said that with respect to imported margarine, current demand lies somewhere
around 200 tonnes a year.

However, if the product is made available locally at a relatively cheaper price compared
to the imported item, a good number of urban dwellers can substitute margarine for
butter at least, for the time being, for its lower price compared to the ever increasing price
of cow butter.

2. Demand Projection

Provided that the product is properly promoted and consumers are made to be well aware
(that the end result of fats – be it from cow butter or margarine – is to give the required
calorie for the body to function properly) of the benefits of this food item, the demand for
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margarine is expected to increase considerably. It should be emphasized here that
availability of the product itself at a reasonably price is one principal driving force of
demand.

Hence, it is expected that a gradual increment of demand will take place every year. A
rate of increment of 10% is regarded as a reasonable rate of increment and accordingly
the demand projection for the next ten years based on this consideration is presented in
Table 3.2.

Table 3.2
DEMAND PROJECTION FOR MARGARINE (TONNE)

Year Quantity
2001/2 220
2002/3 242
2003/4 266
2004/5 319
2005/6 351
2006/7 387
2007/8 425
2008/9 468
2009/10 514
2010/11 566

Future demand estimates for margarine in the country range from 220 tonnes in 2001/2 to
about 566 tonnes by the year 2010/11. Here one should note that both the absolute
amount of consumption in a given year and the annual rate of growth of consumption are
substantially different when a product is imported and locally produced. When locally
produced, existing consumers as well as new consumers will purchase the product.
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Taking this fact into account, the estimation of the current demand at about 200 tonnes
and the assumption of an annual rate of growth of 10% are on the conservative side.

Margarine is consumed mostly by the urban population and it is a consumer item which
can be marketed at national level. The envisaged project can therefore target the national
market. In view of this it can be assumed that a pioneer project could fully exploit the
available demand and hence replace import fully. But to be on the conservative side only
50 percent of the projected demand is envisaged to be a market share for this project.

3. Pricing and Distribution

Margarine is purchased from many sources and as such prices vary with quality and
sources. However, in these project profiles a mean CIF price of Birr 8/kg is used.
Adding 25% for transit expenses and inland transport, this gives an ex-factory price of
Birr 10.00/kg.

Common outlets for margarine are specialized food item department stores, super
markets and general merchandize shops.

B. PLANT CAPACITY AND PRODUCTION PROGRAMME

1. Plant Capacity

The proposed unit is expected to produce 100 tonnes of margarine on the basis of 300
working days per year and one shift of 8 hours per day.

2. Production Programme

The plant is expected to start production at 75% capacity in the first year, 85% in the
second year and 100% on the third year and onwards.
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IV. MATERIALS AND INPUTS

A. MATERIALS

Oils and fats are the essential raw materials from which margarine is produced. These
raw materials cover the major portion of the ingredients, i.e., about 54% of the total. It is
obvious, that the type and quality of raw oils and fats used for the production of
margarine differ much among countries. In this respect, the oils and fats available in our
country are of cotton seed, rape seed, linseed, etc. Thus, a specified quantity of
dehydrogenated products of the above mentioned raw oils and fats are supplied to the
manufacturing plant. The other sub-materials which will be blended with the principal
ingredient are milk and emulsifying agents. Dehydrated products of cotton seed, linseed,
etc are locally available from Tigray region and other neighbouring regions like Gojam,
Gondar etc. Milk can be supplied from dairy plants in the region while the emulsifying
agent has to be imported.

The annual raw and auxiliary materials requirement are shown in Table 4.1.
Table 4.1.
REQUIRED RAW AND AUXILIARY MATERIALS

Cost ‘000 Birr

No Description Qty. (tonnes) FC LC Total
1 Dehydrogenated oil and fat 120.0 - 202.89 202.89
2 Milk 25.5 - 2.55 2.55
3 Emulsifying material 4.5 19.9 - 19.9
4 Packing material - 150.0 150.0

Total - 19.9 355.44 375.34

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B. UTILITIES

Electricity and water are the major utilities required by the plant. Water is partially used
as an ingredient in the margarine production process. Electric power is used for lighting
and motor driving purpose. The annual power requirement is about 29,308 kWh, the total
cost of which amounts to Birr 12,215. Annual consumption of water will be about 15,000
cubic meters, the cost of which is estimated at Birr 15,000 per year. Annual expenditure
for consumable amounts to Birr 5,000.

VI. TECHNOLOGY AND ENGINEERING

A. TECHNOLOGY

1. Production Process

Major unit operations involved in the margarine manufacturing plant are blending and
forming. By blending operation, the hardened, oils and fats are mixed well with a pre-
determined portion of milk and other ingredient known as emulsifying agent until it is
homogenized. The emulsion is then sterilized in order to remove bacteria by passing it in
a continuous sterilizing equipment. The product is cooled rapidly and kneaded. Later on
the blend/mixture is filed in a desired container or formed into a prescribed shape and
packed with a proper packing material.

2. Source of Technology

Address of a firm which can be considered as one of the possible sources of technology is
given here below:

Tetra Laval Food Shroder GmbH & Co. KG Falkenstr. 51-57,

D-23564 Lubeck
Tel.: (0451) 37-09.0
Fax: (0451) 37-09-200
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B. ENGINEERING

1. Machinery and Equipment

The manufacture of margarine requires tanks of different volumes for mixing and
emulsifying purposes, continuous sterilizing equipment, continuous cooling and mixing
equipment and a forming and packing machine for handling and processing of the various
ingredients. Estimated prices of the required machinery and equipment are shown in
Table 6.1.
Table 6.1
MACHINERY AND EQUIPMENT COST
Cost ‘000 Birr
No Description Qty. FC LC Total
(tonnes)
1 Mixing tank 1 24.45 - 24.45
2 Emulsifying tank 1 35.56 - 35.56
3 Continuous sterilization equipment 1 53.34 - 53.34
4 Continuous cooling and mixing 1 155.75 - 155.75
5 Forming and packing machine 289.00 - 289.00
Sub-total 5 558.03 - 558.03
Bank, insurance, and freight and - 111.62 111.62
transportation
Grand total 558.03 111.62 669.65

2. Building and Civil Works

Total land required including provision for open space is 1,000 meter square, the total
lease cost of which will be Birr 2,000 per year. Of this, 500 meter square is for building
and the remaining is an open space. The cost of building and civil works is estimated at
Birr 725 thousand.

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3. Proposed Location

The western zone of Tigray where the industrial oil crops are in abundance could be good
location for the plant.

VII. MANPOWER AND TRAINING REQUIREMENTS

A. MANPOWER REQUIREMENT

The plant will require a total of 26 employees of whom 8 are skilled and 8 are unskilled.
The remaining are engaged in managerial and other activities. The detail breakdown of
the manpower requirement is given in Table 7.1.
Table 7.1
MANPOWER REQUIREMENT
Description No. Monthly Salary Annual Salary
persons (Birr)
B. Administration
1. Manager 1 1600 19200
2. Chemist 1 1200 14400
3. Secretary 1 600 7200
4. Sales man 1 600 7200
5. Store man 1 400 4800
6. Guards 2 200x2 4800
Sub-total 7 57600
C. Production
1. Operators 4 300X4 14400
2. Labourers 6 200x8 14400
Sub-total 10 28800
D. Others
1. Mechanic 1 600 7200
2. Electrician 1 600 7200
3. Cleaner 1 200 2400
Sub-total 3 16,800
Total 20 103,200
Employees’ benefit - 2,562 20,640
(20% of basic salary)
Grand Total - 123,840

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The annual cost of labour is estimated to be Birr 95, 520. Total employees’ benefit is
calculated to be Birr 23,880 per annum.

B. TRAINING REQUIREMENT

The operators do require 3 weeks on-the-job training on margarine production process.

The training should be conducted during commissioning. The chemist should have a
good experience in oil and fat processing. The total training cost is estimated at Birr
9,600.

VIII. FINANCIAL ANALYSIS

The financial analysis of the Margarine project is based on the data presented in the
previous chapters and the following assumptions:-

Construction period 2 years’

Source of finance 30 % equity
70 % loan
Tax holidays 2 years
Bank interest 10.5%
Discount cashflow 10.5%
Land value Based on estimated lease rate of the region
Repair and maintenance 0.5 % of the plant and machinery
Accounts receivable 15days
Raw material local 20 days
Raw materials import 90 days
Work in progress 3 days
Finished products 15 days
Cash in hand 5 days
Accounts payable 30 days

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A. TOTAL INITIAL INVESTMENT COST

The total investment cost of the project including working capital is estimated at about
Birr 2 million, out of which 27.8 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
SUMMARY OF THE INITIAL INVESTMENT COST (‘000 BIRR)

Cost Items Foreign Local Total

Currency Currency
1 Land 140.00 140.00
2. Building and Civil Work 725.00 725.00
3. Plant Machinery and Equipment 558.03 111.62 669.65
4. Office Furniture and Equipment 50.00 50.00
5. Vehicle 200.00 200.00
6. Pre-production Expenditure 210.38 210.38
Total Investment cost 558.03 1,436.62 1,995.03
7 Working Capital 6.82 25.65 32.47
Total 564.85 1,462.27 2,027.50

B. PRODUCTION COST

The annual production cost at full operation capacity is estimated at Birr 805.645
thousand (see Table 7.2). The material and utility cost accounts for 50.5 per cent while
repair and maintenance take 2.3 per cent of the production cost.

* Pre production expenditure include interest during construction ( Birr 150.78

thousand), training ( Birr 9,600) and cost of registration, licensing and formation of the
company including legal fees, commissioning expenses, etc.

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Table 8.2
ANNUAL PRODUCTION COST (‘000 BIRR)
 Year
Items 3 4 7 10
Raw Material and Inputs 270.67 316.77 375.34 375.34
Labour direct 32.88 38.48 45.60 45.60
Utilities 23.23 27.19 32.21 32.21
Energy and Power
Spare parts
Maintenance and repair 13.79 16.14 19.13 19.13
Factory overheads 14.88 17.41 20.64 20.13
Administration Overheads 57.60 57.60 57.60 57.60
Total Operating Costs 413.07 473.60 550.52 550.52
Depreciation 123.19 123.19 123.19 123.19
Cost of Finance 151.43 148.10 131.96 110.02
Total Production Cost 687.69 744.90 805.64 783.73

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 is estimated by using income statement projection.

BE = Fixed Cost = 36 %
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 9 years.

4. Internal Rate of Return and Net Present Value

Based on the cashflow statement, the calculated IRR of the project is 17.64 % and the
net present value at 10.5% discount rate is Birr 792.5 thousand.

D. ECONOMIC BENEFITS

The project can create employment for 26 persons. In addition to supply of the
domestic needs, the project will generate Birr 8.67 million, interms of tax revenue. The
establishment of such factory will have a foreign exchange saving effect to the country by
substituting the current imports.