161.

PROFILE ON PRODUCTION OF LEMON

GRASS OIL









161-2
TABLE OF CONTENTS

PAGE

I. SUMMARY 161-3

II. PRODUCT DESCRIPTION & APPLICATION 161-3

III. MARKET STUDY AND PLANT CAPACITY 161-4
A. MARKET STUDY 161-4
B. PLANT CAPACITY & PRODUCTION PROGRAMME 161-7

IV. MATERIALS AND INPUTS 161-8
A. RAW & AUXILIARY MATERIALS 161-8
B. UTILITIES 161-9

V. TECHNOLOGY & ENGINEERING 161-9
A. TECHNOLOGY 161-9
B. ENGINEERING 161-10

VI. MANPOWER & TRAINING REQUIREMENT 161-11
A. MANPOWER REQUIREMENT 161-11
B. TRAINING REQUIREMENT 161-12

VII. FINANCIAL ANALYSIS 161-12
A. TOTAL INITIAL INVESTMENT COST 161-12
B. PRODUCTION COST 161-13
C. FINANCIAL EVALUATION 161-14
D. ECONOMIC BENEFITS 161-15

161-3
I. SUMMARY

This profile envisages the establishment of a plant for the production of lemon grass oil
with a capacity of 21.6 tonnes per annum.

The present demand for the proposed product is estimated at 26 tonnes per annum. The
demand is expected to reach at 40 tonnes by the year 2022.

The plant will create employment opportunities for 18 persons.

The total investment requirement is estimated at Birr 4.41 million, out of which Birr
2.49 million is required for plant and machinery.

The project is financially viable with an internal rate of return (IRR) of 17 % and a net
present value (NPV) of Birr 1.27 million, discounted at 8.5%.

II. PRODUCT DESCRIPTION AND APPLICATION

Lemon grass oil has a strong lemon-like odour due to high citral content (75-90%). The
minimum commercial requirement is 70% citral content.

Oil of lemon grass is used as an ingredient in toiletry products such as toilet soaps, bath
salts, etc. It is also employed in artificial lemon flavouring and in the manufacture of
ionenes, which are very important for the production of artificial flavour, perfumes and
soaps and as raw material for vitamin A manufacturing.


161-4
III. MARKET STUDY AND PLANT CAPACITY

A. MARKET STUDY

1. Past Supply and Present Demand

Lemon grass (Cymbopogon flexuosus) oil contains citral which is its major constituent.
Lemon grass oil quality is judged by its citral content and its solubility in alcohol.

The oil is of a reddish-yellow to reddish-brown colour, with a strong, lemon odour. It is
used in the perfume, soap and cosmetics industries. Lemon grass forms the starting
material in the manufacture of synthetic Vitamin A. It is also used in pharmaceutical
preparations, such as pain balm, disinfectants, and mosquito-repellent cream.

Since the local end users of lemon grass oil are not well developed the market out let for
the envisaged product is export.

India is the worlds major producer of lemon grass oil but with an output of around 50
tonnes/ year followed by Sri Lanka (about 25 tonnes annually). Nepal and Bhutan are
also major producers. The former sells to India while the latter sells its best quality
material to Europe and lower grades to India. Bhutans production is estimated at about
20 tonnes.

Trade in lemongrass oil is dominated by imports into the industrialized countries. The
major importers of lemongrass oil are Western Europe and North America. J apan has
accounted for about 10% of total demand.

There is no dependable data of recent demand in the EU and J apan since lemongrass oil
customs information is lamp summed with other essential oils. However, the pattern of
the products import is indicated in the USA import statistics (see Table 3.1).

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Table 3.1
IMPORT OF LEMON GRASS OIL BY USA

Year Import ( tone)
1999 80
2000 42
2001 61
2002 44
2003 43
2004 75
2005 56

Source; USDA Foreign Agricultural Service Tropical Agricultural Products, World
Market and Trade.

As can be seen for the above table during the period 1999 2005 US import of lemon
grass oil averaged at 57 tonnes, with an annual average growth rate of 3%. Working on
the basis that US demand accounts for one third of the total global demand, the total
global demand is estimated at 172 tonnes per annum.

Assuming that by maintain product quality and aggressive promotion locally produced
lemon grass oil could capture 15% market share the present demand for locally produced
lemon grass oil is estimated at 26 tonnes.

2. Projected Demand

In projecting the global demand for lemon grass oil the average growth rate of the
products import by the USA registered during 1999 2005, i.e., 3 % is used.
Accordingly, taking the estimated present demand as a base and applying a 3 % growth
rate the projected demand for the product is shown in Table 3.2.
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Table 3.2
PROJECTED GLOBAL DEMAND AND ETHIOPIAS MARKET SHARE

Year
Projected Global
Demand (Tonnes)
Ethiopia's
Market Share
2008 177 27
2009 182 27
2010 188 28
2011 193 29
2012 199 30
2013 205 31
2014 211 32
2015 218 33
2016 224 34
2017 231 35
2018 238 36
2019 245 37
2020 252 38
2021 260 39
2022 268 40

3. Pricing and Distribution

Over the period 2000 2005 lemongrass oil prices fluctuated have between USD20 -25/
kg. The price fluctuations have been largely influenced by availability at origin.
However, acute shortages of Guatemalan West Indian oil contributed to price increases in
some periods.

For the purpose of financial analyses, a factory-gate price of USD 23 (Birr 215/kg) is
recommended.
161-7
B. PLANT CAPACITY AND PRODUCTION PROGRAMME

1. Plant Capacity

The production capacity of the project is 21.6 tonnes per annum, based on 300 working
days and three shift per day.

2. Production Programme

The production program is indicated in Table 3.3. During the first two years of
production, full capacity utilization may not be attained. This is because of lack of
manufacturing and marketing experiences. Therefore, in the first and second year of
production only 70% and 85% of the plant capacity will be utilized. In the third year and
then after, full capacity can be attained.

Table 3.3
PRODUCTION PROGRAMME

Production Year Sr.
No. Description 1 2 3-10
1 Lemon grass oil (tonne) 15.12 18.36 21.6
2 Capacity utilization rate
(%)
70 85 100

161-8
IV. MATERIAL AND INPUTS

A. RAW AND AUXILIARY MATERIALS

Lemon grass plants grow well in soils not suitable for richer production plants. From
sandy and rather dry soils yield relatively more oil and oil of higher citral content than
plants from very fertile soils.

A lemon grass plantation has a life cycle of 6 to 8 years. The oil yield reaches its
maximum around the third or fourth year and its annual average value ranges between 15
and 20 kg/ha with three crops per year. The ratio of oil to leaves is equal to 0.348%.
Therefore, to produce 1 kg of essential oil, about 288 kg of lemon grass is required.

At full capacity production, the annual raw material (lemon grass) requirement and its
cost is estimated to be 6220.8 tonnes and Birr 1.555 million, respectively. Table 4.1
indicates the total annual raw and auxiliary materials cost of the project.

Table 4.1
RAW AND AUXILIARY MATERIAL REQUIREMENT AND COST (AT FULL
CAPACITY PRODUCTION)

Sr.
No.
Materials Qty LC
1 Lemon grass 6,220.8 1,555
2 Tin-plated drums (200 kg capacity) 108 12.96
Total 1,567.96

161-9
B. UTILITIES

Electricity, furnace oil and water are utilities of the project. Table 3 shows the annual
utility consumption and cost of the plant. The total annual utility cost is estimated at Birr
1,736,700.

Table 3
ANNUAL UTILITIES REQUIREMENT & COST

Sr.
No.
Utility Unit Qty Cost
(000 Birr)
1 Electricity kWh 50,000 23.7
2 Furnace oil Lt 311,091 1,683
3 Water m3 3,000 30
Total 1736.7

V. TECHNOLOGY AND ENGINEERING

A. TECHNOLOGY

1. Production Process

Steam distillation is the preferred method for lemon grass produced in large quantity.
The steam produced in a boiler is introduced into the vessel which contains the leaves
and water. The leaves are located on a grid placed at a certain distance above the level of
the water which fills the bottom of the vessel. The water is vaporized indirectly by steam
flowing in a pipe coil submerged to the water.

The water vapor plus the distilled oil coming from the evaporator vessel is recovered in a
separate water cooled condenser.

161-10
The mixture flowing out of the condenser is separated by decantation in a Florentine
flask. The lemon grass oil floates at the top and separated easily The distilled water still
contains some soluble parts of the oil and therefore is sent back to the evaporator.

2. Source of Technology

Different suppliers of machinery could be requested for their offer. For example, the
following company is interested to supply the turn key plant.

B/R Instrument Corporation
E-mail. Br.service@brinstrument.com
Fax. 4108208141

B. ENGINEERING

1. Machinery and Equipment

The list of machinery and equipment is indicated in Table 5.1. The total cost of the turn-
key plant is estimated at Birr 2,494,800, out of which Birr 2,079,000 is required in
foreign currency.
Table 5.1
LIST OF MACHINERY AND EQUIPMENT

Sr.
No.
Description Qty
1 Evaporator vessel 4
2 Condenser 2
3 Florentine flask 2
4 Steam boiler 1
5 Pump (condensate) 1
6 Pump (cooling water) 1
7 Cooling tower 1
161-11
2. Land, Building and Civil Work

The total area of the project is 2000 m
3
of which 300 m
2
is the built-up area. The cost of
building is estimated at Birr 450,000. The lease value of land, at a rate of 1 Birr per m
2

per year for 80 years, is about Birr 160,000.

3. Location and Site

Chelelektu is the best location of the envisage project because of its proximity to major
raw material sources.

VI. MANPOWER AND TRAINING REQUIREMENT

A. MANPOWER REQUIREMENT

The list of manpower and labor cost are indicated in Table 6.1. The total annual cost of
labor is estimated at Birr 264,000.

Table 6.1
MANPOWER REQUIREMENT & COST

Sr.
No.
Manpower Req.
No.
Monthly
Salary (Birr)
Annual Salary
(Birr)
1 General manager 1 3000 36,000
2 Secretary 1 800 9600
3 Accountant 1 2000 24,000
4 Production and Technic Head 1 2500 30,000
5 Mechanic 1 1500 18,000
6 Quality control 1 1500 18,000
7 Operators 6 4200 50400
8 Ass. Operators 3 1200 14400
9 Guards 3 900 10800
Sub-total 18 17,600 211200
Benefit (25% BS) 4400 52800
Grand Total 22000 264000
161-12
B. TRAINING REQUIREMENT

On-the-job training is carried out during plant erection and commissioning by the experts
of machinery suppliers. The cost of training is estimated at Birr 30,000.

VII. FINANCIAL ANALYSIS

The financial analysis of the lemon grass 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 1 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
4.41 million, of which 36 per cent will be required in foreign currency.

The major breakdown of the total initial investment cost is shown in Table 7.1.


161-13

Table 7.1
INITIAL INVESTMENT COST

Sr. Total Cost
No. Cost Items (000 Birr)
1 Land lease value 160.0
2 Building and Civil Work 450.0
3 Plant Machinery and Equipment 2,494.8
4 Office Furniture and Equipment 100.0
5 Vehicle 200.0
6 Pre-production Expenditure* 290.4
7 Working Capital 715.6
Total Investment cost 4,410.8
Foreign Share 36


* N.B Pre-production expenditure includes interest during construction ( Birr 140.37 thousand ) training
(Birr 30 thousand ) and Birr 120 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 4.09
million (see Table 7.2). The material and utility cost accounts for 80.66 per cent, while
repair and maintenance take 1.83 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 1,567.96 38.27
Utilities 1736.7 42.39
Maintenance and repair 75 1.83
Labour direct 126.72 3.09
Factory overheads 42.24 1.03
Administration Costs 84.48 2.06
Total Operating Costs 3,633.10 88.68
Depreciation 351.98 8.59
Cost of Finance 111.98 2.73
Total Production Cost 4,097.06 100

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 = 51 %
Sales Variable Cost

3. Pay Back Period

The investment cost and income statement projection are used to project the pay-back
period. The projects initial investment will be fully recovered within 6 years.

4. Internal Rate of Return and Net Present Value

Based on the cash flow statement, the calculated IRR of the project is 17 % and the net
present value at 8.5% discount rate is Birr 1.27 million.

D. ECONOMIC BENEFITS

The project can create employment for 18 persons. In addition to supply of the
domestic needs, the project will generate Birr 1.37 million in terms of tax revenue.