120.

PROFILE ON PRODUCTION OF
ABSORBENT COTTON
 120-2

TABLE OF CONTENTS

PAGE

I. SUMMARY 120-3

II. PRODUCT DESCRIPTION & APPLICATION 120-3

III. MARKET STUDY AND PLANT CAPACITY 120-4

A. MARKET STUDY 120-4
B. PLANT CAPACITY & PRODUCTION PROGRAMME 120-7

IV. RAW MATERIALS AND INPUTS 120-7

A. RAW & AUXILIARY MATERIALS 120-7
B. UTILITIES 120-8

V. TECHNOLOGY & ENGINEERING 120-9

A. TECHNOLOGY 120-9
B. ENGINEERING 120-9

VI. MANPOWER & TRAINING REQUIREMENT 120-10

A. MANPOWER REQUIREMENT 120-10
B. TRAINING REQUIREMENT 120-13

VII. FINANCIAL ANALYSIS 120-13

A. TOTAL INITIAL INVESTMENT COST 120-13
B. PRODUCTION COST 120-14
C. FINANCIAL EVALUATION 120-15
D. ECONOMIC BENEFITS 120-16
 120-3

I. SUMMARY

This profile envisages the establishment of a plant for the production of absorbent
cotton with a capacity of 180 per annum.

The present demand for the proposed product is estimated at 79 tonnes per annum. The
demand is expected to reach at 330 tonnes by the year 2022.

The plant will create employment opportunities for 48 persons.

The total investment requirement is estimated at about Birr 9.73 million, out of which
Birr 6.94 million is required for plant and machinery.

The project is financially viable with an internal rate of return (IRR) of 26 % and a net
present value (NPV) of Birr 8.37 million discounted at 8.5%.

II. PRODUCT DESCRIPTION AND APPLICATION

Absorbent cotton is cleared de-oiled and bleached cotton packed in different sizes. Since
absorbent cotton is a material which comes in direct contact with the human body, its
quality is very important and should satisfy the required pharmaceutical parameters.
Either virgin cotton or waste cotton can be used as raw material. Comber waste cotton is
desirable in case of waste cotton. The fiber of absorbent cotton is very elastic. It consists
of 98%-99.5% of cellulose which has a diameter of 16.30 and a length of 12-40 mm.

Absorbent cotton is mainly used for sanitary purposes and surgical operations as well as
for ordinary daily use. It is also usually needed by women during their menstruation
period that reoccurs at least once a month.
 120-4

III. MARKET STUDY AND PLANT CAPACITY

A. MARKET STUDY

1. Past Supply and Present Demand

Absorbent cotton is widely used in hospitals, clincs, health centers and pharmacies for
medical purposes. It is also used in barberries, beauty salons, business organizations and
households for various purposes. The country’s requirement for absorbent cotton is
essentially met through import. However, data on imports of the product is not readily
available since the external trade statistics of the customs authority does not show the
product separately.

The requirement of health facilities for absorbent cotton is considered in estimating the
demand for the product. According to a previous IPS study, the average monthly
requirement of absorbent cotton for a hospital, a clinic and a health center is about 27kg,
3kg, and 1 kg, respectively. According to the Region’s Five Year Action Plan for
Development, Good Governance and Democracy (2006 – 2010), the type and number of
health facilities in the Region by the end of 2005 was as follows:

• Hospitals……….16
• Clinics/health post…………1316
• Health centers… 161

Based on the above stated requirement, the monthly and annual requirement of absorbent
cotton for the different health facilities in the Region is given in Table 3.1.
 120-5

Table 3.1
MONTHLY AND ANNUAL REQUIREMENT OF ABSORBENT COTTON
IN SNNPR, 2005

Type of Health No. of Total Total Annual

Health Monthly Requirement
Facility Facilities Requirement (Kg)
(kg)
Hospitals 16 432 5184
Clinics/health post 1316 3948 47376
Health Centers 161 161 1932
Total 1493 4541 54492

As can be seen from Table 3.1, the annual absorbent cotton requirement of health
facilities in the Region in 2005 was about 54492 kg. Assuming the regional market
constitutes the viable market for the product and other users require about 20% of the
requirement of health facilities, the demand for the product for 2005 is in the order of
65390 kg. The demand for absorbent cotton is directly related with the development and
expansion of health facilities. Given the low rate of health coverage in the country, the
Federal as well as Regional governments have given high attention and priority for the
expansion of health facilities. In the SNNP Region, the average annual rate of growth of
health facilities during the period 1994 – 2005 is computed to be 36.3%. However, for the
purpose of estimating the demand for absorbent cotton, a conservative estimate of a 10%
rate of growth is used. The present demand for the product (i.e. for 2007) in the Regional
market is thus estimated at 79122 kg.

2. Projected Demand

As stated above, a rate of growth of 10% is applied in estimating the demand for
absorbent cotton. The projected demand for the product is depicted in Table 3.2.
 120-6

Table 3.2
PROJECTED DEMAND FOR ABSORBENT COTTON AT REGIONAL
LEVEL (TONNES)

Year Projected
Demand
2007 79.12
2008 87.03
2009 95.74
2010 105.31
2011 115.84
2012 127.43
2013 140.17
2014 154.19
2015 169.61
2016 186.57
2017 205.22
2018 225.74
2019 248.32
2020 273.15
2021 300.47
2022 330.51

3. Pricing and Distribution

The retail price of absorbent cotton is about Birr 44 per a pack of 500 gram or Birr 88 per
kg. Allowing margin for wholesalers and retailers, a price of Birr 37 per kg is
recommended for the product of the envisaged plant.

The product can get its market outlet through the existing distributors of drug and
medical supplies.
 120-7

B. PLANT CAPACITY AND PRODUCTION PROGRAMME

1. Plant Capacity

Based on the market study above, the suggested plant capacity is 180 tones per annum on
a three shifts of 8 hours per day and 300 working days per annum basis.

2. Production Programme

Due to technical reasons such as skill upgrading of the operators and acquaintance with
the machines such as a smooth running of the machinery parts, it is vital to have a gradual
capacity buildup.

Hence, it is assumed that the plant will go into full capacity, utilization in three years time
starting with 75% capacity in the first year, 85% during the second years and then to full
capacity during the 3rd year and then after.

IV. MATERIALS AND INPUTS

A. MATERIALS

The principal raw material required is virgin cotton .The annual raw materials and
various chemicals for bleaching which are necessary as subsidiary raw materials are
presented below. (see Table 4.1).
 120-8

Table 4.1
ANNUAL REQUIREMENT FOR RAW AND AUXILIARY MATERIALS AND
THEIR COSTS

No Description Qty Cost, 000 Birr

Tone F.C L.C Total
1 Raw ginned cotton 225.25 - 1,576.75 1,576.75
2 Soda ash 14.4 - 83.15 83.15
3 Caustic soda 4.05 - 11.66 11.66
4 Bleaching agent 45.00 142.45 35.61 178.06
5 Other chemicals Lump sum - 13.45 13.45
6 Wetting agent “ 196.34 196.34
7 Packing and labeling Materials ” 23.30 23.30
Total - 142.45 1,940.26 2,082.71

B. UTILITIES

Utilities required are electricity, water and furnace oil for boiler. The annual quantities
and cost of utilities are estimated as shown in Table 4.2.

Table 4.2
ANNUAL UTILITY REQUIREMENT

Cost, OOO Birr

No Description Qty F.C L.C Total
1 Electric Power 155,000 - 73.408 73.408
Kwh
2 Water 75,000 m3 - 750.00 750.00
3 Furnace Oil 37.5 m3 - 202.875 202.875
Total 1,026.283 1,026.283
 120-9

V. TECHNOLOGY AND ENGINEERING

A. TECHNOLOGY

1. Production Process

The technology of manufacturing absorbent cotton involves opening cleaning and

bleaching that can be performed automatically or manually in which the facilities are
made as simple as to keep the production cost low. In view of simplicity of operation and
maintenance the manual method is taken in this profile.

Cotton is fed to opener and cleaner to free it from extraneous matter and to get the fibers
loosened. Next filling process is taken followed by bleaching them and hydro extracting
process for which dewatering is done. Then opening and drying are carried out, in order
to facilitate the subsequent carding process. The dried cotton is further loosened finally
by the opening machine and tested and carded. Finally winding, cutting and packing is
performed. Since the process uses hazardous chemicals like caustic soda and bleaching
powder, a liquid waste treatment plant is necessary to control pollution of the
environment.

2. Source of Technology

The above described technology is available from the following sources:

Small and Medium Industry Promotion Corporation
South Korea
http//:www.smipc.or.kr

B. ENGINEERING

1. Machinery and Equipment

The list of machinery and equipment required for the envisaged plant is given in Table
5.1.
 120-10

Table 5.1
MACHINERY & EQUIPMENT & ESTIMATED COSTS

Cost, ( OOO Birr)

No Qty F.C L.C Total
1 A. Production Machinery &
Equipment

Opening & Cleaning Unit 1 set

Filling Unit 1 set 4,685.37 1,171.343 75,856.713
Bleaching Unit 1 set
Hydro-extracting Unit 1 set
Opening/for wet cotton) 1 set
Drying Unit 1 set
Opening unit (for dried cotton) 1 set
Reserving Unit 1 set
Carding Unit 1 set
Winding and Cutting 1 set
Packing Machine 1 set
Sub – Total - 4,856.713 1,171.343 6,028.056
2 B. Auxiliary Machinery &
Equipment 1 set 66.47 16.62 83.09
Air conditioning equipment 2 set 545.00 136.25 681.25
Boiler (3 tonnes/hr, 10 kg km2
Water treatment facilities for 1 set 97.87 24.47 122.34
fresh water (50 tonnes/day) Lump 23.52 5.88 29.40
softener sum
Testing equipment & Tools
Sub – Total 732.86 183.22 916.08
Grand Total - 5,589.573 1,354.563 6,944.136
 120-11

2. Land, Buildings & Civil Works

The production building will be made by hollow blocks, both sides of the walls will be
plastered, reinforced concrete floor lined with chemical resistant tiles and RHS truss and
EGGA sheet roof. Taking into consideration space for easy movement and possible
future expansion, the total area of the project will be 1,500 square meters the lease value
at a rate of Birr 1.20 per square meter and for 95 years will amount to Birr 171,000.
Total built-up area will be 700 square meters. The total building and construction cost at
a unit cost of Birr 1600 is estimated at about Birr 1,120,000.

3. Proposed Location

Based on resource potentials the proposed location for the plant is Amaro special woreda.

VI MANPOWER AND TRAINING REQUIREMENT

A. MANPOWER REQUIREMENT

Total manpower required is 48 persons. The detail of the manpower requirement and the
estimated annual labor cost including employees’ benefit is given in Table 6.1.
 120-12

Table 6.1
MANPOWER REQUIREMENT AND ESTIMATED LABOUR COST

No. of Salary (Birr)

Persons
No Job Title Monthly Annual
1 General Manager 1 2,000 24,000
2 Secretary 1 800 9,600
3 Production & Technical Head 1 1,700 20,400
4 Commercial Head 1 1,600 19,200
5 Finance & Administration Head 1 1,600 19,200
6 Personnel 1 800 9,600
7 Accountant 1 750 9,000
8 Accounts Clerk 1 400 4,800
9 Cashier 1 500 6,000
10 Sales person 1 500 6,000
11 Purchaser 1 500 6,000
12 Store Keeper 1 500 6,000
13 Quality Controller 1 800 9,600
14 Shift Leader 3 750x3 27,000
15 Operator 9 400x9 43,200
16 Assistant Operation 9 250x9 27,000
17 Labourer 3 150x3 5,400
18 Mechanic 3 700x3 25,200
19 Electrician 3 700x3 25,00
20 Driver 2 400x3 9,600
21 Guard 3 200x3 7,200
Sub – Total 48 309,600
Employee’s Benefit 20% basic salary 61,920
Grand Total 371,520
 120-13

B. TRAINING REQUIREMENT

The supervisor, skilled workers and quality control worker need at least two weeks
training on the technology, maintenance and quality control. For the rest, on-the-job
training will be sufficient on the start up period by the specialists. Total training cost is
estimated at about 75,000 Birr.

VII. FINANCIAL ANALYSIS

The financial analysis of the absorbent cotton 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 years
Bank interest 8%
Discount cash flow 8.5%
Accounts receivable 30 days
Raw material local 30 days
Raw material, import 90 days
Work in progress 5 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
9.73 million, of which 49 per cent will be required in foreign currency.

The major breakdown of the total initial investment cost is shown in Table 7.1.
 120-14

Table 7.1
INITIAL INVESTMENT COST

Sr. Total Cost

No. Cost Items (‘000 Birr)
1 Land lease value 171.0
2 Building and Civil Work 1,120.0
3 Plant Machinery and Equipment 6,944.1
4 Office Furniture and Equipment 100.0
5 Vehicle 250.0
6 Pre-production Expenditure* 623.9
7 Working Capital 523.6
Total Investment cost 9,732.6
Foreign Share 49

* N.B Pre-production expenditure includes interest during construction ( Birr 473.87 thousand )
training (Birr 75 thousand ) and Birr 75 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 4.85
million (see Table 7.2). The material and utility cost accounts for 63.99 per cent, while
repair and maintenance take 2.37 per cent of the production cost.
 120-15

Table 7.2
ANNUAL PRODUCTION COST AT FULL CAPACITY ('000 BIRR)

Items Cost %
Raw Material and Inputs 2,082.71 42.87
Utilities 1026.28 21.12
Maintenance and repair 115 2.37
Labour direct 185.76 3.82
Factory overheads 61.92 1.27
Administration Costs 123.84 2.55
Total Operating Costs 3,595.51 74.01
Depreciation 848.96 17.47
Cost of Finance 413.89 8.52
Total Production Cost 4,858.36 100

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.
 120-16

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 = 28 %
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 26 % and the net
present value at 8.5% discount rate is Birr 8.37 million.

D. ECONOMIC BENEFITS

The project can create employment for 48 persons. In addition to supply of the
domestic needs, the project will generate Birr 4.1 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.