Cinnamon Oil

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163. PROFILE ON PRODUCTION OF

CINNAMON OIL


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TABLE OF CONTENTS

PAGE

I. SUMMARY 163-3

II. PRODUCT DESCRIPTION & APPLICATION 163-3

III. MARKET STUDY AND PLANT CAPACITY 163-4

A. MARKET STUDY 163-4

B. PLANT CAPACITY & PRODUCTION PROGRAMME 163-7

IV. MATERIALS AND INPUTS 163-8

A. RAW & AUXILIARY MATERIALS 163-8

B. UTILITIES 163-8

V. TECHNOLOGY & ENGINEERING 163-9

A. TECHNOLOGY 163-9

B. ENGINEERING 163-10

VI. MANPOWER & TRAINING REQUIREMENT 163-11

A. MANPOWER REQUIREMENT 163-11

B. TRAINING REQUIREMENT 163-12

VII. FINANCIAL ANALYSIS 163-12

A. TOTAL INITIAL INVESTMENT COST 163-12

B. PRODUCTION COST 163-13

C. FINANCIAL EVALUATION 163-14

D. ECONOMIC BENEFITS 163-15


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I. SUMMARY

This profile envisages the establishment of a plant for the production of cinnamon oil

with a capacity of 2,000 kg per annum.

The present demand for the proposed product is estimated at 219 tonnes per annum. The

demand is expected to reach at 348 tonnes by the year 2022.

The plant will create employment opportunities for 18 persons.

The total investment requirement is estimated at Birr 3.88 million, out of which Birr

1.6 million is required for plant and machinery.

The project is financially viable with an internal rate of return (IRR) of 29% and a net

present value (NPV) of Birr 3.34 million discounted at 8.5%.

II. PRODUCT DESCRIPTION AND APPLICATION

Cinnamon oil can be produced from both bark and leaves. The essential oil content of

both parts of the plant is nearly the same. The major constituent of the oil is cinnamic

aldehyde (60%). The other components identified are ecegenol (10%), limonent, p-

cymene, linalool and B-caryophyllone.

Cinnamon oil is used

-as food additives

- in perfumes

-soft drinks

-dental preparations

-etc.


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III. MARKET STUDY AND PLANT CAPACITY

A. MARKET STUDY

1. Past Supply and Present Demand

Cinnamon oil is extracted form bark and leaf of the plant oils. Cinnamon bark oil

possesses the delicate aroma of the spice and a sweet and pungent taste. Its major

constituent is cinnamaldehyde but other, minor components impart the characteristic

odour and flavour. It is employed mainly in the flavouring industry where it is used in

meat and fast food seasonings, sauces and pickles, baked goods, confectionery, cola-type

drinks, tobacco flavours and in dental and pharmaceutical preparations.

Cinnamon leaf oil has a warm, spicy, but rather harsh odour, lacking the rich body of the

bark oil. Its major constituent is eugenol. It is used as a flavouring agent for seasonings

and savory snacks. As a cheap fragrance it is added to soaps and insecticides. The oil's

high eugenol content also makes it valuable as a source of this chemical for subsequent

conversion into iso-eugenol, another flavouring agent.

There are no industries in Ethiopia which make use of cinnamon oil. There are no local

producers and the product is not imported. Therefore, at present it has no market

potential locally. Internationally, however, cinnamon oil is widely used. Therefore, the

envisaged product is targeted for the export market.

Sire Lanka is the major and the only constant producer and exporter of cinnamon oil

while Madagascar and the Seychelles have been intermittent suppliers of the oil on a

minor scale. India produces very small amounts of leaf oil for domestic use.

Global import of cinnamon oil which is assumed to approximate demand has averaged

about 1,333 tones per annum during the period 1999 2004. (See Table 3.1). The United

States and Western Europe are the largest importers markets for cinnamon oil. Hong


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Kong is a significant importer although most of the oil is re-exported. During the period

under consideration global import of the product has registered an annual average growth

rate of 3.12%.

Table 3.1

GLOBAL IMPORT OF CINNAMON OIL (TONNES)

Year Export

1999 1,133

2000 1,232

2001 1,362

2002 1,746

2003 1,307

2004 1,219

Source: FAO, FAOSTAT database.

The current (2007) global demand for the product and the market share that could

possibly capture by cinnamon oil produced locally is estimated using the following

assumptions.

- The average global import during the period of analyses is taken as aneffective demand for the year 2004.

- The average growth rate recorded by global import of the product (3.12%) canbe applied to arrive at the current (Year 2007) level of import.

- With aggressive promotional activity and product quality cinnamon oilproduce locally could capture 15% market share.

Accordingly current effective global demand and Ethiopias market share is estimated at

1,462 tonnes and 219 tonnes respectively.


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2. Projected Demand

To project the demand for cinnamon oil the average annual growth rate registered by the

global import of the product (3.12%) is used. Table 3.2 shows the projected global

demand for the product and estimated market share of locally produced cinnamon oil.

Table 3.2

PROJECTED DEMAND ( Tonnes)

Year

Projected

Global

Demand

Market Share

of Local

Product

2008 1,507 226

2009 1,554 233

2010 1,603 240

2011 1,653 248

2012 1,704 256

2013 1,758 264

2014 1,812 2722015 1,869 280

2016 1,927 289

2017 1,987 298

2018 2,049 307

2019 2,113 317

2020 2,179 327

2021 2,247 337

2022 2,317 348


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3. Pricing and Distribution

Cinnamon bark oil is considerably more expensive than the leaf oil and probably the most

highly priced of all essential oils. During 2004 it was being offered at around US$385/kg.

Price of cinnamon leaf oil, in contrast, has been in the range US$6.50-7.50/kg.

Accordingly, a factory- get price of Birr 3,800/kg is recommended.

Distribution of the product should be arranged through contacts with agents having deep

and extensive experience of the market.

B. PLANT CAPACITY AND PRODUCTION PROGRAMME

1. Plant Capacity

The annual production capacity of the project is 2000 kg of cinnamon bark oil based on

three shift per and 300 working days per annum.

2. Production Programme

The production program of the project is indicated in Table 3.3. At the initial stage of

production, the project may require some years to penetrate the market. Therefore, in the

first and second year of production the capacity utilization rate would be 70% and 90%,

respectively. From the third year onwards full capacity production shall be attained.

Table 3.3

PRODUCTION PROGRAMME

Production YearSr.

No.

Product

1 2 3-10

1 Cinnamon oil (kg) 1400 1800 2000

2 Capacity utilization rate (%) 70 90 100


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IV. MATERIAL AND INPUTS

A. RAW AND AUXILIARY MATERIALS

The harvest time from a cinnamon bark from a plant is every five years. On the other

hand, the cinnamon leaves can be collected every year. The crop yield of the bark and

leaves is 60 quintal /ha five years and 190 quintals per hectare per year, respectively. The

oil yield of the bark is on average 0.64% and that of the leaves is between 0.6 to 0.82%.

Table 4.1 shows the annual raw and auxiliary material requirement of the envisaged

project at full capacity.

Table 4.1

RAW & AUXILIARY MATERIAL REQUIREMENT AND COST

Sr.

No.

Raw Material Qty Cost (000 Birr)

1 Cinnamon bark (tonne) 315 5,140.5

2 Tin-linned drums (pcs) (200 ltcapacity)

10 1.2

Total 5,141.7

B. UTILITIES

Electricity, fuel oil and water are utilities of the project. The annual utility requirement

and its cost is indicated in Table 4.2.


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Table 4.2

ANNUAL UTILITIES REQUIREMENT AND COST

Sr.

No.

Utility Unit Qty Cost

(000 Birr)

1 Electricity kWh 200,000 94.8

2 Fuel oil Lt 135,000 730.35

3 Water m3

2,000 20

Total 845.15

V. TECHNOLOGY AND ENGINEERING

A. TECHNOLOGY

1. Production Process

Cinnamon bark is first milled to fine sizes and then conveyed k the distillation kettle, and

placed on a grid which is located at a certain distance above the level of the water which

fills the bottom of the kettle. The water is vaporized indirectly, by steam flowing in apipe coil submerged by the water. The water vapor and the distilled oil coming from the

evaporator vessel is recovered in a separate water cooled condenser. This mixture

flowing out of condenser is separated by decantation in a Florentine flask. The distilled

water, which may contain some soluble parts of the oil, shall be sent back to the

evaporator vessel to recover the soluble alcohols by means of a second distillation.

2. Source of Technology

The technology of cinnamon oil processing can be acquired from diffeent suppliers of

steam distillation turn-key plants. For example, the following company could be

contacted.


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Servotex engineers

Ghodbunder road, Opp. Strips, Mumbay, India

Phone: +91-22-28454982

Fax: +91-22-28455615

B. ENGINEERING

1. Machinery and Equipment

The list of machinery and equipment required for the production of cinnamon oil is

indicated in Table 5.1. The cost of machinery and equipment including engineering and

know-how is estimated at Birr 1,607,400, of which Birr 1,339,500 is required in foreign

currency.

Table 5.1

LIST OF MACHINERY AND EQUIPMENT

Sr.

No.

Description No.

1 Evaporator 2

2 Condenser 1

3 Grinding unit 1 set

4 Florentine flask 1

5 Pumps 2

6 Cooling tower 1 set

7 Boiler 1 set

8 Submersible pump 1


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2. Land, Building and Civil Work

The total land requirement of the project is estimated at 1000 m2 out of which the built-up

area is 300 m2. The cost of building is Birr 450,000. The lease value of land is about

Birr 80,000 at a rate of 1 Birr per m2 per annum for 80 years.

3. Location and Site

Tepi towen of Yeki woreda Sheka zone is selected as the best location of the proposed

project because of its proximity to major raw material sources.

VI. MANPOWER AND TRAINING REQUIREMENT

A. MANPOWER REQUIREMENT

The project requires 18 employees. The list and cost of manpower is indicated in Table

6.1. The total annual cost of labour is estimated at Birr 210,000.

Table 6.1

MANPOWER REQUIREMENT & LABOUR COST

Sr. No. Manpower Req.

No.

Monthly

Salary (Birr)

Annual Salary

(Birr)

1 General manager 1 3,000 36,000

2 Production & techine manager 1 2,500 30,000

3 Accountant 1 2,000 24,000

4 Secretary 1 800 9,600

5 Operators 3 2,100 25,200

6 Ass. Operators 3 1,200 14,400

7 Daily labourers 6 1,800 21,600

8 Guards 2 600 7,200

Sub-total 18 14,000 168,000

Benefits (25% of BS) 3,500 42,000

Grand Total 17,500 210,000


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B. TRAINING REQUIREMENT

On-the-job training shall be carried out by the experts of machinery suppliers, and its cost

is estimated at Birr 20,000.

VII. FINANCIAL ANALYSIS

The financial analysis of the cinnamon 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

Raw material, import 90 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 Birr

3.88 million, of which 51 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 INVESTMENT COST

Sr. Total Cost

No. Cost Items (000 Birr)

1 Land lease value 80.0

2 Building and Civil Work 450.0

3 Plant Machinery and Equipment 1,607.4

4 Office Furniture and Equipment 100.0

5 Vehicle 200.0

6 Pre-production Expenditure* 290.4

7 Working Capital 1,152.3

Total Investment cost 3,880.1

Foreign Share 51

* N.B Pre-production expenditure includes interest during construction ( Birr 140.37 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 6.63

million (see Table 7.2). The material and utility cost accounts for 90.18 per cent, while

repair and maintenance take 1.13 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 5,141.70 77.45

Utilities 845.15 12.73

Maintenance and repair 75 1.13

Labour direct 67.2 1.01

Factory overheads 33.6 0.51

Administration Costs 100.8 1.52

Total Operating Costs 6,263.45 94.35

Depreciation 263.24 3.97

Cost of Finance 111.98 1.69

Total Production Cost 6,638.67 100

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 = 40%

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 4 years.

4. Internal Rate of Return and Net Present Value

Based on the cash flow statement, the calculated IRR of the project is 29 % and the net

present value at 8.5% discount rate is Birr 3.34 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 2.24 million in terms of tax revenue.

Documents

Cinnamon Oil