163.

PROFILE ON PRODUCTION OF
CINNAMON OIL
 163-2

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
 163-3

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.
 163-4

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
 163-5

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 an

effective demand for the year 2004.

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

- With aggressive promotional activity and product quality cinnamon oil

produce locally could capture 15% market share.

Accordingly current effective global demand and Ethiopia’s market share is estimated at
1,462 tonnes and 219 tonnes respectively.
 163-6

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)

Projected Market Share

Year Global of Local
Demand 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 1,812 272
2015 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
 163-7

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

Sr. Product Production Year

No. 1 2 3-10
1 Cinnamon oil (kg) 1400 1800 2000
2 Capacity utilization rate (%) 70 90 100
 163-8

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. Raw Material Qty Cost (‘000 Birr)

No.
1 Cinnamon bark (tonne) 315 5,140.5
2 Tin-linned drums (pcs) (200 lt 10 1.2
capacity)
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.
 163-9

Table 4.2
ANNUAL UTILITIES REQUIREMENT AND COST

Sr. Utility Unit Qty Cost

No. (‘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 a
pipe 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.
 163-10

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. Description No.

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
 163-11

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. Monthly Annual Salary

No. Salary (Birr) (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
 163-12

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.
 163-13

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.
 163-14

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.
 163-15

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 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 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.