Economic assessment of producing a fluting paper using agricultural residues – a case study: Iran, Mazandaran Province

Abstract

Given limited forest resources and increased paper consumption and imports, establishing fluting paper mills using non-wood raw materials seems more essential than ever. This paper aims to investigate, technically and economically, the possibility of establishing a fluting paper mill (with a capacity of 10,000 tons a year) from agricultural residues in Iran's Mazandaran province. The average annual agricultural residues output (including wheat, barley, rice, corn, oil seeds and cotton) in the province was about 1.3 million tons from 2000 to 2010, showing the potential of the province as an appropriate source for providing raw material from agricultural residues. For economic evaluation of the project, economic indices such as rate of return, pay-back period and production break-even point were measured. The results indicated that establishing a fluting paper mill based on agricultural residues is feasible.

Keywords:

• feasibility
• fluting paper
• Mazandaran province
• agricultural residues

1. Introduction

Examining the possibility of establishing a plant in terms of providing raw material provision, determining the amount of investment and adapting the technology of the industry under consideration to the potential expertise and skills in Iran requires multiple and coordinated economic, technical, regional and geographical studies. The technical study of establishing industries involves a set of research on the nature of the materials and products, consideration of various production processes and available technologies, as well as examination of the required systems, equipment and machinery. These examinations are designed to achieve the development, production and increased quality of products, which makes supplementing the lack of raw material in the market and competition with international producers possible by improving the technical capability of the newly established plant (Niakan et al. 2004). The worldwide production of paper pulp was 187.6 million tons in 2005, 17.4 million tons of which, i.e. 9.27%, was produced from wood fibres (Antunes et al. 2000). In the past decade, paper and paperboard consumption increased considerably in Iran – from about 48,000 tons for newspaper paper, 2,39,000 tons for printing and writing paper and 30,000 tons for fluting paper in 1994 and is estimated to rise to more than 1,06,000, 3,24,000 and 1,14,000 tons for newspaper, printing and writing paper and fluting paper respectively, in 2020. A close examination of the structure of paper consumption indicates that more than 70% of the fluting paper consumption rate by 2020 will be supplied through imports and the rest will be supplied through internal production (Tajdini 2007). Fluting paper consumption in Iran was more than 175,000 tons in 2010, 20,000 tons of which was supplied through imports and the rest was provided by internal products.

Unfortunately, due to the lack of appropriate investment in past decades, the industry is not in a good condition to meet increasing internal needs. Therefore, a great deal of the demand was and will be satisfied through imports. Thus, it is essential that steps are taken to establish a number of paper and paperboard mills in Iran. One of the major challenges to achieve the goal is supplying raw material for the industry. In the past, the forests and rangelands organisations of Iran have greatly constrained the use of the industrial forest in the north. This amount was reduced from 1.34 million square metres (m²) in 2000 to 920,000 tons in 2004 (Arian 2005). The minimum required wood for the paper and paperboard industry in Iran was more than 1.3 million m² in 2011.

On this basis, supplying wood for a new paper and paperboard mill would be impossible and there in no possibility that the Ministry of Industry, Mining and Trade would permit the establishing of new mills based on using this raw material (Islamic Republic of Iran, Ministry of Industry, Mining and Trade, Deputy for Planning and Economic Affairs 1997). Thus, attempts should be made to utilise the available capacities for using lignocellulose raw materials other than wood, such as wheat and rice straw fibre, etc. in new industries.

Based on the studies conducted in Iran and abroad, using agricultural residues can appropriately compensate for the shortage of raw material fibre required for the paper industry in Iran. Mahdavi (1995), Shokoei (1998), Kashani (1998), Jafari (2000), Rudi (2001), Moradian (2003) and Yaghoobi et al. (2003), respectively, investigated the production of paper and pulp from wheat straw, cotton stem, wheat and rice straw, bagasse, sunflower stem, wheat straw and cotton stem through various processes. The results of these studies indicate that the non-wood resources referred to are suitable for producing paper. Murakami et al. (1990) and Rowell et al. (1997) reported similar results (Sefidgaran et al. 2006).

Barimany Aboksari et al. (2011) investigated the possibility of producing fluting pulp (with a capacity of 20,000 tons a year) from agricultural residues in Iran's Golestan province. The results generally indicated that producing annually 20,000 tons of fluting pulp from agricultural residues in Golestan province was feasible in terms of both provision of raw material and suitability of engineering economy indices.

Samariha et al. (2010) investigated, technically and economically, the possibility of producing fluting pulp (with a capacity of 1350 tons) from bagasse in Iran's Khuzestan province. The results indicated that, regarding the agro-industry projects already underway relating to the cane industry and its peripheral industries in the south of Iran, bagasse can be considered as the most suitable non-wood raw material for new fluting paper and pulp mills, and the project is feasible technically and economically.

Tajdini (2007), aiming at maximising profit, offered an optimal model for establishing and developing complex pulp and paper mills producing 75,000 tons paper from cereal straw, to be used for printing and writing, newspaper and fluting. This used mathematical programming models based on the linear programming concept, taking into account the limited resources and variable production costs such as consumptive raw material, various kinds of chemicals, additive and softwood pulp, the workforce in the production department as well as the potential demand and time for producing a ton of the product. The results indicated that, given more than 1.7 million tons wheat and rice straw output in a year in Mazandaran and assuming that 20% of this amount of output can be used as raw material in the new paper and pulp industry, two complex mills with a capacity of 50,000 tons of chemical pulp (soda process), 80,000 tons of printing and writing paper, 75,000 tons of neutral sulphite semi-chemical pulp (NSSC process) and 108,000 tons fluting paper (corrugating medium) can be established in the province. Producing paper for newspaper is not cost-effective and profitablẽ raw material was the most important.

1.1 Hypothesis

According to the available data, establishing such a mill with the considered capacity is feasible economically.

1.2 Goal

This study aims to investigate the possibility, technically and economically, of establishing a fluting paper mill (with a capacity of 10,000 tons in a year) from agricultural residues in Mazandaran, Iran.

2. Materials and methods

2.1 Estimating the amount of usable residues in Mazandaran

The harvest index, defined as the ratio of reproductive yield to total plant biomass, has been taken as a measure of efficiency in partitioning assimilated photosynthesis to harvestable product. This parameter was first considered in 1914 by Beaven, who described it as the ratio of grain yield to total plant weight and termed it the ‘migration coefficient’ [reviewed in (Sinclair 1998)]. Later on, the term ‘harvest index’ was suggested and recommended as an important reference to assess progress in germplasm development towards improved yield potential. The harvest index has been commonly used as a parameter for plant breeding, particularly in cereals. Domestication of grain crops during the twentieth century caused continuous improvement in the harvest index along with increasing crop yields (Hay 1995). However, it is not that the harvest index of ancestral grain crops was generally low. Indeed, there is considerable evidence that some ancestral species of wheat and rice had very high harvest indices (Sinclair 1998; Doebley et al. 2006).

To estimate non-gross yield (NGY) for each product, the harvest index (HI) and gross yield (GY) were used after consulting experts and conducting studies. Table 1 shows the harvest index for different products (Rowell et al. 1997). The harvest index coefficient is not fixed and depends on different factors. Thus, the average harvest index for each product obtained in internal research is shown in Table 1 (Tashakori et al. 2004; Edalatifard 2004; Golipoor et al. 2004; Yahyaei 2007; Mashi et al. 2008; Harivandy et al. 2005; Mahmoudi 1998; Niknejad et al. 2008). By residues, we mean the remainder of the plant after harvest except for the root and parts of the stem posited in the ground (Madhoushi et al. 2008).

Table 1 Harvest index for different agricultural products.

Product	Harvest index
Wheat	0.42
Barley	0.40
Rice	0.50
Corn	0.29
Seed oil	0.28
Cotton	0.40
Sources: Tashakori et al. (2004), Edalatifard (2004), Golipoor et al. (2004), Yahyaei (2007), Mashi et al. (2008), Harivandy et al. (2005), Mahmoudi (1998) and Niknejad et al. (2008).

Using Formula 1, non-gross yield was obtained for the product (Tabarsa 2002).

As the root and some parts of the stem cannot be harvested, 15% was subtracted from non-gross yield to measure usable residues according to Formula 2 (Tabarsa 2002).

According to statistics published by the Ministry of Jihad-e-Agriculture in Iran, gross yield values were measured for each product both generally and separately during the agricultural years 2000–2010.

Table 2 summarises the average annual usable grain residues including wheat, barely, corn as well as oil seed and cotton in Mazandaran, and Iran generally, between agricultural years 2000 and 2010. The average agricultural residues total output was estimated to be over 27 million tons annually in Iran during these years, 1.28 million tons of which were in Mazandaran, indicating a considerable amount of residues in the province. Only 20% of the residues are assumed to be used as raw material in the paper and paperboard industry in the province. This value was determined according to the experts in the industry. Resalati et al. (2001) agree on 25% of the total output.

Table 2 The average usable agricultural residue estimate in Mazandaran and Iran during 2000–2010.

The amount of agricultural waste	Cotton (ton)	Corn (ton)	Barley (ton)	Wheat (ton)	Seed oil (ton)	Rice (ton)	Average (ton)
Mazandaran province	6260	10,050	52,060	143,700	185,900	884,300	1,282,270
Iran	580,048	3,998,592	3,859,266	15,622,974	842,200	2,393,211	27,296,291

According to Table 2, it can be said that, given 1.28 million tons residues annual output and assuming that more than 20% of this value is used as raw material in the paper and paperboard industry, establishing a paper mill with a capacity of 10,000 tons is possible in Mazandaran.

2.2 Measuring economic indices

When carrying out an industry project, one should first examine all aspects closely and make sure that the project is feasible and implementable. Such examination involves a set of studies before investment. Although such investment is costly, it mitigates losses that would otherwise be caused by inappropriate implementation and extra expenses imposed on the project and, therefore, waste of valuable human and financial resources. This study identifies all the factors related to production and analyses their effects. Production capacity, the location of the mill, the existing technology, as well as the agencies, investment expenses, accountable sale income and investment return related to fluting paper production, were appraised precisely in the study (Kazemi 2006).

Financial studies are required to determine the amount of profit and engineering economy indices. On this basis, statistics published by the Small Industries and Industrial Parks Organisation were used and similar justified projects were reviewed to provide primary data, especially data on fixed investment expenses, for financial evaluation of the fluting paper-producing project. Also, the prices and cost items of similar production units were referred to in part in assessing production current expenditures. The financial audit involves appraising total investment cost, and the costs of raw material, maintenance, depreciation, etc. Based on technical appraisal carried out using industrial accounting principles, working and fixed capital as well as fixed and variable costs of the project were estimated, and the cost price and annual profit were appraised. Stockholders' investment and financial facilities obtained from banks will be the financial resources of the project. Having collected the required data using industrial accounting principles, engineering economy indices of the project including rate of internal return, pay-back period, product cost price, product break-even point and value of sales at break-even point were calculated. The primary computations were performed assuming that the prices are fixed during the establishment and operation period, estimated to be two years in this project. Also, the paper was priced at $520 per ton for sale (the selling price is based on the average worldwide price for fluting paper in 2011).

3. Results

Financial computations were carried out based on the unit performance. Table 3 summarises the data.

Table 3 The operation of the fluting paper mill.

Production	Unit	Wholesale price per unit ($) (2010)	Annual capacity	The total value of annual production capacity ($)
Fluting paper	ton	520	10,000	5,200,000
Total annual production				5,200,000
Note: 270 workdays a year, 2 work times 7.5 h in day (useful time regarding allowed unemployment).

Raw material prices were set based on enquiry from internal companies and the wholesale markets. The details on raw material (regarding production capacity) are appraised in Table 4.

Table 4 The estimate of raw material consumption cost.

Raw material	Amount needed (tons)	Cost per unit ($)	Total cost ($, × 1000)
Agricultural residue	32,000	52	1664
Sodium hydroxide	2000	250	500
Lime (to neutralisation and precipitation of wastewater chemicals)	1200	30	36
Packaging material (polypropylene sacks)	42	365	15.4
Other than the raw materials (3.5%)^a			77.6
Total annual value of raw materials			2293
^a In this study, nonessential and rarely used materials that have little technical and economical values are not mentioned. For this reason, 3.5% of consumptive material values are allocated to these items.

Table 5 summarises the working capital based on required material and energy accounts as well as staff payroll.

Table 5 Total item working capital.

Description	The number of working days	Total value ($)
Internal supply of raw materials^a	45	382,167
Staff salary and benefits^b	68	56,149
Energy types^c	68	28,728
Repair and maintenance costs^d	60	25,959
Depreciation costs^e	60	50,568
Selling expense (0.5%)	–	26,000
Other current expenses (5%)^f	–	28,498
Total working capital ($)		598,469
^a The total annual raw material cost of the project is estimated at $2,293,000.
^b The workforce is appraised in production and nonproduction parts. Monthly payroll of the staff is computed based on common criteria. It should be mentioned that, for exact estimation of reward and Nowruz gift, annual payroll is based on 14 months a year. Also, 23% of the total personnel payrolls as insurance premium are the staff. The total annual staff payroll and benefits cost of the project is estimated at $222,944.
^c The consumed energy cost is estimated at $114,065 annually.
^d Maintenance cost is estimated at $119,815 annually.
^e With the passage of time, fixed capital except for the ground (the ground used for establishing the building) will lose usability. Thus, the cost price of such assets should be added to the expense account regularly and gradually during their expected life. This gradual cost price reduction is called depreciation. The consumptive depreciation costs were estimated at $229,355 annually.
^f To increase reliability of the accounts and decrease possible risk, 5% of the above is added to the total in order to compensate for the possible items that are not considered.

Table 6 shows details of fixed capital. Given the industrial capacities of machine factories in Iran, all machinery and equipment in the study were internal.

Table 6 Total component and the estimate of fixed capital.

Description	Total value ($)
Machinery and manufacturing equipment^a	1,607,278
Land	340,900
Building and landscaping^b	1,153,280
Vehicles	75,637
Equipment and public facilities^c	214,837
Office furniture	10,840
Unforeseen costs (3.5%)	119,097
Preoperative costs^d	55,000
Total fixed capital	3,576,869
^a The value of all the machinery and equipment was estimated based on the conducted enquiry in addition to 10% of installation and operation costs with equipment total costs.
^b It involves landscaping (landscape and parking lot, green space, walling and lamps) as well as building costs (production saloon, warehouses, installation and levorotatory, official buildings, etc.).
^c To improve the efficiency, a production unit, in addition to the main production plants, needs a set of peripheral general equipment and installation such as laboratory, power installation (power for production units, compound and installation), emergency power installation, water installation (water needed for production line, installation, buildings and compound), fuel installation, heating installation, cooling and ventilating, steam-producing installation (steam boiler), fire-extinguishing installation and sewage-refining system.
^d Pre-operation costs include the costs of primary studies, justifying project, unit establishing permit and plan's contracts registry as well as costs associated with preliminary training, setup and pilot operation and current costs during project operation.

4. Conclusion and discussion

Choosing an appropriate capacity level and production plan for industrial units leads not only to optimal use of investment but also to the greatest possible profit. As establishing industrial units requires a primary investment that is fixed in some cases, choosing low-level capacity will make it impossible for the project to be profitable. Besides, choosing high-level capacity in small industries requires the investor to provide great investment. As a result, the unit will go beyond small industry status. Thus, considering the market, the consuming centres and internal needs, the capacity level will be determined according to the limitations of small industries and consumptive needs. Taking all this into account, the capacity level of this project (the mentioned capacity level in the study was only intended for small industry) was estimated at 10,000 tons a year (with a workforce fewer than 50 people =  small industry).

Assuming 10,000 tons fluting pulp production a year and considering nominal capacity of production machinery and the need for this raw material in the unit and regarding 50%, 25%, 5% and 2% residue reduction as a result of dry cleaning, wet cleaning, displacement and loss of fibres, respectively, and also considering the average efficiency of 45%, the residue needed for the project is 32,000 tons. Therefore, investment in this project will lead directly to the employment of 40 people.

Considering the computed fixed and working capital, the total investment of the project is appraised according to Table 7. It should be mentioned that 60% of the fixed capital is provided through a five-year long-term loan with 15% interest and 80% of the working capital is provided through a one-year short-term loan with 22% interest. Thus, over $1,550,441.4 of the whole investment is provided by investors and the rest, i.e. about $2,624,896.6, is provided through bank facilities.

Table 7 The estimate of investment.

Description	Total value
Fixed capital	3,576,869
Working capital	598,469
Total ($)	4,175,338

In any production process, in addition to the investment required for establishing and operating the unit, some expenses should be considered annually and during the unit operation. These expenses consist of fixed and variable expenses, the items of which are summarised in Table 8.

Table 8 The estimate of fixed and variable costs.

Description	Fixed percentage^a (%)	Fixed costs ($)	Variable percentage^a (%)	Variable costs ($)	Total costs ($)
Raw materials	0	–	100	2,293,000	2,293,000
Energy types	20	22,813	80	91,252	114,065
Repair and maintenance costs	10	11,682,5	90	105,133.5	116,815
Staff salary and benefits	85	189,502.4	15	33,441.6	222,944
Unforeseen costs (3.5%)	–	7840	–	88,299	96,139
Operating cost	15	9300	85	52,700	62,000
Factory insurance (0.2%)	–	7154	–	–	7154
Obtained facility costs	100	427,249	–	–	427,249
Depreciation costs	100	229,355	–	–	229,355
Total fixed and variable costs	–	904,895.9	–	2,663,826.1	3,568,722
^aThe mentioned percentages are based on Industry and Mine Ministry and Iran Small Industry Organisation and Industrial Parks Organisation (ISIPO) statistics.

Fixed expenses are expenses that do not change with change of production. The expenses of mill insurance and obtained facilities are the most salient examples of such expenses. Some expenses are not completely fixed but have a fixed nature to some extent. For example, the payroll of the staff in the central and official bureau is not dependent on the production rate. Also, with a slight change in the production rate, the payroll of production staff is fixed. Thus, 85% of the payroll is considered a fixed expense. Variable expenses are those that change with changes in the production rate. For example, more production needs more raw materials. In this instance, some items change depending on the production capacity level, but their dependence is not 100%. For example, the payroll does not change with a slight increase or decrease in production; but when production increases lead to overtime, expenses for payroll will increase, or if production decreases to less than a certain level, it leads to a cut in the workforce and the payroll decreases too. Therefore, 15% of the payroll expenses are considered as variable expenses. A percentage of expenses in other cases are also considered as variable expenses (Table 9-11).

Table 9 The estimate of total annual costs.

Description	Annual costs ($)
Fixed costs	904,895.9
Variable costs	2,663,826.1
Total annual costs	3,568,722

Table 10 Result of economic study of fluting paper project.

Row	Description	Formula	Solution	Results
1	Finished price per ton of paper ($)	Total annual costs/nominal capacity	3,568,722/10,000	356.88
2	Total annual selling	Production capacity ×  price selling	520 ×  10,000	5,200,000
3	Break-even point	Fixed costs/(total selling – variable costs)	904,895/9/5,200,000 – 2,663,826/1	35/68%
4	Value of sales in break-even point	Fixed costs/(1 – variable costs/total selling)	904,895/9/(1–2,663,826/1/5,200,000)	1,846,726/23
5	Non-worth profit	Total selling – total costs	5,200,000 – 3,568,722	1,631,278
6	Functional costs	Non-personnel costs of central office+Current costs of laboratory + sale costs (0.5%)+ transportation costs (0.5%)	–	62,000
7	Functional profit	Non-worth profit – functional costs	1,631278 – 62,000	1,569,278
8	Non-functional costs	Depreciation costs preoperative + the financial facilities costs of long term and short term	–	432,749
9	Worth profit	Functional profit – non-functional costs	1,569,278 – 432,749	1,136,529
10	Internal rate of return	(Worth profit ×  100)/total investment	(1,136,529 ×  100)/4,175,338	27.22%
11	Pay-back period	Total investment/worth profit	4,175,338/1,136,529	Three years and nine months (45 months)

Table 11 Abstract result of economic study of fluting paper project in Mazandaran province.

Finished price per ton of paper ($)	356/88
Total annual selling ($)	5,200,000
Break-even point (%)	35.68%
Value of sales in break-even point	1,846,726/23
Worth profit	1,136,529
Internal rate of return	27.22%
Pay-back period	Three years and nine months (45 months)

5. Final conclusion

The conducted studies and computations indicate that the total annual expense of the project with a nominal capacity level of 10,000 tons a year is estimated at $3,568,722 ($904,895.90 fixed expense and $2,663,826.10 variable expense). Besides, the total investment in the project would be $4,175,338, about $3,576,869 of which is fixed investment and $598,469 is working capital.

Generally, the results indicate that the project of producing 10,000 tons of fluting paper a year from agricultural residues in Iran's Mazandaran province is feasible in terms of both raw material provision and appropriateness of engineering economy indices. The rate of internal return of the total capital is 27.22%, which is acceptable in terms of international paper and pulp industry conventions. The investment return duration (total investment) is three years and nine months given the prospect in the project, implying a high-level capacity for the project to return the invested expenses. The break-even point is 35.68% in the first year of production with full capacity, indicating that, even with production at half capacity, all production expenses are covered, and an increase in production will lead to the project's profitability. (In a study on producing ethanol from sugar beet molasses with a capacity level of 1,350,000 batteries in Iran, Khuzestan, the investment return duration was 72 months, and the annual investment return percentage was estimated at 16.75.)

Additional information

Notes on contributors

Abdollah Barimany Aboksari

1

Ali Gasemian

2

Nemat Mohebbi

3

Notes

1. barimany [email protected]

2. ghasemian @gau.ac.ir

3. mohebbi [email protected]