Chapter 4. Financial and economic aspects of resin tapping and processing

Resin tapping operations
Resin processing operations
Comparative advantages and disadvantages of domestic, regional and export markets for a new producer

The aim of this section is to provide economic and financial guidelines for the production and processing of pine resin. Although the production of crude resin, and its processing into rosin and turpentine, are distinct operations, the cost levels of resin tapping will directly affect the economic and financial competitiveness of resin processing.

It is impossible to compete in world markets if crude resin costs are markedly higher than those of the largest three exporters, the People's Republic of China, Indonesia and Brazil. The international trade in crude resin has expanded over the last five years, particularly from Brazil to Portugal and India, but it still represents a very small percentage of the total volume of rosin and turpentine traded.

It must be emphasized that costs will be site specific and there could be substantial differences according to local circumstances. This is particularly true of the tapping operation, and a detailed feasibility study, which would be necessary before making any investment decision, would need to look closely at the pine resource and the likely productivity. It has already been noted that intrinsic resin yields are influenced by species and local climatic conditions, but output is also greatly influenced by the productivity of the workforce and the effectiveness of the management, and this may vary considerably from one country to another (or even within-country).

Resin tapping operations

Tapping is a labour-intensive operation and labour costs will therefore greatly influence production costs and, hence, profitability. The tapping operation itself can be carried out by c contractors or pieceworkers who are paid according to the amount of clean resin they produce. The advantages of this system of payment have been discussed in a previous section. A much smaller, permanent work force is required to supervise and manage the tapping operation, arrange for purchase, storage and transport of crude resin, and maintain stores and accounts. However, it is essential for management to undertake periodic checks to ensure that correct tapping procedures are being followed.

The major capital cost when establishing a tapping operation is the purchase of gutters and cups, a range of tools, and items of protective clothing and footwear for the tappers. The gutters and cups may be manufactured specifically for the purpose, or they may be made using suitable secondhand materials. Other major items of expenditure include pre-production and start-up costs, transport within the forest and to the processing plant, and licence fees payable to the owner of the trees for tapping rights.

Although it is impossible to provide accurate costs of a tapping operation, Table 4 gives details of the estimated pre-production, start-up, fixed investment, working capital and annual production costs for an African country at 1995 prices.

Table 4. Resin tapping operations: estimated pre-production, fixed investment, working capital and annual production costs for an African country

All the costs are based on 1000 tonnes of crude resin being produced from 400000 trees, each yielding an average of 2.5 kg of resin per year from two faces. As stated above, labour productivity and annual resin yields per tree will be critical in determining the profitability of the tapping operation.

It should be noted that in order for the data to reflect the true annual costs of production, fixed and working capital costs are charged at 20%/year; this is lower than is usual in many African countries.

Table 4 shows a total annual cost of crude resin at the production site of US$, 295/tonne. World prices for crude resin in the period 1991-94 (for traded material) averaged US$ 270-320/tonne (c&f) but prices may fall back slightly between 1996 and 2000. Allowances for ocean freight, internal transport costs, and ad valorem import duties, will enable a new resin producer in Africa, for instance, to be competitive in domestic and regional markets and to make a profit on capital employed, even if crude resin is produced at levels slightly above this range. Profitability is likely to be low, however, if imports are permitted and duty levels are only 20% or lower.

Resin processing operations

The overall capital costs of a resin processing plant cover machinery and equipment, freight of all imported items, and installation and start-up. Pre-production costs such as manpower recruitment and training and all initial management and administrative expenses also have to be included. It is assumed that the training element will be provided by a foreign technical expert. Additional provision must be made for land costs and civil works, buildings, utilities, auxiliary equipment and spares.

An approximation of pre-production, fixed investment, working capital and annual production costs for an African country is given in Table 5 (based on 1995 prices). Costs relate to single-shift working throughout the year and are based on 1000 tonnes of crude resin as raw material (costed in Table 4) producing an estimated 700 tonnes of rosin and 110 tonnes of turpentine. Operation of the factory on a two-shift basis processing 2000 tonnes of resin annually, would reduce unit fixed and working capital costs per tonne of rosin produced. The annual charge for fixed costs would fall by US$ 60000, but annual production costs would rise. Table 5 shows a total annual cost for processing 1000 tonnes of crude resin of about US$ 668000.

Using the figures for total annual costs shown for the African model in Tables 4 and 5, and assuming that 700 tonnes of rosin and 110 tonnes of turpentine are recovered from 1000 tonnes of crude resin, it is possible to calculate the annual production cost per tonne of rosin. In those parts of Africa where petroleum-based 'mineral turpentine' or white spirit is available cheaply, gum turpentine may not be highly valued, and it may be uneconomic to ship small consignments to export markets because of the cost of drums and ocean freight. Therefore, in calculating a break-even price for rosin, turpentine is given a nominal value of US$ 350/tonne. The total value for 110 tonnes of turpentine is thus US$ 38500, and deducting this from the total annual production costs of US$ 668400 gives a residual cost of US$ 629900; this is equivalent to a break-even price for the rosin of US$ 900/tonne.

Table 5. Resin processing operations: estimated pre-production, fixed investment, working capital and annual production costs for an African country

It should be noted that the gum naval stores industries established during the last 20 years will be operating with older, lower-cost equipment which will have fully or partially depreciated. As a result, they should be able to produce both crude resin and processed rosin at prices 20-30% lower than those shown in Tables 4 and 5 which are based on capital equipment purchase and start-up costs at 1995 prices.

Comparative advantages and disadvantages of domestic, regional and export markets for a new producer

It is recognized that the break-even price for rosin of US$ 900/tonne is high compared with the price of Chinese or Indonesian imported rosin, although it should be possible to reduce costs by improvements in productivity, particularly in the tapping operation. However, if the quality of his product is acceptable, an African (or any other) producer would have an advantage over the end user of imported rosin, in terms of meeting domestic or regional demand, because he would not incur the following additional costs. First, internal transport costs from port to factory for imported material would probably be around US$ 40-60/tonne Even if exports are made to regional countries by rail and truck, the advantage will be retained of not having to bear the cost of ocean freight (approximately US$ 70-90/tonne) incurred by Chinese, Indonesian and other competitors.

Secondly, any customs duties or tariffs levied on imports will add to the landed cost; a duty of 20% will add a further US$ 100-120/tonne. It is also possible that a neighbouring country buying gum naval stores will have a reduced (or preferential) rate of duty, allowing the regional exporter to pay only 50% of the full ad valorem tariff.

Thirdly, relatively small users often experience difficulty in opening 30-day letters of credit or providing sight drafts; several months' working capital may be tied up in the import of 50-200 tonnes of rosin in a single shipment, and interest charges may add a further US$ 50-100/tonne to their costs.

These additional costs amount to US$ 190-280/tonne for imported rosin and would raise the cost to the end user from about US$ 600 (c&f) to US$ 790-880/tonne. At the early 1995 rosin price of US$ 750-800 rather than US$ 600, the African producer could sell competitively in the domestic market for between US$ 900 (his break-even price) and US$ 1100/tonne. However, as these price levels are unlikely to be sustained over the next three to five years, a new producer should aim to produce rosin at US$ 750-800/tonne or preferably less.

Once the domestic demand is satisfied, the new producer will face a dilemma. He will be obliged to become a competitive exporter to find new markets but will only have marginal tonnage to sell. He may have a surplus of crude resin, but will have to contend with low prices and with buyers' minimum volume requirements which are hard to meet. His factory may be able to sell all its rosin and rosin products but may also need to dispose of 50-150 tonnes of turpentine in drums. Turpentine in such small quantities, and possibly not of the best quality, may be difficult to sell on international markets. However, it is also difficult to expand output from 1000 tonnes of product sold in domestic markets, to 3000-4000 tonnes split between export and domestic markets. The greatest barrier is the extra cost incurred from local transport by road or rail, port handling charges and ocean freight; although this was an advantage when import substitution began, it has now become a major barrier to profitable exporting, even if markets can be found for small tonnages. The cost of new drums will add a further US$ 20-25/tonne to export costs.

These charges mean that the ax-factory prices of rosin and turpentine for a new producer must be US$ 130-175/tonne (internal transport + ocean freight + packaging) below the market price for established producers if it is to be landed in importing countries at parity. For many small producers, the swing from a freight advantage of US$ 110-115/tonne (internal transport + ocean freight) on domestic sales to a freight disadvantage of US$ 130-175/tonne on export sales, is too great. Agents and brokers are sometimes reluctant to handle very small consignments of uncertain and untested material, and the time and effort which may be required to overcome such difficulties often provides a further disincentive to the new or small producer.

The best solution to this problem is to first expand the processing capacity for rosin and turpentine in line with domestic or regional demand. Assuming there are sufficient trees to support increased production of resin, crude resin exports, or increased output of processed products (by working multiple shifts) which will be more marketable than very small quantities, can be considered at a later date.

New producers of crude resin, rosin and turpentine should anticipate these problems of balancing resin supply, local demand, capacity and export sales, if they are to operate profitably. It should not be presumed that the price levels of late 1994/early 1995 of US$ 750-800/tonne for rosin will continue for two or three more years.