Session 8 ic2011 dadzie

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Session 8 ic2011 dadzie

  1. 1. VALUE ADDITION TO WOOD RESOURCES,THE CASE OF GARDEN FURNITURE PRODUCTIONAND EXPORT IN GHANA-STUDY OF A LOCAL FIRM BY DADZIE PETER KESSELS LECTURER:FURNITURE DESIGN AND PRODUCTION DEPT. KUMASI POLYTECHNIC, GHANA. WEST AFRICA Email; pkkdazie@yahoo.com 1
  2. 2. OUTLINE OF PRESENTATION OUTLINE OF PRESENTATION  Introduction  Objectives  Materials and methods  Results and discussions  Conclusions  Recommendations  Acknowledgement 2
  3. 3. INTRODUCTIONGhana used to have 8.13Million hectares ofhigh forest (Forestry Department, 1995; Asumadu, 1997)  This has dwindled due to over-exploitation for mainly log and lumber export to meet high demand(World Bank, 1988)Deforestation- 750km2/year ≡1million GhanaCedis-€877,346.903 loss, (World Bank, 1988) 3
  4. 4. INTRODUCTION To control deforestation and encourage tertiary processing of wood, Ghana collaborated with United Kingdom, through Overseas Development Administration, to;  strengthen regulations and  stopped export of logs in the 1990s (Pleydell et al, 2002) All these efforts- not yielding needed results, as Ghana is still ranked low, relative to some ITTO countries, in terms of further processing (Johnson, 1997) Garden Furniture- made with wood is an outdoor type, used in gardens, at beaches, in porches, etc for people who want to enjoy fresh air (Plow and Hearth, 2006) 4
  5. 5. INTRODUCTION Meanwhile, whiles a M3 of kiln-dried (KD) lumber is about €377.172, a M3 of garden furniture parts is €1,677.850 showing a value difference of €1,300.717 (TIDD,2005a)  this represents 344.85% in value increase An indication that, further processing lumber to garden furniture for export may be a very profitable venture,  that can yield better economic gains,  and ensure sustainable use of wood resources. 5
  6. 6. INTRODUCTION However, no organised information has been sighted on;  recovery rate of converting lumber (KD) to garden furniture, and  the processing costs involved, • To make any meaningful assessment. 6
  7. 7. INTRODUCTION The question is;  do these factors make garden furniture production for export economically unprofitable, for which reason, Ghanaian firms seem not to be interested? 7
  8. 8. OBJECTIVES To estimate the recovery rate of converting lumber (KD) to garden furniture. To ascertain the economic viability or otherwise in further processing lumber to garden furniture, in Ghana, for export. 8
  9. 9. MATERIALS AND METHODS Study coverage- three-year period from January 2003 to December 2005 Materials and equipment; Wood, Tape Measure, various records/reports and Vernier Callipers Data collection process;  In-factory study, Observations, Interviews and Records Reviews Exchange rate;  €1Gh¢1.139-May 2005 was used 9
  10. 10. A model for the study TOTAL INCOME:(E) ={D+C} EXPORT OTHER/BY-PRODUCT’S INCOME (C) INCOME (D) -Firewood & Others PROCESSED RESIDUAL TOTAL COST. (B): INCOME TO FURNITURE -MAT. COST Raw material F= (E-B)Split –off-point Other materials (Additional differential profit/loss) -LABOUR COST processing COMPARED WITH A LUMBER (KD) -OTHER EXPENSES cost -DIFFERENTIAL SELLING & DIST. COSTS AND TAXES EXPORT INCOME (A) 10
  11. 11. MATERIALS AND METHODS Recovery rates of converting lumber (KD) to garden furniture  Eleven (11) wood species were selected based on availability of both, their lumber and furniture values, • Included, Odum (Milicia excelsa), Mixed Redwoods, Mahogany (Khaya spp.), Teak (Tectona grandis), Dahoma (Piptadeniastrum africanum), Albizia (Albizia ferruginea), Akasaa (Chrysophyllum spp.), Afromosia (Pericopsis elata), Avodire (Turraeanthus africanus), Hyedua (Guibourtia ehie), and Emire (Terminalia ivorensis). 11
  12. 12. MATERIALS AND METHODS Three replicates of three different garden furniture types made from each species were used. Equations 1 and 2 were used for the calculations, • Equation 1 → Recovery Rate of each garden furniture (RR) = Output lumber volume X 100% Input lumber volume • Equation 2 → Average Recovery Rate for Species and general = RR1 +RR2+RR3…RRn/N • where, RR= recovery rates of furniture piece or species and N= Total no. of furniture pieces or Total no. of species 12
  13. 13. MATERIALS AND METHODS Income or values of garden furniture and lumber/m3 {income after further processing-Free-on-Board (FOB) + ‘Other Income’, and raw material cost}  Values of garden furniture; • Free-on-Board (FOB) values of garden furniture -From Timber Industries Development Division (TIDD’S) export reports on wood products • Values of by-products (‘other income’), -From study company’s financial statements  FOB values of lumber, - From TIDD’S export reports on wood products ≡ Raw material cost. 13
  14. 14. MATERIALS AND METHODS Costs of further processing kiln-dried lumber to garden furniture  Material costs (Raw and ‘other materials’); • Raw material- export(FOB) value of lumber (KD); found by reviewing TIDD export reports, • Equation 3-for volume used for 1m3 of furniture,Equation 3→ Raw material volume = Finished/planed lumber volume X 100% Recovery rate • Answer multiplied by FOB value of lumber gives value of lumber needed for furniture in €. 14
  15. 15. MATERIALS AND METHODS • ‘Other materials’ cost • 10 different furniture pieces and equation 4 were used to find % in a furniture piece, -Equation 4 • answer X annual average value of furniture sold (export + local) = total monetary value, • total monetary value ÷ annual volume= cost/m3 Differential Processing, and Marketing Costs and Taxes • interviews and review of study company’s financial statements were used to obtain them. 15
  16. 16. MATERIALS AND METHODS • Costs and ‘other income’ apportionment -to Garden Furniture and Parquet Flooring • two bases used; • percentage of average number of workers, -for labour costs • percentage annual volume of each product produced and sold, –for other expenses and ‘other income’ Scenario analyses of Costs and Benefits; • Five (5) Scenarios based on a cost-volume-profit equation Required Volume X Unit Price = Total Cost + Targeted Net Profit (Garrison, 1991; Hilton et al, 2000) 16
  17. 17. MATERIALS AND METHODS • Scenario 1- (Base Case) (S1); costs + ‘other income’ ÷ company’s two products • Scenario 2(S2); total labour given to only garden furniture, other variables remained at Scenario 1 levels • Scenario 3 (S3); total other expenses given to only garden furniture, other variables remained at Scenario 1 levels • Scenario 4(S4); total labour + other expenses given to only garden furniture, volume remained at Scenario 1 level • Scenario 5 (S5)- if company produced only furniture (total volume = furniture + parquet flooring), all costs remained at base (Scenario 1) levels • Economics Analyses’ Computation • Accounting procedure for ‘sell or further process at the split-off-point’ was used for the calculations (Garrison, 1991). 17
  18. 18. RESULTS AND DISCUSSIONSRECOVERY RATE OF CONVERTING LUMBER TO GARDENFURNITURE Table 1: Recovery Rates (%) of Eleven (11) Wood Species Species Average Species Average Wood Species Wood Species Recovery Rates Recovery Rates ODUM/IROKO 65.97 AVODIRE 51.60 MIXED REDWOOD 60.90 DAHOMA 57.35 TEAK 56.10 ALBIZIA 57.23 MAHOGANY 63.78 AKASAA 61.69 AFROMOSIA 55.87 EMIRE 55.28 HYEDUA 63.97 GENERAL AVERAGE RECOVERY RATE = 59.07 • From GDV, (2005) • ODUM/IROKO has very good durability, fungus resistance, very minimal insect infestation and reasonably termite-resistance, and 18 • AVODIRE has Low durability and high susceptibility to fungal and insect attack
  19. 19. RESULTS AND DISCUSSIONS Values/m3 of Lumber (Raw material costs) and Garden Furniture (Income after further processing) • Free-on-Board (FOB) Values/m3 of Lumber (Table 2) Table 2: Annual Cumulative Average FOB Values of Lumber and Garden Furniture Yearly Values/m3 (€) of ProductsProduct Type 2003 2004 2005 Average Value/m3Lumber (KD) 352.980 363.910 387.100 367.997Garden Furniture 1,917.800 2,086.330 1,996.030 2,000.050 SOURCE: TIDD Export Report-2003 to 2005 •Lumber = €367.997 is the raw material cost/m3 for the production of garden furniture, in general • with Average Recovery Rate of 59.07%, implies that 1.693m3 is needed for 1m3 of garden furniture, 19
  20. 20. RESULTS AND DISCUSSIONS • Hence FOB value of lumber (KD) for 1m3 of garden furniture (€367.997 x 1.693m3) = €623.019 • Generally, garden furniture has an average value (FOB) = €2,000.050/m3 • By Products’ income/value= €73.078/m3 ≡ 3.65% of FOB •Total income from garden furniture =€2,073.128/m3 However, the FOB values of different wood species are different - Table 3 20
  21. 21. RESULTS AND DISCUSSIONSTable 3: Annual Average Values (FOB) /m3 of Lumber (KD) and Garden Furniture from Different Wood Species (€)Species of Wood Annual Average Annual Average Value/m3 of Percentage of Difference over Values/m3 of Lumber Garden Furniture Value Difference lumber Odum/Iroko 657.26 2,473.27 1,816.01 276.30 Dahoma 323.05 1,033.42 710.37 219.89 Emire 391.92 961.26 569.34 145.51 Teak 624.68 2,530.18 1,905.50 305.04 M. Redwood 252.95 1,939.32 1,686.37 666.68 Mahogany 605.16 1,722.89 1,117.73 184.70 Avodire 355.87 1,625.58 1,269.71 356.79 Albizia 414.31 792.95 378.64 91.39 Akasaa 525.24 1,179.91 654.67 124.64 Hyedua 511.18 2,283.34 1,772.16 346.70 Otie 333.10 1,598.12* ---------- --------- Afromosia --------- 2,946.93 ---------- ---------- Papao/Apa 613.71 1,613.54* ---------- ---------- Danta 394.44 1,524.90* ---------- ---------- Walnut 376.74 1,840.68* ---------- --------- Sapele 548.18 1,328.43* ---------- --------- 21
  22. 22. RESULTS AND DISCUSSIONSCost of converting lumber to garden furniture forsale - Table 4 Table 4: Average Total Differential/Incremental Costs Due to Conversion of Lumber to Garden Furniture. Amount involved (€) Lumber (KD) 1m3 Garden Furniture Differential/Incremental Cost Item (value of volume for (€2,000.050) Costs & Their Percentages furniture-€623.019) in Furniture Value 1m3 Marketing and Taxes 14.42% = 89.839 13.42% =268.407 178.568 (8.93) Labour 328.298 (16.41) Other Expenses 505.284 (25.26) Other Materials 323 .808 (16.19) Total differential cost 1,335.958 (66.79) Raw material (lumber) (623.019-89.839) 533.180 (26.66) Total Product Cost 1,869.138 (93.45) Source: Study Company and Internal Revenue Service • Thus, €130.912 ≡ 6.55% of the FOB value of garden 22 furniture is left as profit
  23. 23. RESULTS AND DISCUSSIONS  Scenarios indicate that costs range from €1,750.805 (Gh¢2,451.127) S(5) to €2,007.051 (Gh¢2,809.871) S(4),  S(4) is higher than FOB value (€ 2,000.050) of furniture.  This seem to agree with literature that,  Africa’s poor export performance is mainly from high production costs and unfavourable policies of governments(Amjadi and Yeast, 1995).  However, costs differ from one species to another due to differences in values of lumber and furniture as in Table 3. 23
  24. 24. RESULTS AND DISCUSSIONS Scenario Analysis of Costs and Benefits of Garden Furniture (in general) • Additional incomes,-Table 5 Table 5: Additional Income after Producing and Selling Garden Furniture (€/m3) and their Percentages, in relation to Average FOB Value (after marketing cost & Taxes) of lumber needed (€ 533.180) Additional income Percentage Scenarios (€) increase Scenario1(Base case- Vol.=2001.532m3) 203.990 38.25 Scenario 2 (Vol. =2001.532m3) 149.674 28.07 Scenario 3 (Vol. =2001.532m3) 120.393 22.58 Scenario 4 (Vol. =2001.532m3) 66.077 12.39 Scenario 5 (Vol. = 2332.685m3) 334.414 62.72• Additional incomes range from €66.077/m3 ≡Gh¢75.314, (Scenario 4) to €334.414/m3≡Gh¢381.163, (Scenario 5), •represent12.39% and 62.72% value increase respectively, on every 1.693m3 of lumber used to produce and export 1m3 of garden furniture. 24•All are opportunity costs of lumber export
  25. 25. RESULTS AND DISCUSSIONS Scenario Analysis of Costs and Benefits of Garden Furniture from Different Wood Species  Applying the five (5) scenarios, on nine (9) selected wood species, only three (3) were profitable under all the five scenarios -(Table 6). Table 6: Profitability (%) of Nine (9) Wood Species in Relation to the Income obtained from Export of their Lumber Volumes used to Produce 1m3 of Garden Furniture Wood Species Scenario 1 Scenario 2 Scenario 3 Scenario 4 Scenario 5 *Odum/Iroko 33.38 26.94 23.46 17.02 48.86 *M. Redwood 86.94 71.66 63.42 48.14 123.63 *Teak 23.91 18.21 15.14 9.44 37.59 Avodire -18.13 -29.03 -32.29 -41.50 3.96* Mahogany -44.31 -51.00 -54.60 -61.29 -28.25 Albizia -115.85 -124.63 -129.37 -138.14 -94.77 Akasaa -90.39 -97.84 -101.86 -109.32 -27.51 Emire -113.80 -122.74 -127.56 -136.50 -92.34 Dahoma -90.01 -101.28 -107.35 -118.62 - 62.96* Species found profitable and therefore viable for specialization, should the need be. 25
  26. 26. RESULTS AND DISCUSSIONS Losses of the six wood species is attributable to; • low recovery rates, • inadequate value difference between their lumber and garden furniture. • But effect of inadequate value differences is more pronounced; • since conversion process requires about €1,335.958 to cancel all differential processing costs (Table 4), • and value differences for such species range from highest of €1,269.710 for Avodire, to lowest of €378.640 for Albizia (Table 3). Hence with even 100% recovery rate, these species may still not be profitable. 26
  27. 27. CONCLUSIONS Generally, recovery rate from kiln-dried lumber to garden furniture is about 59.07%, different wood species have different, 51.60% to 65.95%. by-products’ income is vital in aiding either profit making or losses reduction. Producing 1m3 of garden furniture costs about €1,750.805 (Gh¢2,451.127) to €2,007.051 (Gh¢2,809.871) , in total However, 1m3 of garden furniture yields additional income in percentage range of 12.39% and 62.72% increase in value, of the total volume of lumber used. Converting kiln dried lumber to garden furniture is generally profitable, but focus should be on Odum (Milicia excelsa), Mixed Redwood, and Teak (Tectona grandis). 27
  28. 28. RECOMMENDATIONS Conversion of lumber to garden furniture should be encouraged to generate more income and employment for the growth of the Ghanaian economy. Odum, Mixed Redwoods and Teak are more profitable species and should be giving priority in reforestation and other plantation efforts. Efforts should always be made to market and sell all by-products of the production process to improve on profits or reduce losses. Tax reductions and other incentives should be used to attract investors into further processing lumber to garden furniture before exports. 28
  29. 29. ACKNOWLEDGEMENT Sincere appreciation is owed to;  Management of Kumasi Polytechnic  Management and Staff of the study company  Dr. N. A. Darkwa of the Faculty of Renewable Natural Resources KNUST-Kumasi  Mr. Albert Zanu- Deputy Chief Accountant of the study company  Messrs, Emmanuel Ben Quansah of Standard Chartered Bank, Ghana Ltd.-Kumasi; Haruna Alhasan, Ecobank Ghana Ltd.-Kumasi  Messrs Kingsford E. Anane and Albert Offei-Nyarko of Timber Industry Development Division (TIDD)- Kumasi; and  Messrs Tuffour Walter and James D.D.T. Dogoli of the Internal Revenue Service in Kumasi. 29 • May all be blessed accordingly!
  30. 30. THANKYOU ALL 30

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