Peru - Pacasmayo Cement Plant Project

R ESTR ICT E D Report N0.T.O. 17-c This document was prepared for internal use in the Bank. In making it available to others, the Bank assumes no responsibility to them for the accuracy or completeness of the information contained herein. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT ON PACASMAYO CEMENT PLANT PROJECT PERU April 13, 1955 Department of Technical Operations  TABLE OF EQUIVALENTS U.S. $ 1.00 S/. 20.00 S/. 1.00 = U.S. $ 0.05 S/. 100,000 U.S. $ 5,000 S/. 1,000,000 a U.S. $ 50,000 1 Metric Ton 5.88 barrels of cement  REPOtT ON PAt1SWI-YO CEMENT PUi NT PROJECT PERU Table of' Contents Page Numbers I. Stmmary 1-2 II. Purpose and Scope of Ehis Report 3 III. Estimated Cost of the Project 3 IV, The Borrower 3 V. Description of the Project 14 VI. Raw Materials 4 VII. Estimated Cost Qf Production 4 5 VIII. Cement Production and Market Oxtlook 5 IX. The Market for Cement in Northern Peru 6 X. Justification of the Project 6 -7 XI. Financial Results from the Project 7 -8 XII. Conclusions and Recommendations 8 Table I Table II Table III Table IV Table V Table VI Figure I Figure II Map  REPORT ON PA CASPNYO CEIvENT PLAN T PROJECT P E R U I. Summary 1. The Compania Nacional de Cemento del Norte, S.A., a privately owned company, has requested a loan equivalent to US$2.5 million to help finance a cement plant at Pacasmayo, Peru. The total cost of the project is estimated to be equivalent to US$5 million, including interest during con- struction, starting up costs and working capital. 2. Ihe company has an authorized share capital of S/. 50 million (US$2.5 million), of which S/. 18.5 million has been paid up. The company has a binding obligation from the subscribers to pay up the remainder when called. Management is made up of responsible Peruvian businessmen. Technical supervision will be handled by the German firm of Miag IThlenbau und Industrie G.m.b.H. until local personnel can be trained in cement mill operation. 3. The plant, with an annual capacity of 100,000 metric tons, will be located at Pacasmayo, 656 kilometers north of Lima. The market in the area is estimated to be sufficient to absorb the capacity of the plant. 4. lIhe plant will use the conventional wet process and will include complete power plant facilities. Raw materials in the vicinity are suitable for the manufacture of cement and proven reserves are sufficient to operate the plant for more than 25 years. 5. The production cost of cement, including interest charges, when the plant is operating at full capacity, is estimated at S/. 250.49 (US$12.52) per metric ton. This cost compares favorably with similar costs in Peru and in other countries, 6. Currently, Lima cement is selling for S/. 337.98 (us$16.90) at the factory and for S/. 443.82 (US$22.19) at Pacasmayo, excluding dealerst markup while imported cement is selling at the equivalent of about US$28.00 per ton. Accordingly, a selling price of about S/. 400 per ton appears justified for cement to be produced by the Pacasmayo Company and at such price the company should have a market for its product in the northern area of Peru. 7. Estimated earnings indicate adequate coverage of interest charges and return on share capital and the estimated statement of receipts and disbursements indicates satisfactory coverage of debt service. 8. The project is considered suitable as a basis for a loan for the eouivalent of US$2.5 million, wtich amounts to about 75% of the foreign currency requirements. A term of 15 years with a grace period of three years is considered reasonable for a loan on this project.  - 2 - 9. Ihe following objectives should be talcen into consideration if a loan is negotiated on this project. 1. Engineering consulting services satisfactory to the Bank should be retained during design and construction of plant. 2. A superintendent acceptable to the Bank with broad experience in operation of cement plants should be engaged for the technical management of the plant. 3. A sound financial condition should be maintained by the company, with adequate working capital and a reasonable relationship of equity to debt. In this connection, it is suggested that the company should not: a) incur debt to a point where it would exceed equity; b) acquire stock; c) pay dividends except out of accumulated net earnings.  II. Purpose and Scope of This Report 10. Ihis report presents an analysis of the Pacasmayo cement plant project to determine the suitability of the project as a basis for a Bank loan. It is based on information supplied by the management of the company; reports prepared by the engineering firm of Knowles Associates, which was retained by the company to study the project and analyze bids from suppliers; data from equipment manufacturers submitted to the company, and on field investigations by members of the Bank's staff. III. Estimated Cost of the Project 11. The total cost of the project is estimated at about US$5 million as shown below: Estimated Cost of the Project 2/ Foreign Local Item Exchange Currency Main plant $ 2.97 $ 1.08 Quarry - installations 0.20 0.05 Interest during construction 0.18 Land and quarry 0.25 Other expenses 0.05 Working capital 0.22 Sub-Total $ 1.65 Grand Total $5.00 12. ,Uorking capital is estimated on the basis of cash requirements for about three-month operation. IV. The Borrower 13. hle Borrowver would be the Compania Nacional de Cemento Portland del Norte, S.A. This company was organized in 194i9 for the purpose of erecting a cement plant at Pacasmayop Peru. It has an aut..orized share capital of S/. 50 million (U4$2.5 million), of which S/. 18.5 million has been paid up. Ihe company has a binding obligation from the subscribers to pay up the remainder when called. lb. The management of the company is under a competent Board of Directors, composed of w4ell known and responsible businessmen from manu- facturing, construction, and allied fields. HowJever, since the company is newly formed and has no experience in the construction or operation of cement plants, it should retain the services of a consulting engineer to supervise construction and it should engage a general superin- tendent to operate the plant after it is completed. g/ See Table I in Appendix  - 4 - V. Description of the Proiect 15. The project involves the construction of a cement plant of 100,000 metric tons annual capacity (350 tons daily) at Pacasmayo in Northern Peru. The plant will be of conventional design employing the wet -rocess. 16. The limestone and shale quarries are located near Tembladera, 60 kilometers by road from the factory site. The primary crushers are to be located at the quarry. The crushed rock will be trucked to the plant over a newly paved all-weather highway. 17. International bids for a complete cement plant with necessary equip- ment and installations, including construction and erection of works were asked for in the fall of 1954. The consulting firm of Knowles Associates analyzed the bids and recommended that the contract be awarded to Hiag of Germany. In accordance with Miag's bid, the plant can be designed, delivered and erected ready for operation within 25 months. Miag will train local operating personnel during the first 12 months of operation. VI. Raw Materials 18. The limestone deposit owned by the company covers an area of about two square kilometers. Test drillings have proven reserves of 3.5 million tons or enough material to operate a plant of 100,000 tons annual cap-;city for more than twenty-five years. Unproven reserves in the same deposit are estimated at 100-300 million tons. 19. Shale, another raw material, is also located near the town of Tembladera. Reserves are estimated at 1.0 million tons. Since shale consump- tion amounts to 15% of the limestone consumption, reserves are more than adequate for the project. 20. Gypsum, which is needed in small amounts (4% of finished cement) will come by truck from an area near Trujillo whieh is about 150 kilometers from the proposed plant site. 21. Oil from the Talara field is to be used as fuel. This will be trans- ported by sea from Talara to Pacasmayo and pumped to the factory storage tanks. VII. Estimated Cost of Production 22. The factory cost of the cement when the plant is operating at full capacity is estimated at SI. 227.08 (US$tL1.35) per ton before interest charges and S/. 250.49 (TUS$12.52) per ton including interest. (See Table No. II in the Appendix.) These costs are considered to be reasonable and compare favorably with similar costs at Lima and in the United States. 23. Most of the areas, although close to coastal ports, are spplied by truck shipments from Lima. The reason for this is that the cement arrives in better condition by truck with less lose during handling. Talara is the only town in the north which regularly receives cement by ship.  24. It may be seen in Table III in the Appendix that the delivered price of Lima produced cement in the more distant northern Dart of the country is quite high, although it is still cheaper than cement imported from Japan at about US$28.00 per ton (S/, 560) or from England at a price of about US$33.00 (S/. 660) per ton ex-duties; duty is about S/. 70.56 (USt3.53) per ton. 25. Assuming selling prices of SI. 360 and S/. 400 per ton of cement at Pacasmayo, the estimated cost of cement in various towns is compared in the following table with the present cost of Lima cement, using the average commer- cial truck rate of S/. 0.20 per ton kilometer. This comparison indicates that under present conditions, with a selling price of up to S/. 400 per ton at Pacasmayo, the resulting selling price, including freight, would be below the present delivered price of Lima cement at eight of the ten points shown. Estimated Delivered Price of Pacasmayo Cement in Northern Peru Distance Pacasmayo Assumed Delivered Price from Freight Selling Price Lima Cement Pacasmayo S/. plus Freight per ton Citv (Kiloters) rer ton S/. per ton S/. per ton (a) (b) Pacasnayo - - 360.00 400.00 443.82 Trujillo 106 21.20 381.20 421.20 432.06 Chimbote 236 47.20 407.20 447,20 408.52 Chiclayo 104 20.80 380.80 h20.80 443.82 Piura 376 75.20 435.20 475.20 514.38 Sullana 415 83.00 443.00 483.00 514.38 Talara 509 101.80 461.80 501.80 494.39 Tumbes 677 135.40 495.40 535.40 573.18 Cajamarca 197 78.80 438.80 478.80 573.18 Jaen 420 168.00 / 528.00 568.00 713.00 21 Excluding dealers' markup LI At double rates because of road conditions VIII. Cement Production and Market Outlook 26. Cement is now being produced in Peru at Lime and Chilca with a combined potential outpllt of about 520,000 tons annually. During the last two years, consumption outstripped production and cement has been in short supply. Imports took care of only the most urgent demands and some construc- tion projects were delayed because of the scarcity of cement. A nominal price for cement exists for each town but because of the shortage, a premium market has developed in many areas where cement is availblea to small consumers only at prices of 11% to 33% above the nominal price. 27. Over a long period cement consumnption has been increasing at an average annual rate of 8.5% (see Appendix, Figure I). On this basis, consump- tion would be expected to reach 650,000 tons by 1958. Actual consuption during recent years has increased at a much higher rate.  IX. The Market for Cement in Northern Peru go, Ihe proposed plant would serve all the coastal area from Chimbote nrth to the border of Ecuador (the 'Northern Zone). In this zone are some *f the major agricultural, petroleum and mineral regions of the eountry. tab The distribution of cement, based on sales' records of the Lima