FILE COpy DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No. 218a-.YU APPRAISAL OF KIKINDA IRON FOUNDRY EXPANSION PROJECT YUGOSLAVIA November. 5, 1973 Industrial Projects Department This report was prepared for offical use only by the Bank Group. It may not be published. quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report. CURRENCY EQUIVALENTS Except where otherwise indicated, all figures are quoted in Yugo- slav Dinars (Din). Us$ 1 = in 15.5 Din 1 u os$o.o645 Din 1,000 US$64.516 WEIGHTS AND MEASIURES All units are metric, except pipe diameters which are in inches. 1 metric ton = = 1,000 kilograms (kg) 1 metric ton = 2,204.6 pounds 1 kilometer (km) = 0.62 miles 1 cubic meter (i3) = 35.32 cubic feet (cu ft) ABRRETIALT[ONS AND ACRONYMS FOB - Fabrika Odlivaka Beograd KIKINDA, the Company - Livnica Zeljeza i Tempera SAS - Social Accounting Service TPY - (metric) Tons Per Year UMI - Udruzena Metalska Industrija YIB - Yugoslav Investment Bank ZASTAVA - Zavodi Crvena Zastava KIKINDA FISCA-L YEAR January 1 - December 31 Industrial Projects Department October 1973 YUGOSLAVIA - KIKINDA IRON FOUNDRY EXPANSION PROJECT TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS i-iii I. INTRODUCTION ........................., 1 A. General ......................................... 1 B. The Role of the Bank ........1..................... I II. TFE COMPANY ......................................... 2 A. Background ...................................... 2 B. Organization and Management ............... 3 C. Plant Facilities ............................ 3 D. Past Growth and Financial Results ................ 4 E. Recent Financial Position .................... ... 5 III. THE MARKET ................ 5 A. Supply and Demand ............................... 5 1. Castings .................................... 6 2. Machine Tools ................... 7 B. Kikinda's Market Position and Sales Forecasts ... 8 1. Castings ................. .. .................. 8 2. Machine Tools ................ , 9 3. Sales Build-up and Destination of Sales ...0.. t 4. Marketing Organization ...................... 11 C. Prices and Competitive Position .............. ... 11 1. Export Incentives ........... .. .............. 12 2. Protection . .. .................... ............ 12 IV. TEE PROJECT .................... ..................... 12 A. Objectives and Scope ..... ....................... 12 B. Observations ....... ............................. 13 C. Ecology . . .............. 14 D. Labor Force . . . ......... 14 E. Project Execution ...... ......................... 15 F. Project Timing .................................. 15 V. CAPITAL COST AND FINANCING PLAN ..................... 15 A. Project Cost .................. .................. 15 B. Working Capital ................ ................. 17 C. Financing Plan ................. 17 D. Procurement and Disbursement ......... .. ......... 19 - 2- TABLE OF CONTENTS (continued) IV. REVENUE, RAW MATERIALS, AND PRODUCTION COSTS ........ 19 A. Sales Revenues .................. ................ 19 B. Raw Materials .................. ................. 20 C. Production Costs ................................ 20 VII. FUTURE PROFITABILITY AND FINANCIAL POSITION ......... 21 A. Profitability ................................... 21 B. Financial Position .............. .. .............. 22 C. Financial Rate of Return ........................ 23 D. Debt Service Coverage ............ .. ............. 24 E. Break-Even Points ........... o .... ............... 24 F. Major Risks ....... .............................. 25 G. Accounting and Audit Requirements ............... 25 VIII. ECONOMIC JUSTIFICATION ...... ........................ 26 A. Economic Rate of Return ..... .................... 26 B. Competitiveness ....... .......................... 26 C. Linkages and Employment ..... . 26 D. Comparative Advantage ......... .27 E. Estimated Foreign Exchange Effects .............. 27 IX. RECOMMENDATIONS ....... ............................... 27 ANNEXES 1-1 Description of Terms and Production Processes 2-1 Workers' Self-Management and Organization Chart 2-2 Description of Existing Facilities 2-3 Historical Income Statement 2-4 Historical Balance Sheet 3-1 Market for Iron Castings 3-2 Market for Machine Tools 3-3 Sales History and Forecasts 4-1 Proposed Facilities 4-2 Plant Layout 4-3 Ecology 4-4 Labor Force Projections 4-5 Project Implementation Schedule 5-1 Capital Cost Estimates 5-2 Working Capital Requirements 5-3 Equipment to be Financed by the Bank 5-4 Disbursement Schedule 6-1 Ex-plant Selling Price Projections 6-2 Raw Materials and Utilities 6-3 Production and Production Costs 7-1 Projected Income Statements (with expansion) 7-2 Source and Application of Funds (with expansion) 7-3 Balance Sheet Projections (with expansion) 7-4 Projected Income Statements (without expansion) 7-5 Balance Sheet Projections (without expansion) 7-6 Assumptions for Financial and Economic Rate of Return and Financial Sensitivity Analysis 7-7 Foreign Fund Sources and Uses 7-8 Break-Even Point 8-1 Inputs for Economic Rate of Return and Economic Sensitivity Analysis 8-2 Foreign Exchange Earnings 8-3 Indirect Employment Generation MAPS (IBRD 10504R1) Main Foundry Locations (IBRD 10503R1) Location of Plant and Raw Material Sources This report was prepared by Messrs. S.P. Nayar, I. Glenday and Y.T. Shetty of the Industrial Projects Department. YUGOSLAVIA KIKINDA IRON FOUNDRY EXPANSION PROJECT SUMMARY AND CONCLUSIONS i. This report appraises the expansion of Livnica Zeljeza i Tempera (Rikinda), one of the largest producers of iron castings and the only producer of grinders--a machine tool--in Yugoslavia. The project is located in the town of Kikinda, Vojvodina Province, about 130 km north of Belgrade near the border of both Hungary and Romania. The project would increase the annual production capacity of Kikinda from 19,900 tons of castings to 39,000 tons; from 4,000 tons of pipe fittings to 6,400 tons; and from 350 units of machine tools to 460 units. The estimated financing required for the project, in- cluding interest during construction and incremental working capital, is Din 591 million (US$38.1 million equivalent), of which the foreign exchange component would be equivalent to Din 290 million (US$18.7 million)--about half of total total financing required. Implementation of the project is about to begin and is expected to be completed by early 1977. ii. Since 1967, the Bank has made three loans to industry in Yugoslavia amounting to US$45 million equivalent, using the Yugoslav Investment Bank as a channel, for the modernization and expansion of 19 industrial projects which were individually appraised by the Bank. However, in order to maximize the impact of Bank lending to industry in that country, the Bank has modified its lending strategy to include direct industrial loans to large projects of key economic importance if long-term finance on reasonable terms cannot be obtained from other sources. It is also envisaged that at some later date ir.direct lending for small and medium size industrial projects would be pro- vided through a line of credit. iii. It ,-s in this context that the Federal Government has asked the Bank to help finance this high priority project which would thus become the first recipient of a direct Bank loar, to industry in Yugoslavia. The loan, in the amount of US$14.5 million equivalent, would f'inance the foreign ex- change cost of competitively - bid equipment and spares, and would be for 14 years, inchuding 4 years of grace, with ar. effective interest rate of 9% per annum, including guarantee fees to the Autonomous Province of Vojvodina where the plant is located. Tne loan would help meet approximately 41% of the cost of the project; the remaining 59% would be financed entirely from internal cash generation, including US$1.2 million in foreign exchange. In addition US$3 million required for interest payment during construction will be met from internal cash generation. iv. The Bank loan would finance the c.i.f. foreign exchange cost of equipment and spares. Since all equipment that could be procured locally has been allocated to local currency expenditures, Yugoslav manufacturers are not expected to bid directly for Bank-financed equipment. For the purpose of bid comparisons, preference would be given to local components - ii - of foreign bids to the extent of 15% of the price of such components or actual customs duty on similar imported components, whichever is less. v. The project is linked to the anticipated expansion of industries in Yugoslavia such as agricultural machinery, electrical equipment, building construction, commercial vehicles and automobiles, machine tools, consumer durables, rail wagons and shipbuilding. These industries are targetted to ex- pand at over 8.5% per year on average during the current Five-Year Social Plan (1971-75). Their rapid growth would not be possible without the availability of castings and machine tools, which would have to be imported (under tight world supply conditions as far as castings are concerned) if domestic output were not expanided. vi. Kikinda's project is export-oriented as well. In 1972, nearly 35% of the Company's sales revenue of Din 296 million (US$19.1 million) came from exports. By 1977, when the project is expected to be fully operational, exports would account for more than half of total revenue estimated at Din 713 million (US$46 million). Furthermore, average net foreign exchange earnings and savings to the economy resulting from the project are expected to be US$17 million per year, offsetting in just over one year after project comple- tion the entire foreign exchange cost of the project. Faced with mounting debt repayment obligations on short and medium-term suppliers' credits, and an increasing gap in the balance of trade, Yugoslavia has a critical need to raise its foreign exchange earnings from exports through the expansion of competitive industries and to save foreign exchange by import substitution. vii. Markets for Kikinda's products appear well assured and the Company has established a good name for high quality, both at home and abroad. In general, the existing shortage of castings in the world is expected to con- tinue because, in developed countries, it is becoming more difficult to attract labor to work in foundries and wages in the relatively labor-intensive produc- tion of castings and machine tools have increased costs there substantially. Kikinda's prices are generally lower than those for comparable products in Western Europe. Even if international prices were to fall by 10% from the levels assumed in the financial projections, most of the Company's products would still be competitive. viii. Kikinda has a young, dynamic and efficient management team and is headed by a capable General Manager, who was elected in 1971 for a four-year term by the Central Workers' Council, the supreme management body of the enterprise. The General Manager is supported by an Executive Board consis- ting of eight members from the Council. In practice, the management makes all major decisions and has the full cooperation of the Council. ix. The Company has a sound financial position which provides a good base for expansion. Since a major portion of the project cost is expected to be financed from the Company's internal cash generation, debt as a per- centage of eqtuity plus debt is expected to remain consistently below 40% even during the construction period. Long-term debt service coverage would - iii - be above 2.5 times during project implementation and reach the high level of 3.9 in 1978, the first year of repayment of the Bank loan. Furthermore, it is estimated that the project has high financial and economic rate3 of return of 19% and 18% respectively and, even under foreseeable adverse conditions, the probability is low that they would drop below 15%. x. Based on agreements reached during negotiations on necessary commit- ments as summarized at the end of the report, the project is suitable for a Bank loan of US$14.5 million equivalent. A guarantee fee of 1-3/4% per annum is to be paid to the Autonomous Province of Vojvodina by the Company in addi- tion to the Bank's normal lending rate. I. INTRODUCTION A. General 1.01 This report appraises the proposed expansion project of Livnica Zeljeza i Tempera (Kikinda) 1/, one of the major castings producers and the only producer of grinding machines in Yugoslavia. The plant is situated at Kikinda, a town about 130 km north of Belgrade and about 5 km south of the Romanian border, in the Autonomous Province of Vojvodina. The project would increase Kikinda's capacity for castings from 19,900 to 39,000 metric tons per year (TPY); pipe fittings from 4,000 to 6,400 TPY; and machine tools from 350 to 460 units, including broadening of the product range. The project is expected to be completed by early 1977. The total financing required, including interest during construction and an increase in working capital, is Din 591 million equivalent (US$38.1 million), of which about Din 224.8 million (US$14.5 million) will be for imported equipment.and spares. The proposed Bank loan of US$14.5 million would cover the entire foreign ex- change cost of equipment and spares. 1.02 This loan would be the first direct Bank loan to industry in Yugoslavia, all Bank loans in this field since 1967 having been channeled through the Yugoslav Investment Bank (YIB). The Borrower, therefore, would be Kikinda. Following an industrial identification mission in 1971, eight industrial projects were submitted to the Bank for financing, of which the expansion of Kikinda was one of the projects selected. Another selected foundry expansion project - that of Fabrika Odlivaka Beograd (FOB) - has also been appraised and will be presented shortly to the Executive Directors for consideration. 1.03 The expansion programs of the Kikinda and FOB foundries are on the Government's priority list for industrial development. They are considered vital for the fu-rther growth of the country's engineering industries, in par- ticular those producing machine tools, agricultural machinery, motor vehicles, ships, electrical as well as non-electrical equipment, and consumer durables. Some of the enterprises in these sub-sectors have already started their ex- pansions in anticipation of the additional castings from the two projects; the foundry projects should, therefore, be executed without delay. 1.04 The Kikinda project was appraised by a mission which visited Yugoslavia in April/May 1973 and which consisted of Messrs. Nayar (Chief), Glenday and Shetty of the Industrial Projects Department and Mr. Paschke (Consultant). Foundry terms and production processes are briefly described in Annex 1-1. B. The Role of the Bank 1.05 In its bid for acceierated economic development, Yugoslavia has been relying heavily on short aid mediunm-term suppliers' credits. The 1/ This Company is commonly referred to as the Kikinda Iron Foundry. -2- rapidly growing debt service payments over the last 5 years have been a serious problem. To reduce its dependence on suppliers' credit, Yugoslavia is exploring the possibility of long-term finance on reasonable terms from foreign sources, including the Bank. 1.06 In view of past experience with three indirect Bank loans totalling US$45 million for the modernization of 19 industrial enterprises, spreading the impact of Bank lending thinly, the Bank has decided to undertake direct lending to a few selected projects of national importance in Yugoslavia, in those cases where the projects are not suited for IFC participation and/or cannot obtain long-term financing on reasonable terms, while continuing in- direct lending for small and medium size industrial projects through a line of credit. As Kikinda does not require foreign joint venture participa- tion, nor does it wish such participation - at least not at this time - to provide technology, market strategy or market outlets, Bank participation appears appropriate. Furthermore, the Company tried unsuccessfully to obtain adequate external financing on reasonable terms from other foreign sources before approaching the Bank. While Kikinda was able to obtain com- mercial - type financing from Barclays Bank (para. 2.02), this was not anywhere near the amount of foreign exchange credit that it is now seeking. II. THE COMPANY A. Background 2.01 Plant operations of what is now Kikinda started in 1908 with a brick factory; production of malleable and gray iron castings was added in 1934, machine tools in 1951, and malleable pipe fittings in 1954. Since then the enterprise has undertaken a series of expansion programs, raising its annual production capacity to the following current levels: malleable castings, 11,500 tons; nodular castings, 4,500 tons; gray castings, 900 tons; finished pipe fittings, 4,000 tons; and machine tools, 350 units. Expansion of nodular castings' capacity from 4,500 to 7,500 TPY is underway (para. 2.02). 2.02 Kikinda is one of seven enterprises which benefited from a 1967 Bank loan (504-YU) channeled through YIB. Under this loan, the Company re- ceived the equivalent at the time of UTS$1.1 million (Din 13.8 million) to meet foreign exchange costs for expanding the malleable foundry and for replacing an old gray iron foundry with a new facility for both gray and nodular cast- ings. There was a delay of one year in project completion and a cost overrun of about Din 7 million (from Din 37 million to 44 million), mainly because procurement was slower than anticipated, partly due to the enterprise's lack of experience in international competitive bidding procedures and acceleration of inflation in Yugoslavia and abroad. The project was completed in 1971 and following it, the Company borrowed US$348,000 equivalent from Barclays Bank of London to increase further its capacity of nodular castings from 4,500 to 7,500 tons annually by the end of 1973. This expansion program is nearing completion as scheduled. 3 B. Organization and Management 2.03 Kikinda - as is usual in Yugoslavia - is managed by its workers. It has no subsidiaries. The self-management system is explained in Annex 2-1, which also contains an organization chart of the enterprise. The supreme managing body of the Company is the Central Workers' Council, consisting of 28 members elected by the workers for a period of two years. This body for- mulates the policy of the enterprise and approves major investment plans, annual budgets, and disposition of income. It also elects the top management of the Company. Kikinda's key executive is its General Manager, Mr. Pajic, who was elected by the Workers' Council in 1971 for a four-year term. He is eligible for a second term. 2.04 Mr. Pajic has had 12 years of experience with the Company in various managerial and technical positions, and was Deputy General Manager before election to his present position. The General Manager is assisted by an Executive Board, a body drawn from the Workers' Council, and responsible for day-to-day operations of the enterprise. The Board consists of 9 members - 8 from the Workers' Council and the General Manager. The General Manager is independent of the Board in his functions and is responsible only to the Workers' Council. In practice, the management takes all major decisions and has the full cooperation of the Workers' Council. 2.05 The General Manager has delegated most of the day-to-day operational responsibilities to his Deputy General Manager, Mr. Ruzin (who was also elected in 1971), while he concentrates on the development aspects of the Coompany. The members of Kikinda's management are well trained and experienced. They constitute a young, dynamic group, whose average age is about 40 years. Key officials are supported by sufficient qualified persons and the present arrangement is considered effective. According to Yugoslav law, no company can imerge or consolidate without protecting the rights of third parties concerned. During negotiations, it was agreed that the Company will not sell, Lease, Zransfer or assign its rights or assets without the prior consent of xhe Bank. C. Plant Facilities 2.06 The existing facilities include a malleable iron foundry; a gray and nodular iron foundry, a fitting finishing plant, a machine tool plant, a quality control laboratory, and supporting ancillary facilities. They are described in detail in Annex 2-2. The plants are well operated and maintained. However, several factors pose constraints on production. They include: im- balances between melting, molding, and heat-treatment facilities in the found- ries; partly outdated machinery, which makes it difficult to achieve the close * tolerance required for machine tool production; and antiquated facilities for power supply and heating. The proposed expansion project is intended to over- come these shortcomings. 2.07 The enterprise has a unit responsible for safety aspects and acci- dent prevention, but measures taken so far are less than satisfactory. As greater emphasis is needed in this area, the Bank has been assured by the Company during negotiations that it will improve and maintain an appropriate safety program. D. Past Growth and Financial Results 2.08 As a result of previous expansions (as shown in the following table), the Company increased its net sales from Din 115.8 million in 1968 to Din 296.0 million in 1972, an increase of 156% over a period of four years, and net profits jumped from Din 8.3 million to 27 million during the same period (Annex 2-3). It should be noted that during 1968-71, the Company did consid- erably better in terms of sales and cash generation than forecasts contained in the previous appraisal (Report No. LA-2a, dated June 29, 1967). Sales and Earnings, 1968-1972 1968 1969 1970 1971 1972 Sales Volume (tons) Castings (incl. pipe fittings) 6,620 8,096 7,954 10,760 13,258 Machine Tools 616 884 870 868 854 Sales & Earnings (Din million) Net Sales /1 115.8 173.3 359.0 234.2 296.0 of which: Machine Tools 26.6 38.0 36.6 57.4 75.1 Net Income 8.3 6.9 4.7 13.7 27.0 Net Income as % of Net Sales 7.2 4.0 3.0 5.9 9.1 /1 Including revenue from machine tool servicing not shown in product breakdown. 2.09 Kikinda has been expanding its production and sales by concentrating on higher quality products, starting new product lines and closing unprofitable ones (e.g. stoves and lathes). The Company has established a name both at home and abroad for its products, especially foundry products which, in 1972, ac- counted for nearly 60% of net sales and which have a low rejection rate of 2% or less. Furthermore, the Company's exports have been growing at an average annual rate of 55% during the last four years; they represented 35.0% of net sales in 1972. 1/ Capacity production has consistently been very high. As a matter of fact, in 1972 the Company operated above its rated capacity in all departments except the nodular foundry. In the case of nodular castings, a newly-introduced product line, full capacity utilization is anticipated by the end of 1973. 1/ Kikinda's export performance is described in greater detail in paras. 3.13 and 3.14. 2.10 Net income in the above table is understated because of high depre- ciation charges and the practice of charging to operations certain costs associated with expansion investments. Net income as a percentage of net sales increased from 7.2% in 1968 to 9.1% in 1972, with an intermittent dip in 1969 and 1970 mainly due to the charging of interest during construction and start-up expenses to operations in accordance with Yugoslav law. Kikinda's record of production, sales, and earnings thus indicates that it is a growing and profitable firm. E. Recent Financial Position 2.11 Balance sheets for the past five years (1968-1972) are given in Annex 2-4, and the balance sheet as of December 31, 1972 is summarized below: Kikinda's Balance Sheet, as of December 31, 1972 (in Din million) Assets Liabilities Cash and Bank 16.1 Accounts Payable 53.6 Receivables 56.0 Current Portion of Inventories 71.2 Long-Term Debt 7.7 Total Current Assets 143.3 Total Current Liabil- ities 61.3 Net Fixed Assets 51.6 Long-Term Debt 51.5 Others 37.5 Equity /1 119.6 232.4 232.4 /1 "Equity" includes the Business Fund, Collective Consumption Fund, Reserve Fund and Mutual Reserve Fund; they are explained in Anmex 7-3, pages 4 to 6. 2.12 It can be seen that the Company's financial stnrcture is sound, with a current ratio of about 2.3:1 and a debt/equity ratio of 30/70. This reflects the fact that the Company has been able to finance its past expansions primarily by internal cash generation, and thus provides a good financial base for the expansion project. Furthermore, net fixed assets are likely to be understated because of the accelerated depreciation and other write-offs mentioned above. III. THEI MARKET A. Supply and Demand 3.01 A detailed analysis of the market for foundry products (castings) and machine tools is provided in Annexes 3-1 and 3-2. -6- 1. Castings 3.02 There are some 250 foundries in Yugoslavia, of which about 50 ac- count for 90% of total output. In 1972, total production of castings, in- cluding steel and non-ferrous castings which make up some 18% of the total, was about 453,300 tons; total iron castings output - i.e. Kikinda's line of production - was about 373,000 tons, of which 92% was gray castings, 5% mal- leable castings (including pipe fittings) and 3% nodular castings. Taking into account the present expansion plans of various Yugoslav foundries, in- cluding those of Kikinda and FOB, it is likely that the output of iron cast- ings in the countrv will increase to 575,000 tons in 1977, or by an average annual rate of 9%. 3.03 The following table summarizes past and projected demand and sup- ply of iron castings in Yugoslavia through 1977: Yugoslavia-Demand/Supply Comparisons for Iron Castings (000 tons) Average Annual 1968 1972 1973 1977 Growth Rate (%) --actual--- --forecast-- 1968-72 1972-77 Production 260.0 373.0 418.0 575.0 9.5 9 Imports 4.0 14.0 15.0 25.0 37 12 Total Supply 264.0 387.0 433.0 600.0 10 9 Domestic Consumption 212.7 321.0 375.0 609.0 11 13.5 Exports 51.3 66.0 72.5 100.0 6.5 8.5 Surplus (deficit) 0.0 0.0 (14.5) (109.0) 3.04 Domestic consumption of iron castings increased at an annual rate of 11% during 1968-1972, reaching 321,000 tons in 1972. Considering the plans for accelerated industrial development in Yugoslavia and based on an industry by industry assessment of their needs for castings, consumption in the future is likely to grow at 13.5% per year, reaching 609,000 tons in 1977. The main consumers of castings are producers of agricultural machinery, motor vehi- cles, machine tools, electrical and non-electrical equipment, consumer dura- bles, and rail wagons, as well as the construction and shipbuilding industries. 3.05 Yugoslavia is a net exporter of iron castings. Important export markets for it have been the Federal Republic of Germany, France, Italy, Bulgaria, Poland, Romania and the U.S.S.R. In 1972, exports reached 66,000 tons (about 18% of production) of which about 65% and 35% respectively went to convertible and clearing area countries. Imports, on the other hand, amounted to only 14,000 tons and consisted mainly of items which are not produced in Yugoslavia. In the future, exports to convertible as well as clearing area countries are expected to grow at an annual rate of 8.5%, while imports are projected to increase by 12% a year from the present low base. 3.06 Based on the above projections, and as shown in the above table, Yugoslavia is expected to have a shortage of some 9,000 tons of iron cast- ings in 1977 to meet internal demand alone, or a gap of about 109,000 tons - 7 - when the export demand is taken into account. Some further expansion of capacity beyond that already contemplated would, therefore, appear necessary to meet the anticipated domestic and export demand. Furthermore, the ex- port potential might well be greater than assumed here. There is a short- age of castings in the world that is expected to continue at least in the foreseeable future, primarily because, in developed countries, which are responsible for about 90% of castings' output, it is becoming more dif- ficult to get labor to work in foundries despite high wages, and stringent pollution controls there have increased capital as well as production costs. 2. Machine Tools 3.07 Production of machine tools in Yugoslavia did not start until after World War II, when a limited range was manufactured in small quantities. Since then production has been growing fast and the range of machine tools produced has been expanded. However, as shown in Anmex 3-2, over the past five years (1968-1972) consumption of machine tools has been increasing even faster than production and dependence on imports has continued to increase. It is expected that in the near future Yugoslavia will have to continue im- porting a major share of its requirements of machine tools, as additions to local production capacity are not expected to keep pace with growing demand. It should be noted that the anticipated 1972-77 average annual growth rate in machine tool consumption of 8.5% as compared to the 16% during the 1968- 72 period does not reflect a softening of demand but merely an adjustment of the distortion in the former growth rate that was due to the extraordinarily high increase in Yugoslavia's machine tool consumption in 1972. The average growth rate between 1968 and 1977 would be about 12% per year, slightly higher than it had been during 1968-71 (11%). 3.08 However, the overall market development for all machine tools is not very relevant for Kikinda's market prospects in this area (other than setting the general framework) since its production is directed to only a rather specialized market segment - that of grinding machines of which, as was mentioned previously, the Company is the sole producer in the country. In Yugoslavia, as in most other industrializing and developed countries, demand for grinders has been increasing more rapidly than for most other types of machine tools. The important domestic users of grinders are the motor vrehicle, tractor, ball bearing and machine tool industries. The following table summarizes the past and projected demand and supply for grinders in Yugoslavia through 1977: - 8 - Yugoslavia: Demand/Supply Comparisons for Grinding Machines 1968 1972 1977 Average Annual Growth Rate (X) -------units --- 1968-1972 1972-1977 Production 124 271 380 21 7 Imports /1 90 90 330 0 29 Total Supply 214 361 710 Domestic Consumption /1 207 340 570 13 11 Exports 7 21 140 25 46 /1 Includes certain types of grinders not produced in Yugoslavia. 3.10 Domestic consumption of grinders is projected to increase by 12.5% annually up to 1975, reaching about 485 grinders in that year and thereafter at about 8.5% reaching some 570 grinders in 1977. Domestic production of grinders is expected to increase from 271 units in 1972 to 380 units in 1977, equivalent to a growth rate of 7% per year, of which, however, only 240 units are destined for domestic consumption since 140 units (37%) are intended to be exported. The supply gap of 330 units in 1977 including certain types of grinders (centerless and special purpose grinders) not produced in Yugoslavia, will have to be met from imports. However, Kikinda, being the only producer in the country, has plans for further future expansions of its grinder pro- duction capacity to narrow this gap, closely watching changes in technology and consumer preference. 3.11 Exports of grinders increased from 7 machines in 1968 to 78 machines in 1971; but dropped sharply to 21 machines in 1972, partly due to the expira- tion of the licensing arrangement of Kikinda with Fortuna, a German manufac- turer of grinders, and the consequent stoppage of sales through Fortuna; and partly due to the pressing needs in the domestic market. The exports of grinders are expected to increase from the present low base to about 140 units by 1977 on the basis of contracts already concluded by Kikinda and others now being negotiated. B. Kikinda's Market Position and Sales Forecasts 1. Castings 3.12 Kikinda has become one of Yugoslavia's largest producers of malle- able and noduj.ar iron castings, but has only a negligible position in the country's production of gray castings, which the Company makes only to meet its own requirements in the manufacture of machine tools. As the result of the project, the Company will further increase its market position in malle- able and nodular castings but stay with its present share in gray castings as shown in the following table: - 9 - Production, Demand and Kikinda's Share by Type of Castings (in tons) Country's Domestic Kikinda's Production Demand Deficit Production 1967 1972 1977 1977 1977 1967 1972 1977 Malleable and Pipe Fittings 10.5 20.3 28.8 30.5 (1.7) 5.8 9.2 19.5 Gray 242.0 341.6 522.2 548.0 (25.8) - /1 0.7 1.5 Nodular 1.0 11.0 24.0 30.5 (6.5) - /2 3.3 16.0 Total Castings 253.5 372.9 575.0 609.0 (34.0) 5.8 13.2 37.0 /1 The Company had virtually no production of gray castings in 1967. /2 Production started only in 1971 with the Bank's past loan. 3.13 The table indicates that for each of the different types of cast- ings (as was the case for all castings combined, para. 3.06), domestic pro- duction is not expected to fill domestic demand in 1977, so that imports of castings will have to continue, even if there were no exports of castings from Yugoslavia. Nevertheless, Kikinda intends to export about 75% of its incremental output, with total exports expected to increase from 7,290 tons (55% of total sales) in 1972 to 24,700 tons (nearly 67% of total sales) in 1977. 3.14 Also while the Company's production in 1977 of malleable castings (including pipe fittings) and nodular castings is anticipated to rise to about two-thirds each of the country's total output of these items (against 45% and 30% respectively in 1972), due to its substantial exports, Kikinda's share in the doamestic raarket for these products is to increase only from about 17% in 1972 to 18% in 1977. As will be described further below, the Company has already started to negotiate medium and long-term sales contracts, as is usual in this type of industry, for a major portion of its additional production. 2. Machine 'cools 3.15 As was mentioned previously, Kikinda, apart from grinding machines, also produces radial drills and in 1972 entered into a 5-year contract with Romania to supply hydraulic parts to a company there producing "Fortuna" ma- chines under a German license. However, radial drills and hydraulic parts tnade up only a small portion of the Company's sales in 1972 (21% of the value of machine tools and 5.5% of total Company sales) .nd are primar'1i: used to fill capacity of the machine tool plant efficiently. This will also be their prime purpose in the foreseeable future. 3.16 Since Kikinda is the only producer of grinding machines in Yugoslavia, the Company's market prospects are identical with those of the country, which were discussed in paras. 3.07-3.11. It should be remembered that domestic demand is expected to be substantially in excess of Kikinda's production capabilities, so that even if exports were to fall short of expectations, the Company should still find a ready market at home. - 10 - 3.17 So far the Company has been producing only universal and surface grinders but not special purpose, centerless and internal grinders. Kikinda has recently entered into an agreement with the Bryant Corporation, a sub- sidiary of the Ex-Cell-0 Corporation of the U.S. for the production of in- ternal grinders starting from 1974. The production of these grinders is ex- pected to increase from 10 units in 1974 to 20 units in 1977, exclusively for sale in the domestic market. The import demand for such machines has averaged about 25 annually during 1968-72. 3. Sales Build-Up and Destination of Sales 3.18 Kikinda is heavily export oriented (para 6.02). A year by year sales breakdown is provided in Annexes 3-3 and 6-1, by product, volume and value through 1983. The volume forecasts together with destination of sales by currency area are summarized below for 1972 (actual) and for 1977, the first full year of operations upon completion of the project: Sales Build-Up by Product and Area of Destination Total Distribution by Area /1 1972 1977 D co CL T D CO CL T Castings (tons) Malleable (inel. pipe fittings) 4,217 4,552 429 9,198 6,800 11,500 1,200 19,500 Gray 750 - - 750 1,500 - - 1,500 Nodular 1,000 500 1,810 3,310 4,000 10,500 1,500 16,000 13,258 37,000 Machine Tools (units) Grinders 250 11 10 271 240 70 70 380 Radial Drills 60 - - 60 60 10 10 80 Others /2 - - 195 195 - - - - /1 D = Domestic; CO = Convertible currency countries; CL = Clearing currency countries; and T - Total. /2 Hydraulic parts to Romania. 3.19 Kikinda sells most of its malleable castings through long-term contracts (5 to 10 years) with Zavodi Crvena Zastava (Zastava), the only local car manufacturer and a beneficiary under Bank Loan 654-YU, and the German automaker, Opel. These two customers alone will account for about 60% of Kikinda's malleable castings sales in 1977. The Company is negotiating with local car assemblers and foreign firms for additional supply contracts and, on the basis of preliminary inquiries, indications are that demand for Kikinda's malleable castings will be in excess of what it could supply in 1977. 3.20 Kikinda and the other major foundry in Yugoslavia, FOB, signed an agreement in 1971 in which they reached a basic understanding on the demar- cation of production. While Kikinda makes gray castings only for its own - 11 - machine tool production, FOB produces a wide range of gray castings primarily for the engine-driven vehicle sector. Kikinda, in turn, concentrates on the production of malleable and nodular castings. Priority in supply is given to customers in convertible currency countries (predominantly Germany) and the remainder is to be supplied to Zastava as well as TAM (a beneficiary under Bank Loan 504-YU) and FAP-FAMOS, two commercial vehicle manufacturers. Based on present contracts and inquiries, the Company expects to sell close to 70% of its 1977 output abroad. 3.21 In the case of pipe fittings, Kikinda has already contracted for 6,100 tons in 1977, out of the 9,200 tons it intends to sell in that year. Here also, some 65% of production is expected to be exported to customers abroad, prominent among which are Locatelli (Italy) and Induco Handel (Germany). 3.22 As for machine tool exports, the Company already has orders on hand for the supply of 82 machines by 1977 to the following countries: the U.S.S.R., 50; the U.S., 12; and Italy and Germany, together 20. Kikinda is currently negotiating orders for another 38 machines to the U.S. and 20 to other countries. 4. Marketing Organization 3.23 The Company has an efficient marketing organization with represen- tatives in Germany, Italy, the U.S.S.R. and some other countries. In the past, Kikinda relied largely on Invest-import and Dinava in Belgrade, iMasino- Implex of Zagreb, and other agents for export sales. However, it is now placing more emphasis on direct sales to foreign customers under long-term contracts. 3R24 In the domestic market, castings are sold directly to customers under long-term contracts except for pipe fittings which are distributed throL.t1r 'Local wholesalers. For local sales of machine tools, Kikinda has field representatives in various republics. The Company plans to increase the number of sales engineers in domestic representative offices. Further- more, it works closely with M1asino-Union, Belgrade, in studying long-term machine tool requirements and product development needs. C . PzPrices and CorLpetitive Position 3.25 An international comparison of prices of castings is difficult because of variations of castings in size, quality and intricacy. However, there is no doubt that Kikinda's prices of castings are on the whole very competitive inter- nationally. :Kikinda's competitive prices coupled witn their high quality have resulted in substantial demand by foreign customers for these products and have placed the Company in a very favorable position. Approximate average 1972 domestic, ex-alant, price indices for selected items of Kikinda are compared with those of German and Italian producers, also ex-plant, in the following table (details are given in Annex 3-1 and 3-2): - 12 - Average 1972 Domestic Price Indices (Ex-Plant) (Kikinda Price = 100) Selected Products Kikinda Italian German Malleable Casting (Wheel Hub) 100 110 130 Nodular Casting (Wheel Hub) 100 106 124 Flat Grinders (URB-550) /1 100 163 132 /1 Compared with Blohm's Simplex-S of Germany and Alpa's RT-450 of Italy. 3.26 Kikinda's sales prices vary among domestic, clearing and convertible area markets (Annex 6-1). Prices for the clearing area countries are fixed according to agreements; they bear little relation to market conditions in those countries. However, in the past, export prices to the clearing area countries have been higher than domestic prices generally and are expected to remain so in the future. In the case of pipe fittings 1/, nodular castings and grinding machines, the Company's export prices for the convertible area are on average about 15% lower than its domestic prices. This is partly because of keen compe- tition with foreign suppliers in establishing new markets. However, in the case of malleable castings, a major product line of the Company, its domestic prices are lower than export prices although this may in part be due to some differences in quality requirements between the products exported and those sold at home. At present, domestic prices of pipe fittings and machine tools are controlled, whereas malleable, gray and nodular castings are free from such controls, ex- cept general temporary controls for reasons of containing inflation. 1. Export Incentives 3.27 The Federal Government provides export incentives, the most important of which is the retention quota under which the exporting company is allowed to retain 20% of its foreign exchange earnings for use without any restriction. 2. Protection 3.28 As already noted, Kikinda's products are internationally competitive. However, nominal protection through customs duties and taxes exists to the extent of 25% for iron castings and about 30% for grinders. This duty shelter is of interest to Kikinda only to the extent that it helps prevent the sale of foreign products in Yugoslavia at marginal cost. IV. TIE PROJECT A. Objectives and Scope 4.01 The proposed project is designed both to increase the capacity of different plants and to modernize and replace obsolete equipment. It would increase the capacity of malleable iron castings from 11,500 to 21,000 1/ In the case of pipe fittings. export prices are substantially lower than domestic prices largely because of keen competition from Far Eastern countries. - 13 - TPY; nodular iron castings from 7,500 to 16,500 TPY; gray iron castings from 900 to 1,500 TPY; pipe fittings from 4,000 to 6,400 TPY; and machine tools from 350 to 460 units annually, including the introduction of new lines of precision and internal grinding machines. The project plans, detailed engineering and cost estimates were orginally prepared by the Company in early 1972, and were subsequently revised in the first quarter of 1973 after consul- tation with different equipment suppliers. 4.02 To achieve the above objectives the following major additions and alternations are to be made: (i) expansion and modernization of the malle- able foundry, which would include two 6-7 tons/hr hot blast cupolas, four 10-ton/hr electric induction furnaces, two flaskless molding lines, one automatic molding line, two annealing furnaces and supporting facilities; (ii) expansion of the gray and nodular foundry, with four 12-ton/hr electric furnaces and core-making facilities, and one heat-treatment plant with sup- porting facilities; (iii) expansion of the fitting finishing plant with more specialized machines for finishing and galvanizing, and packing facilities; (iv) expansion and modernization programs of the machine tool plant which will include relocation of existing machines, replacement of old machines and addition of more sophisticated facilities including numerically - con- trolled machines and a climatized mounting room; (v) revamping of the exist- ing utility installations; (vi) installation of modern pollution control equipment; and (vii) a new centralized storage and materials handling system, including a railroad connection to the plant, to streamline materials flow and reduce handling costs. A detailed description of the project is given in Annex 4-1 and the plant layout is shown in Annex 4-2. B. Observations 4.03 The proposed facilities and plant designs are based upon careful identification of the bottlenecks in the present plants and were chosen with the objective of further improving product quality and increasing pro- ductivity. 1Te project can be implemented without significantly interfer- ing with the production of the existing facilities, although in the case of the malleable iron foundry, this will require that the expansion be carried out in two phases. This foundry is designed in such a way that it could be changed over to a nodular iron foundry, if required in the future by shifting market demand, with only slight modifications and minor additions. In the gray and nodular iron foundry, new production facilities will be added without any major alterations to the existing facilities. Further expansion of this foundcy beyond that contemplated by the project is not possible due to lack of space. 4.04 Most of the existing facilities in the pipe fitting finishing plant will continue to be utilized after the expansion. With the addition of specialized production machines to this plant, Kikinda will be able to produce pipe fittings of a larger range than hitherto possible (3/8" to 4' in diameter). In the case of the machine tool Dlant, the addition of numerically - controlled equipment is essential for starting the production of more specialized precision grinders. Kikinda has no prior experience - 14 - in operating these numerically - controlled machines, which require highly skilled operators and programers; however, training facilities are avail- able in Yugoslavia for such machines and, moreover, the Company plans to train operators abroad with the help of its licensor, the Bryant Corporation of the U.S., and equipment suppliers. In order to be competitive the Company has to mechanize some of its operations. However, the Company plans do not include the installation of sophisticated equipment to save labor. 4.05 Projected plans for infrastructure - power, gas, road and railroad connection - development are satisfactory. During negotiations, the Company has provided evidence that it has obtained commitments from the authorities concerned for the timely development of these infrastructure facilities. Further, the Company has received a formal expression of intent from Electro- vojvodina that the latter will install at its own cost a new 35/10 KV trans- former station near the plant site. C. Ecology 4.06 A new Federal law for environmental and pollution control, passed recently, stipulates that all enterprises have to conform to certain general pollution standards by the end of 1973 and must meet more stringent standards by 1977. In a foundry, the major pollutants are dust and fumes, and to im- prove the present situation at the plant and to satisfy the regulations, Kikinda plans to install devices for dust and fume extraction in both found- ries at a cost of about Din 10 million, representing some 10% of the cost of the foundry equipment of the project. Although water pollution is not a major problem in a foundry, Kikinda, as a precaution, neutralizes water before discharging it. Details of pollution control are given in Annex 4-3. The measures proposed by the Company are judged to provide adequate pollution control. The necessary equipment will be supplied locally and, therefore, will not be eligible for Bank financing. During negotiations, the Company has agreed that the planned environmental protection measures will be implemented and maintained. D. Labor Force 4.07 At the end of 1972, there were 2,084 employees in Kikinda, including 415 persons in the machine tool plant. Details are given in Annex 4-4. Found- ry labor productivity is currently low, as reflected by the requirement of between 90 and 100 manhours per ton of castings. The Bank has projected the labor productivity in Kikinda to improve to 50 manhours per ton of castings upon completion of the project which is reasonable considering that compar- able foundries in Western Europe require 35-50 manhours per ton. To achieve this goal, Kikinda would need at least 30% more employees compared to the present level and this has been assumed in the financial projections. How- ever, the Company is rather optimistic regarding additional employment and believes that a 20% increase in manpower would be adequate, partly because, under the self-management system, workers are basically reluctant to hire more labor than absolutely necessary since that reduces the surplus that is available for distribution to them. Therefore, during negotiations - 15 - assurances were received from the Company that it will maintain an adequate labor force to meet fully the needs of the project. E. Project Execution 4.08 Kikinda will have primary responsibility for project execution. With several expansions to its credit, the Company management is basically well experienced to carry out the project. The main burden of project exe- cution will rest with Kikinda's expansion department, which is headed by a committee consisting of directorsof operating departments. Although their caliber is high, tnis arrangement is not considered satisfactory for the large-scale expansion envisaged because of an apparent lack of coordina- tion among them even at the present early stage of project implementation, and the question whether they could devote adequate time to the project in view of their other operational responsibilities. An expansion section completely separate from the operating departments with well-defined responsi- bilities and authority is essential for proper project execution. During negotiations, the Bank obtained assurances from the Company that it will form such a functional section with Mr. Lepedat, a well-experienced foundry expert, as the chief and assign adequate full-time staff as required for the implementation of the project. 4.09 Also, the Company requires assistance in the preparation of specifi- cations for international competitive bidding and evaluation of tenders. For this purpose, therefore, the Company, hired in September, 1973, Hayek Engineer- ing A.G., as experienced Swiss consulting firm. 4.10 Civil construction and erection of equipment will be carried out by Yugoslav contractors, while Kikinda's own construction department will be re- sponsible for additions to and alterations of the existing facilities. Equip- ment su.ppliers will provide assistarnce in erection and start-up, and provide performance guarantees. These are satisfactory arrangements. F. Proiect TIE'la 4. 11 The project implementation schedule is shown in Annex 4-5. Engineer- ing and design of the project are well advanced; preparation of procurement documents as well as civil construction of certain facilities have begun. Orders for foreign equipment to be financed by the Bank are expected to be placed during the first quarter of 1974. Phase I of the malleable foundry will become operational in the third quarter of 1974. Most other facilities scheduled for completion in 1975 will become fully operational in 1976. The delivery and construction schedules based on information provided by potential equipment suppliers are considered realistic. V. CAPITAL COST AIND FINANCING PLAN A. Project Cost 5.01 Capital costs of the project are detailed in Annex 5-1 and summarized below: - 16 - Summary of Capital Cost -(Din Million) ---- (US$ Million)-- Local Foreign Total Local Foreign Total % Equipment and Spares /1 48.1 173.4 221.5 3.1 11.2 14.3 37.5 Duty and Taxes &,A.n - 46.0 3.0 - 3.0 7.8 Erection 21.6 - 21.6 1.4 - 1.4 3.6 Civil Construction 36.4 - 36.4 2.3 - 2.3 6.2 152.1 173.4 325.5 9.8 11.2 21.0 55.1 Contingencies: Physical 14.5 21.1 35.6 1.0 1.3 2.3 6.0 Price 29.6 30.3 59.9 1.9 2.0 3.9 10.1 Total Fixed Assets 196.2 224.8 421.0 12.7 14.5 27.2 71.2 Pre-operating & Start-up 12.0 4.0 16.0 0.8 0.2 1.0 2.7 Engineering - 5.0 5.0 - 0.3 0.3 0.9 Incremental Working Capital 92.5 10.3 102.8 5.9 0.7 6.6 17.4 Total Project Cost 300.7 244.1 544.8 19.4 15.7 35.1 92.2 Interest During Construction 0.6 45.8 46.4 /2 3.0 3.0 7.8 Total Financing Required 301.3 289.9 591.2 19.4 18.7 38.1 100.0 /1 c. i. f. cost at plant. /2 Negligible. 5.02 Equipment cost estimates are derived from quotations received in the first quarter of 1973 from suppliers in six different countries. The prevailing import duties and taxes of about 27% on the c.i.f. value of foreign equipment at the Yugoslav border have been added. Pre-operating and start-up expenses are based on Kikinda's previous experience. Civil engineering and construction costs are based on quotations received by the Company in early 1973. Physical contingencies equivalent to slightly more than 10% of equipment and civil works cost estimates are included; they are considered adequate in view of the advanced stage of project preparation. 5.03 Furthermore, price contingencies of 6% per annum have been applied to the cost of foreign equipment including import duties and taxes. As for local equipment, construction and erection costs, the following rates have been applied to cover anticipated inflation in Yugoslavia: 1973 - 10%; 1974 - 8%; and 1975 and 1976 = 6% a year. The declining rates are based on the assump- tion that the measures being taken to curb inflation will succeed. Total assumed contingencies, therefore, amount to 22.7% of total fixed project cost. - 17 - The project cost estimates, including the physical and price contingencies, are considered adequate. 5.04 Of the Din 591 million financing needed for the project, about Din 290 million, or about 49%, are estimated to be required in foreign ex- change. All equipment expected to be procured domestically has been allocated to local currency expenditure and will be bid for only within Yugoslavia. Yugoslav manufacturers are not expected to bid directly on the other (imported) equipment, since it is not presently manufactured in Yugoslavia, but they are expected to contribute local components estimated to average about 15% of the value of foreign equipment. B. Working Capital 5.05 Kikinda's present working capital level is satisfactory. Incremental working capital requirements due to the project are estimated at Din 102.8 mil- lion, of which about Din 10.3 million would be needed in foreign exchange; these take into account recent Yugoslav regulations, which require the Company to reduce its collection as well as payment periods and the Bank has accepted the Company's target as desirable and obtainable. Details are given in Annex 5-2. Working capital is to be financed from internal cash generation and should actual requirements be somewhat higher than anticipated, Kikinda is expected either to use some of its own cash generation (para. 5.07) or to finance them with short-term credits. C. Financing Plan 5X06 The financing plan to cover the project's cost (para. 5.01) of Din 591 million (US$38.1 million) includes Din 366 million (US$23.6 mil- lion) from internal cash generation and the remaining Din 225 million (US$14.5 million) from the proposed Bank loan. 5.07 All foreign exchange costs of machinery and equipment will be financed by the Bank loan and the remaining costs will be met from internal cash generation. A summary of the sources and application of funds (Annex 7-2) during the implementation of the project follows: - 18 - Summarized Sources and Application of Funds during 1973-1977 (Din Million) Sources Applications Cash from operations 620.8 /1 Project 421.0 /2 IBRD Loan 224.8 Other Investments 25.3 Debt Repayment 38.3 Appropriations 60.2 Net increase in working capital including surplus cash 300.8 /3 845.6 845.6 /1 Net of pre-operating and start-up expenses, engineering expenses, and interest during construction of together Din 67.4 million, which are charged to operations, in accordance with Yugoslav law or Company practice. /2 Fixed asset costs. 7i Does not provide for distribution of income to workers. 5.08 The Bank loan would be for 14 years, including a grace period of 4 years, at an interest rate of 7-1/4% per annum plus a guarantee fee of 1-3/4% accruing to the Autonomous Province of Vojvodina 1/, thus raising the total effective cost of the Bank loan to 9%. The Bank loan will be guaranteed by both the Federal Government and Jugobanka of Novi Sad. Strictly on project grounds an 11-year loan, including 4 years of grace, would be adequate. How- ever, the 14-year loan term is recommended instead to help relieve the country's medium-term foreign exchange loan repayment obligations. 5.09 During the construction period (1973-1977), Kikinda's cumulative cash generation is expected to be adequate to meet the project needs. How- ever, due to a heavy concentration of expenditures on the project in 1974 and 1975, Kikinda may require short-term credits in 1975. Whatever additional resources - foreign as well as local - might be needed to complete the project and bring it into operations, including maintenance of an adequate working capital level equivalent to a current ratio of at least 2:1, and independently of whether the need for such additional funds is caused by a cost overrun or a shortfall of cash generation, they are to be provided by the Jugobanka, on terms satisfactory to the Bank. Assurances to this effect have been received during negotiations. 1/ The Federal Government is the guarantor of the Bank loan. It, in turn, is required by Yugoslav law to obtain a guarantee from the Republic or Autonomous Province where the project is located; in this case Autonomous Province of Vojvodina. Since Yugoslav law prevents the Federal Govern- ment from accepting the guarantee fee, it has requested the Autonomous Province of Vojvodina to receive this fee. - 19 - D. Procurement and Disbursement: 5.10 The Bank loan would finance the c.i.f. foreign exchange cost (Yugoslav border or port of entry) of equipment and spares. The Bank-financed items - foreign equipment and spares - will be divided into 21 packages (8 packages for foundries and the fitting finishing shop and 13 packages for the machines tool plant), and will be procured following Bank guidelines. All the 15 equipment packages costing over US$100,000 equivalent each will be procured by interna- tional competitive bidding. Tne remaining 6 packages costing less than US$100,000 each (representing less than 6% of total foreign equipment cost) would be obtained through a procedure under which contracts may be awarded by the Company after having obtained four comparable bids from qualified suppliers in at least three countries outside of Yugoslavia. A detailed list of equipment to be procured under the Bank loan is contained in Annex 5-3. It is recommended that for purposes of bid comparisons, prefer- ence be given to local components of foreign bids to the extent of 15% of the price of such components or the actual customs duty on similar imported components, whichever is less. 5.11 For most of the domestic equipment (to be financed by the Company), quotations have already been received from various suppliers. However, Kikinda will place orders for most of the equipment only in the fourth quarter of 1973 after the procurement consultant (nara. 4.08) will have reviewed the speci- fications. Civil construction work, for which competitive bidding within Yugoslavia is required by law, will be carried out by Yugoslav contractors under the direction of Kikinda. The Company has already awarded civil con- struction contracts to two of the four Yugoslav contractors who had submitted their bids. 5. *2 The estimated disbursement schedule for the Bank loan is shown in Annex 5-4. 1: is based on detailed estimates of order placements, payment schedu'les, and expected delivery times for equipment in line with the con- struction schedule (para. 4.11). VI. REVENUES, RAW MATERIALS, AND PRODUCTION COSTS A. Sales Revenues 6.01 Detailed assumptions on selling prices for each of the Company's product lines and on aggregate sales build-up through 1983 are contained in Annex 6-1 and Annex 3-3 respectively. As a result of the expansion project, sales revenue from foundry products are expected to increase by about 170% from Din 185 million in 1973 to Din 497 million in 1977, whten the project would be fully operational. During the same period, sales proceeds from machine tools would double from Din 81 million to Din 163 million, and revenue from various services would rise from Din 32 million to Din 53 million. Total sales would reach the level of Din 713 million in 1977 compared wi-th Din 298 million in the current year. These projections assume that the foundries and the machine - 20 - current year. These projections assume that the foundries and the machine tool department would operate at 80% and 75% of their respective rated capaci- ties, based on two-shift operations. These assumptions are realistic compared with Kikinda's past performance and the experience of comparable plants in other countries. 6.02 Presently, exports, both to the convertible and clearing areas, account for about 42% of total sales. The share of exports is expected to rise to 52% in 1977, when total sales would be nearly 2-1/2 times the 1973 level. Of the projected export earnings of Din 367 million in 1977, about Din 288 million (78%) would be from the convertible area and Din 79 million (22%) from the clearing area. Foundry products would account for nearly 85% of total exports and machine tools for the balance of 15%. 6.03 Sales revenue has been calculated in current value terms and on domestic sales exclude charges for freight and handling, which in Yugoslavia are usually borne by customers. Selling prices (ex-factory) would continue to vary for domestic sales, and for exports to clearing and convertible areas. For financial projections, prices in current Dinars are assumed to rise by 4-6% a year for all products except part of the pipe fittings to be sold locally. B. Raw Materials 6.04 The Company appears to be well assured of the supply of its main raw materials, including pig iron, steel scrap, ferroalloys, coke, anthracite, bentonite, quartz sand, resins and limestone (Annex 6-2). Import require- ments for all the above items are expected to be low except for ferroalloys and resins a major portion of which need to be procured from abroad. But for these two materials (ferroalloys and resins) also, no problems are foreseen in meeting Kikinda's needs, especially because the foreign exchange and trade regime gives priority to import of raw materials required for export production. Moreover, Kikinda would have an adequate amount of foreign exchange from re- tention quota 1/ to meet any shortfalls in domestic raw materials supply through imports. C. Production Costs 6.05 Production cost estimates (Annex 6-3), like those of sales (para. 6.01), are based on 80% and 75% capacity utilizations of the foundries and machine tool plant respectively. Present (1973) and projected (1977) production costs on a per unit basis are given below separately for the different product groups: 1/ Under the Yugoslav foreign exchange and trade system exporters are entitled to a retention quota in foreign exchange equivalent to 20% of their export revenue from convertible currency countries. This foreign ex- change can be used freely by the companies concerned. - 21 - Direct Production Costs (in Dinars) / Year Malleable Pipe Fittings Gray and Typical Castings Nodular Machine Tools Castings (Universal Grinder) /2 ---------------- (Per ton) ------------- (Per unit) 1973 6,241 11,207 6,980 111,800 1977 6,182 12,484 7,341 131,000 /1 Including costs of raw materials, supplies, utilities and labor, but excluding general overhead expenses, depreciation, insurance and other operating expenses. /2 Universal grinders represent about half of Kikinda machine tool sales in units. 6.06 It has been assumed that during the whole forecast period (1973-1983) wage rates at Kikinda would increase by about 5% a year and raw materials costs by 4-5%. During the period 1973 - 1977, to which the above table relates, production cost per ton of malleable castings (at current prices) is expected to decrease, in spite of inflation, by about 1% because of economies of scale, rationalization, and the impact of new technology. Since the gray and nodular foundry expansion is only in addition to the existing plant which is of rather recent origin. the impact of new technology will not offset completely the inflationary cost increases. As a result, per ton costs of gray and nodular castings are expected to go up by 5%. In the case of pipe fittings, where the ex-pansion is a relatively modest one (from 4,000 to 6,400 tons per year), coscs per ton are expected to increase by about 11%, partly because of rapidly risinc zinc prices. For a typical machine tool, the production cost per unit would increase over the four-year period by 17%, partly because the Company is ernbarking on the production of more sophisticated machine tools, which would, of course, also demand higher prices. VII. FUTURE PROrIF'ABILITY AND PINANCIAL POSITION A. Profitab_lity 7.01 Detailed income and cash flow forecasts through 1983 are shown in Annexes 7-1 and 7-2 respectively, and selected items are summarized below: - 22 Selected Income Statement Items (Din million) 1972 (actual) 1973 1974 1975 1976 1977 1983 Net Sales 296 298 373 459 631 713 850 Operating income 38 67 90 112 154 159 120 Net Income after Taxes 27 62 80 92 132 137 110 x of Net Sales 9 21 21 20 21 19 13 % of Avg. Equity 26 41 36 30 31 25 8 Cash Generation 57 66 86 113 172 184 155 7.02 Compared with Din 27 million in 1972, Kikinda is expected to show a net income of Din 62 million in 1973, primarily due to lower depreciation rates intended to be used by the Company from that year (1973) onward in line with rates in Western foundries. As a result of the project, net sales are expected to increase by Din 415 million, or by about 139% between 1973 and 1977, while net income after taxes go up by Din 75 million, or by about 120%. The fact that net income increases less rapidly than sales during the construction period and even declines thereafter in absolute amounts is due to the higher inflation rates assumed for production cost inputs as compared to selling prices. Net sales during project implementation are not expected to drop because, as mentioned earlier (para. 4.03), the project will be implemented without disturbing existing production facilities. Since a major portion of net income after taxes will be needed to help finance the project, agreement has been reached during negotiations that the Company will - until the project is completed - distribute income to its workers only to the extent that the annual depreciation plus the allocation to the Business Fund during that period would still be sufficient for timely execution of the project. B. Financial Position 7.03 Balance sheet projections for 1973 through 1983 contained in Annex 7-3 are summarized below: Selected Balance Sheet Items (Din million) 1972 1973 1974 1975 1976 1977 1983 (Actual) Net Working Capital 85.4 78 99 126 173 181 219 Equity 120 181 262 354 486 623 1401 Long-Term Debt 52 42 136 214 235 218 75 Current Ratio /1 2.3 2.3 2.7 2.6 2.6 2.6 2.6 Long-Term Debt/Equity Ratio /2 30:70 19:81 34:66 38:62 33:67 26:74 5:95 /1 Excluding surplus cash, which would be earmarked for further expansion. 77 Assuming no income distribution to workers. All surplus cash allocated to equity. - 23 - 7.04 The long-term debt/equity ratio was satisfactory in 1972 and is expected to remain strong during project implementation with a maximum debt position of 38% being reached in 1975. Thereafter, the debt/equity ratio de- clines and by 1983 Kikinda would have only 5% in debt, reflecting good pro- fitability of the expanded plant; this is based on the assumption that generally there will be no income distribution to the workers in excess of 5% annual increase in earnings per employee. For comparison purposes, Kikinda's income statements and balance sheet projections, without the proposed expansion, are given in Annexes 7-4 and 7-5 respectively. 7.05 The Company's liquidity position is satisfactory and is expected to improve even during project implementation. The current ratio would have been higher than shown above (and the equity build-up correspondingly slower) if surplus funds generated had been included in current assets. A portion of net income, except for the funds required for the project, could be distri- buted to the workers, which is normal practice in Yugoslavia, and would then not remain as surplus cash for allocation to equity.-In order to keep the Company in a sound financial position, agreements have been reached during negotiations that Kikinda will not in the course of project implementation, without the prior consent of the Bank: (a) undertake additional capital in- vestments or incur new debts in excess of Din 20 million equivalent in any one year other than for the project; or (b) distribute income and/or make other cash outlays other than for normal operations if the current ratio were to fall below 2:1 after such income distribution and/or cash outlay. After project completion, for any new investment or borrowing in excess of Din 20 million the Company will consult the Bank. C. Financial Rate of Return 7.06 The project provides a financial rate of return of 23.5% at current value terms. ./ Detailed assumptions are contained in Annex 7-6. Kikinda's overall operations, which would have a rate of return of 8.4% without the expansion project, are expected to yield 16.4% with the project. 7.07 Sensitivity tests have been conducted to determine the effects of various events on the financial rate of return; they are shown in Annex 7-6 and are summarized below: Sensitivity Tests on Financial Rate of Return Case Description Rate of Return (%) 1 Base Case 23.5 2 Sales revenue decrease 10% 14.8 3 Operating cost increase 20% 11.6 4 One year project delay plus 15% cost overrun 9.2 5 Sales revenue decrease 10% and operating cost increase 5% 12.2 6 Project cost increase 10% and operating cost increase 10% 15.5 1/ In real terms, the financial rate of return would be 19.3%. - 24 - 7.08 The project has a low financial risk since the rate of return remains above 9% even with such combinations of adverse conditions as assumed in the above table. If revenues drop by 10% - which is equivalent to about a 90% drop in the assumed exports to the clearing area or a 25% decline in exports to the convertible area without any change in domestic sales and without a corresponding reduction in operating costs - the return would decrease to 14.8%. The return tends to be more sensitive to changes in operating costs than capital costs (Annex 7-6). If production costs were to increase by 5%, which would be equivalent to about a 10% increase in the cost of raw materials, the return would drop to 21%. Since the probability of having a serious delay in project completion and major cost overrun (the two factors with the most adverse effect on the return) is rather low in view of the advanced preparation of the project and its impending implementation, the likelihood of the return falling below 15% is remote. D. Debt Service Coverage 7.09 Based on the projections and proposed financing plan, Kikinda's long-term debt service coverage forecasts indicate the following: Long-Term Debt Service Coverage Forecasts 1973 1974 1975 1976 1978 /1 Times Covered 2.5 3.7 4.2 3.3 3.9 /1 The year in which repayment of the Bank loan will begin. 7.10 Debt service coverage is satisfactory even during the implementation of the project. However, according to Yugoslav law, the Company will also have to generate sufficient foreign exchange to service its foreign commitments in- cluding debt service. Funds available to the Company in foreign exchange and its foreign currency requirements have, therefore, been analysed in Annex 7-7. The analysis indicates that there would be enough foreign funds available to meet projected needs, but that the position will be tight during construction, primarily because interest on the Bank loan during that period will be paid out of current operations and not be capitalized. During negotiations, assur- ances were therefore, received from the Jugobanka that it will make foreign exchange funds available to the Company, to the extent that the foreign ex- change generated by Kikinda (through retention and depreciation quotas) is not adequate to meet its repayment obligations in foreign exchange to the Bank. E. Break-Even Points 7.11 The profit break-even point in 1978, after completion of the project, would be at about 57% of effective capacity of the plant. Due to the assumed increases in production costs, the profit break-even would rise to 64% in 1983. The cash break-even point in 1978 would be at about 61% of capacity. Further details on break-even are given in Annex 7-8 . - 25 - F. Major Risks 7.12 As regards the market, the sale of castings to the clearing area is, to some extent, beyond the control of the Company. 1/ However, the Company presently has long-term contracts - about 50% of total projected clearing area sales-to supply castings to certain customers in the clearing area. It is unlikely that revenues from exports to the clearing area would drop by 50% without at least some offsetting sales to convertible currency countries or at home. But, as explained in para. 7.08, even if such a drastic decline should occur, the project would still provide an adequate return. Another risk in the project pertains to the technological changes occurring in Western Europe and elsewhere with respect to the type of castings used in automotive production. Malleable castings are slowly being replaced by nodular castings. However, the Company is guarding against this risk (para. 4.03) by producing malleable casting with sufficient flexibility in the design of the malleable iron foundry to change over to a nodular foundry with only minor additions and alterations. G. Accounting and Audit Requirements 7.13 The Company's present accounting system follows the Yugoslav system in which it is difficult and time consuming to transform financial statements into a format wqhich would make them a more meaningful management tool. From its previous association with the Bank (para. 2.02), the Company has gained adequate experience to improve its internal accounting and is taking measures to improve the accounting system further. Furthermore, agreement has been reached during negotiations on the establishment by the end of 1973 of separate accounts for the Bank project in a form satisfactory to the Bank. 7.14 Kikinda's accounts would be audited by the Social Accounting Service (SAS), which is an autonomous government agency responsible for financial inspection of Yugoslav enterprises. SAS annually conducts a limited review of the statutory financial statements, primarily to ensure that enterprises' financial transactions comply with Yugoslav law; it does not perform an audit nor provide a report on the accounts. SAS is cur- rently planning a training program under which its staff will be trained by an international accounting firm in auditing methods consistent with Bank requirements. 2/ During negotiations, agreements were reached that the Company 1/ Because agreements on exports are reached at the government-government level in the clearing area countries. 2/ The training program would be carried out by accounting consultatLts acceptable to the Bank and employed on terms and conditions satis- factory to the Bank. A few international accounting firms have sub- mitted proposals for the training program scheduled to start in January 1974. - 26 - would invite SAS to undertake annual audits of Kikinda's 1974 and 1975 accounts as a part of the SAS's on-the--sob training program of its staff in collaboration with the international firm of accountants. In the event that SAS is not thereafter able to achieve a consistent and satisfactory standard of auditing, Kikinda will retain, at the request of the Bank, an experienced independent auditing firm. VIII. ECONOMIC JUSTIFICATION A. Economic Rate of Return 8.01 The incremental economic rate of return for the project is about 18% in real terms. 1/ Prices used for this calculation are shown in Annex 7-6 and the economic sensitivity analysis is given in Annex 8-1. Export prices (c.i.f. border) of Kikinda to the convertible currency area have been used as the accounting prices to calculate sales revenues. All ma- terial inputs, most of which are of domestic origin, have been valued at international prices (c.i.f., Yugoslav border). Labor costs have been based on market wage rates. The economic rate of return is generally sensitive to changes in costs and benefits to the same extent as the financial return. A decrease of 10% in revenue lowers the economic rate to 11%. A combination of 10% higher capital costs and 10% higher operating costs would reduce the return to 12%. Thus the project has a good return under foreseeable circumstances. B. Competitiveness 8.02 Kikinda is predominantly export oriented. It is highly significant that about 67% of its incremental revenue would be from exports. As discussed in Chapter III and Annexes 3-1 and 3-2, ex-factory selling prices of Kikinda's products are generally lower than prices for comparable products in Western Europe. Even if international prices were to fall by 10%, most of Kikinda's products would still be competitive. Yugoslavia has a nominal protection of between 25 and 30% (customs duties and other related taxes) on industrial products including castings and machine tools. Kikinda does not require this duty shelter other than to be protected against products that might be sold below marginal cost in Yugoslavia. C. Linkages and Employment 8.03 The project is crucial for the projected expansion of a variety of essential industries (para. 3.04) which are targetted to expand on average at over 8.5% per year in the foreseeable future. Their rapid growth would not be possible without the availability of adequate castings and machine tools. While these could, of course, be imported, Kikinda is able to help fill this gap competitively together with very substantial savings in foreign exchange. 1/ At current prices, the economic rate of return is 21.5%. - 27 - 8.04 The enterprise is located in the predominantly agricultural region of Vojvodina, whose industrial potential is yet to be fully exploited. The project would help to expand the industrial base of the region, thus keep additional industrial capacity away from existing industrial concentration centers and help absorb trained personnel who presently migrate abroad. While the direct employment benefits from this project are small since only some 630 persons are expected to be added to Kikinda's labor force, the indi- rect employment creation is higher at an estimated level of approximately 950 (Annex 8-3). D. Comparative Advantage 8.05 Kikinda as well as other foundries in Yugoslavia have substantial advantage especially in labor costs compared with Western European foundries. For example, at present, the average wage per manhour in Kikinda is hardly US$0.8 as against US$3.5 in the Federal Republic of Germany. E. Estimated Foreign Exchange Effects 8.06 One of the most important benefits from the project is the increase in the annual net foreign exchange earnings. The incremental net foreign exchange earnings from the Kikinda expansion would be about US$10 million a year (Annex 8-2) and would more than offset in two years after project completion the total foreign exchange cost of the project estimated at about US$19 million. The total net foreign exchange earnings of the Company after all foreign operating costs and debt service payments are calculated to range from US$20 million in 1977 to US$23 million in 1983 which is more than the total foreign exchange cost of the project. Furthermore, the total net foreign exchange impact of the project can be considered as the total value of incremental production less its production cost at international prices, because if Kikinda does not expand, its incremental domestic sales will have to be met from imports. Foreign exchange earnings and foreign exchange savings combined then would amount to about Din 264 million (US$17 million) in 1977, the Company's first full year of operations upon completion of the project. 8.O7 Faced with mounting debt repayment obligationas on short and medium-term suppliers' credit, and an increasing gap in the balance of trade, Yugoshavia has a critical need to raise its foreign exchange earnings frorm exports. IX. RECOMMIENDATIONS 9.01 During negotiations, the following principal agreements were reached with the Jugobanka and the Company: - 28 - A. Agreements that the Jugobanka will: (a) provide project completion and cost-overrun guarantees (para. 5.09); and (b) make foreign exchange funds available to the Company, if the latter's foreign exchange funds are not sufficient to cover its obligations (para. 7.10). B. Agreements that the Company will: (a) not sell, lease, transfer or assign its rights or assets (para. 2.05); (b) introduce and maintain adequate safety measures (para. 2.07); (c) implement and maintain strict environmental protection measures (para. 4.06); (d) maintain an adequate labor force (para. 4.07); (e) form a well-staffed expansion section (para. 4.08); (f) pay 1-3/4% guarantee fees to the Autonomous Province of Vojvodina (para 5.08); (g) allocate adequate internally generated funds for the project (para. 7.02); (h) observe certain financial covenants to maintain a sound financial position (para. 7.05); and (i) make adequate provision for proper external auditing (para. 7.13). 9.02 Based on foregoing agreements, the project provides a sound basis for a loan to Kikinda equivalent to US$14.5 million for 14 years, including a 4-year grace period. Industrial Projects Department Ootooer 19, 1973 ANNEX 1-1 Page 1 YUGOSLAVIA - KIKINDA IRON FOUNDRY PROJECT DESCRIPTION OF TERMS AND PRODUCTION PROCESSES 1. In a broad sense, the art of founding may be described as making a cavity in the sand and filling it with fluid metal. In the cold state, the metal retains the shape and contour of the cavity and becames a metal casting. 2. The term "iron castings" covers a wide range of iron - carbon - silicon alloys containing from 2% to 4% carbon and 0.25% or more of silicon in combination with varying percentages of manganese, sulphur and phosphorous, and sometimes one or more of special alloying elements, such as nickel, chro- mium, molybdenum and vanadium. 3. There are various kinds of iron castings; they are roughly grouped as chilled-iron castings, gray-iron castings, alloyed-iron castings, malleable castings and nodular-iron castings. In general, castings are made by mixing and melting together different grades of pig iron, foundry scrap, steel scrap and ferro-alloys or other metals depending on the type of casting. Further details may be found in "Cast Metals Handbook" published periodically by the American Foundryman's Association. A. Types of Castings Gray Iron Castings 4. Gray iron castings are made of pig iron, of mixtures of pie iron and steel, or of mixtures of pig iron, steel and other metals in smaller amounts. They are frequently sold under trade names, such as Mechanite, Gunite, Ermalite, Ferrosteel, Gun-iron, etc. Chemically, gray iron castings include a large number of metals covering a wide range in composition, with carbon varying from 2 to 4 percent, and silicon from 0.5 to 3 percent with small amounts of other metal according to the type of product produced. Nodular Iron Castings 5. Nodular iron, also called ductile iron and sheroid graphite iron, is a relatively new grade introduced around 1948 and is gaining in popularity over malleable castings due to better economy in production. It has been used for castings having section from 1/8 inch up to 40 inches thick. It is produced by treating molten iron that normally would produce gray castings with magnesium alloys. The addition of these alloys results in castings which have the carbon present in spheroid form. Castings so made have relatively high strength and better ductility than ordinary gray iron. Several types of nodular castings with varying structures can be developed by alloying or heat treating. ANNEX 1-1 Page 2 Malleable Castings 6. They are of two kinds, known as white heart, or European; and black heart, or American; these terms indicate differences in the process and the products and countries of origin. Malleable castings are comparatively soft and can be bent without breaking. Malleable castings contain 2.25 to 3.0 percent carbon, 0.3 to 0.5 percent manganese, 0.6 to 1.15 percent silicon and small amounts of sulphur and phosphorous; the exact composition, particularly with respect to silicon, being varied according to the type of castings. In the "green" state, these castings are relatively brittle and possess poor mechanical properties; therefore, annealing of these castings is essential. After annealing a metal similar to soft steel but of much coarser grain and less ductile is obtained. Alloyed Castings 7. These are used most exclusively for applications where resistance to wear, to heat (including elongation), and to corrosion; high strength of castings, rigidity, damping of vibrations and amenability to heat treatment are of prime importance. The alloying elements - silicon, nickel, chromium, molybdenum, copper and titanium - are used in varying quantities depending on the type of use. Many of these irons are patented compositions and are sold under various trade names such as Ni-resist, Causal metal, Silal, Ni- Crosilal. etc. Chilled-Iron Castings 8. These castings are extremely hard on the surface. Cast iron with some sections is purposely cooled so fast by chills that the carbon is re- tained in combined form, while other sections are allowed to cool gradually, so that the carbon is retained in the form found in gray iron. Such castings are used for rolls and various other articles which require a hard, wear- resisting surface. B. Processes of Production 9. The products of a foundry vary in size, complexity, the metal used, the type of castings, the number of castings produced, the techniques of production employed, the precision of the castings and the extent to which they are finished; these differences are most often inter related. There are several important and quite unrelated stages in the production of iron castings - Design and pattern making - Preparation of Sand - Core-Making ANNEX 1-1 Page 3 Mold-Making Melting - Pouring - Cleaning, finishing and inspecting. Design and Pattern Making 10. Design and construction of the pattern is perhaps the most important single factor in the production of castings. Not only the patterns must be dimensionally accurate, but full consideration must be given to making them meet the requirements of the foundry equipment and technique. To make the sand mold, it is first necessary to make a pattern of the part to be cast, which will leave its imprints in the sand. There are several types of patterns, each fulfilling a specific need. Patterns may be made of wood or metal, as required, and used in conjunction with hand-molding or machine molding methods, depending upon the number of castings to be made and the degree of precision required. When a large number of castings have to be produced, a metal pattern is made in the pattern room by skilled patternmakers. Preparation of Sand 11. The quality and composition of the molding sand is very important. It must contain clay as well as silica and be sufficiently loose to allow gases to escape during casting. The particle size of the sand is also impor- tant as it has a bearing on the surface quality of the castings. Clay content in the sand should be about 18-20% to achieve the necessary cohesion of the mixture in the mold. Core-Making 12. A core is nothing more than a solid shape made of sand. Sand is rammed either by hand or machine or blown into a core box. When the core box is filled with sand and the excess sand is removed with a straight edge, it is turned over and the box lifted from the core thus formed. The ramming operation sometimes includes placement of reinforcing rods, or wires, for strengthening purposes. The cores thus prepared are baked to make them hard, strong and smooth. There are various processes to make cores. The interior surfaces of castings are generally formed by cores, which are inserted in the mold after the pattern has been withdrawn. In some molding operations, cores are used to form exterior surface of castings. Mold-Making 13. For making molds, the molder places a pattern on a flat plate and then puts a molding box, or "flask", on this plate and fills it with prepared sand. The sand is compacted by ramming and is finished by hand with special ANNEX 1-1 Page 4 tools. Next, this pattern (first part) is removed, the molder having made half a mold. Then he makes the second half the same way and, after removing this pattern (second part), the two flasks are carefully put together to form the complete mold. A channel, or "runner", is cut in the sand through which the molten metal is poured and also other channels known as "risers" to allow excess metal to escape. Sometimes, depending upon the type and shape of castings, cores are placed upon the type provided for the purpose in the main mold, before the two flakes are put together to form the complete mold. Fundamentally, the machine-molding method differs little from the process previously described for the manual or floor-molding operations, the main difference being that the ramming and the removal of the patterns from the sand are performed by machine. Also construction of gates and risers will be performed by the machine. However, the placement of cores, patching and finishing of the mold still remain as the chief function of the molder. There are various methods of making molds. A relatively new molding method known as "Disamatic molding process" - flaskless molding - lends itself to the production of molds by machine methods without using flask. Melting 14. Generally, three types of furnaces are or have been employed by foundries for melting iron. These are: (1) the cupola furnace; (2) the pneumatic furnace; and (3) the electric furnace. 15. The cheapest and the oldest type, and the most extensively used is the cupola, which is, essentially, a vertical steel cylinder lined with refrac- tory materials. Within the cupola are placed alternate layers of coke and iron; air is forced through them and the iron is melted by contact with hot gases. The molten metal drips down through the incandescent fuel to the bottom of the furnace and, when the plug is removed, the iron runs into ladles ready for pouring operations. 16. The pneumatic furnace is used to produce certain high-grade cast irons, because tests can be made during the melting process and because the metal is more easy to control in it than in the cupola. The entire charge is placed in the furnace at one time, melted down in one mass on hearth, and tapped when the proper temperature and composition are reached. 17. Because quality can be quite accurately controlled and higher temper- atures secured, the electric furnace is sometimes used in melting cast iron. The entire charge is placed in the furnace at one time. Since the cost is ordinarily greater than in the cupola, the electric furnace is generally used only when special quality control is required. Pouring 18. The molten metal withdrawn from the furnace is transferred to the refractory ladle which is carried to the pouring bay where the metal is poured into the molds. The casting temperature and the pouring time must be carefully ANNEX 1-1 Page 5 controlled to avoid casting defects. Once the castings have been cooled, they are shaken out. The gates and risers are broken off and returned to the furnace for remelting, while the sand is screened and either thrown away or sent back for re-use. Cleaning, Finishing and Inspecting 19. Adhering sand is removed by brushing or tumbling in a revolving barrel, or by the abrasive action of sand blasting. Rough places and fins in castings are smoothed and settled by grinding and chipping. A quick inspection is generally made when castings are delivered to the cleaning room so that no further time may be wasted on defective work. After the cleaning, a thorough inspection is made and satisfactory castings are selected for shipment. 20. Certain types of castings - nodular iron and malleable castings, - are heat treated to make castings stronger and more resistant to shock and fatigue. The finished castings are placed in the annealing furnace, heated in the furnace to the desired temperature and cooled gradually to the room temperature. The temperature at which the castings are heated and the cooling rate depend on the type of castings. ANNEX 3.1 Page 6 FLOW CHART GtAY IRON FOUNDRY | METALS | 0 COKE ICORE MAKING MCLDING SAND | t I . l l s II I - -- -- - - -- -- - CONDITION t ~ ~ ~ ~ I I | MAKE |~~ ~~~~~~ II MELT | | PLMACE I"foi ;~~~~~~~~~~~~~~~~~~~~~~~~~~~o to|a - I t ;~~~~~ -i - - - - TO -! I~ ~ ~ ~~~~~ i II I ~~~~~~~~~~~~~~~~~~~~~~~~coot AK t~~~~~ I 1 G ''a 1.41 its C S I…'' SH.P --------- -- --- I OW -I --- ^a> 1 ' S ial rx ,eSS 'i:HW i>s*:I 1; tT.>, t'3l3I ANNEX 2-1 Page 1 YUGOSLAVIA - KIKINDA IRON FOUNDRY PROJECT M)RKER&5 SELF-MANAGEMENT 1. Workers' self-management is a common feature of Yugoslav enterprises. In Kikinda, as in other "work organizations" in the social sector, this system operates through direct as well as indirect participation of employees in making decisions. The organizational framework of self-management mainly consists of Work Units, Work Units Council, the Workers' Assembly, the Work- ers' Council, the Managing Board, and the Genetal Manager. A. Direct Participation Work Units and Work Units Council 2. Economic units are departmental and functional units within the enterprise. Chief of every Economic Unit is a member of the Work Units Council which pays particular attention to work incentives, better utilization of human and capital resources and improved productivity. The council has a president and a vice-president elected by its members. In case of dispute among the Work units, an arbitration commission is appointed whose decision is final. Workers Assembly 3. The Work Units Council is responsible in its work to the Workers' Assembly in which all the employees participate directly in making decisions on key issues. The assembly could be convened any time under the following circumstances: (a) the initiative of the General Manager or on its own initia- tive; (b) when one-tenth of the workers demand it; and (c) on demand by any socio-political organization. The Assembly is presided over by the President of the Work Units' Council. B. Indirect Participation 4. Since it is not possible for workers to make all decisions by themselves, some of their rights and management functions are delegated to management bodies elected by them, i.e. Workers' Council, Board of Management, etc. Central Workers' Council 5. The Central Workers' Council is the most important management body. It consists of 28 members elected for two years by the employees of Kikinda. Nobody can be elected for two consecutive terms. Every year, half the mem- bers of the Council are replaced by newly-elected members. ANNEX 2-1 Page 2 6. The council sets forth the policy of the enterprise. Its approval is necessary on major investments, annual investment plans, and appropriation of company profits. To facilitate its operation, the council has different committees for: investment, internal control, technical Improvement, standard of living, personnel, discipline, work standards, waste disposal, accident prevention and health protection, distribution of personal income, awards of medals, petitions and complaints, and job competition and reappointments. In addition to these standard coumitteeu, some others can be appointed to deal with specific problems as the need arises. Executive Board 7. The Executive Board, a body of the Workers' Council, consists of 9 members, including the General Manager. The members are elected by the Central Workers' Council for two years. No member can be elected for more than one term in a row. Half the members (excluding the General Manager) are replaced every year. The members elect among themselves the president and his deputy. However, the General Manager cannot be elected the president of the Executive Board. 8. The Board has certain independence in the exercise of its functions as laid down by by-laws or other enactments of the enterprise. It drafts working and development plans and programs, and submits them to the Workers' Council for approval. In general, the Board is responsible for the proper functioning of the enterprise. It consists of mostly skilled workers and office employees with higher education. General Manager 9. The General Manager is elected by the Workers' Council but he must have the following qualifications and experience: (a) university-level specialist's training and 6 years of experience in management positions; or (b) high school education combined with 12 years of experience in manage- ment positions. 10. The Workers' Council sets up a committee to consider all applica- tions for the position of General Manager, and proposes the election of the candidate who best meets the prescribed conditions. The term of the General Manager is for four years, but he is eligible to compete for a second term. According to the Company Statute, 4 months before the expiry of the General Manager's first term, an open competition for reappointment should be announced. In case the General Manager does not enjoy the confidence of the Workers' Council and the Executive Board, he could be relieved of his duty even before the expiration of his term. 11. The General Manager is independent in his functions and is only respon- sible to the Central Workers' Council. He carries out the decisions of managing ANNEX 2-1 Page 3 bodies, represents the company outside, concludes contracts on behalf of the firm, and looks after the application of legal measures. He formulates the business policy of the enterprise and is responsible for the attainment of good business results through increased production, economy and profitability. 12. The present General Manager of the Kikinda Foundry is Pajic Rade Miroslav, 39. A graduate of the School of Chemical Engineering, Belgrade, Pajic has had more than 12 years of experience in various management positions in Kikinda. He worked as Chief of Laboratory, Main Metallurgist of the Mallea- ble and Nodular Castings Plants, Chief of the Production Development Department, Director of the Malleable Castings Department, Director of the Nodular Castings Department and Deputy General Manager before becoming General Manager in March 1971. He is an active member of many professional associations as well as socio-political organizations. He is President of the Executive Council of the Federal Machine Tool Producers Association (Masino-Union), Belgrade, and also of the Credit CoGmittee of Jugobanka, Novi Sad. YUGOSLAVIA - KIKINDA IRON FOUNDRY PROJECT H C ORGANIZATION CHART H jWorkers' I Assembly 8~~~~~~~~~~~~~~~~~~~~~ CD - - - - - -__ Wo rkrs > I Council R~~~~I I Executi-ve 1Avsr Board GeneralAvsr Manager Director Director - ector Director _ r _ Machine Tool Casting Tec Development nology and & Engieera. Deputy DeveloPmn General _Manager Direc ~ ~ ~ ~ ~ Itetor- Director- Director -DiIrector-I Director D-eco Director eco director - Firector - Investment & Quality Malleable Gray and Machine tdministra- Finance Commercial Maintenance Control Foundry No arol ~~~~~~~~~~~~~~~~~~~~~~~~~~~~0 ,2 CDz N ANNEX 2-2 Page 1 YUGOSLAVIA - KIKINDA IRON FOUNDRY PROJECT DESCRIPTION OF EXISTING FACILITIES 1. The plant is located in the town of Kikinda (population: 40,000), about 130 km north of Belgrade near the Romanian border, and is about 76 meters above sea level. The plant consists of four main production facilities - malleable foundry, gray and nodular foundry, fitting finishing plant and machine tool plant - which are located in separate buildings as shown in the plant layout (Annex 4-2). 2. The malleable foundry produces exclusively black hearth malleable iron castings for the automotive industry and pipe fittings ana has a capac- ity of 11,500 TPY. The gray and nodular iron foundry produces gray iron castings (mainly hand-molded) for Kikinda's own machine tool production and nodular iron castings (mainly machine-molded) for automotive and miscellaneous other industries. The gray and nodular foundry has a capacity of 900 TPY of gray iron and 4,500 TPY of nodular iron castings; the nodular iron capacity is expected to rise to 7,500 TPY in 1974, after the completion of the exist- ing project. The present pipe fitting finishing plant has a capacity to handle 3,800 to 4,000 TPY of fittings of 3/8" to 2" in size. The machine tool plant presently produces about 350 units, equivalent to about 900 TPY, of grinders, radial drills, and hydraulic parts. 3. The existing principal facilities of the Kikinda plant are as follows: A. Malleable Iron Foundry Melting Plant 4. Facilities for the production of liquid iron consist of two batteries of cupola furnaces with furnace charging systems and liquid iron receivers. The melting plant which delivers liquid iron to the fitting-molding line, has a cold blast cupola with 2 furnaces of 4-ton/hour capacity each. Thnese furnaces work alternatively to meet the liquid iron needs. There is an electirc induc- tion receiver (600 KVA) with a 4-ton/hr. capacity. The liquid iron is trans- ferred to the pouring lines through hand-pushed ladles on a monorail system. This melttng plant will be dismantled to make room for the new electric furnaces before the second phase of the project implementation. This plant was completed in 1961 and some repairs were made in 1970. 5. The melting plant which provides liquid iron to the molding lines for making automotive and other castings, consists of one battery of two hot blast cupola furnaces of 4-ton/hr. capacity - each working alternatively, one electric induction receiver (600 KVA) of 4-ton/hr. capacity and two 50-cycle induction furnaces each with a 4-ton holding capacity. These furnaces are primarily used for superheating and correcting of liquid iron. Hand-pushed ladles mounted on a monorail system are being used for transferring liquid iron to the pouring line. This melting plant was constructed in 1965 and was overhauled in 1970; it will be used even after the implementation of the proposed project. ANNEX 2-2 Page 2 Molding Lines 6. There are two molding lines for fittings production and one molding line for automotive castings. 7. Molding Line No. 1: The capacity of this line is about 4,610 TPY. There are seven pairs of cope and drag molding machines for fittings and each pair has a capacity of 100 molds per hour. This molding line includes a 6- meter/minute transfer car conveyor line with core setting, pouring and cool- ing areas. This line is provided with an automatic weighing system. Prepared sand is transported to the mold-making machines through rubber conveyors. There are overhead sand bins for temporary storage of prepared sand. The flask size used in this line is 400 x 330 x (100 x 2) mm. A shakeout with a capacity of 0.5 tons to separate castings from sand is located adjacent to this line. Used sand is transported out of this area through rubber conveyors. This molding line will be dismantled after the completion of Phase I of the proposed project. 8. Molding Line No. 2: This line has a capacity of 850 TPY, but is operated only part-time owing to its worn out condition. This line comprises a roller conveyor line for mold assembly, pouring and cooling, four pairs of cope and drag molding machines with a total capacity of 140 molds per hour and a 0.5 ton shake-out grate. The conveyor system for the transportation of prepared sand for molding line No. 1 is also used for the molding line No. 2. There are separate overhead bins for prepared sand. This molding line will also be discontinued after the completion of Phase I of the project. 9. Molding Line No. 3: This line is primarily for automotive castings and has a capacity of 6,000 TPY. This molding line includes eight pairs of cope and drag molding machines with a total capacity of 280 molds/hour, roller conveyor lines for core-setting, mold-assembly, pouring, cooling and flask transfer to the molding mechines. This molding line receives prepared scand from a different source than No. 1 & 2 molding lines and the other serves molding line No. 3. The capacity of both the sand preparation plants is 40 m3/hr. each. 10. The sand preparation plant which provides the fitting-molding lines with uniform sand, includes a sand-loading device (5-ton/hr), a rotary dryer for new silica sand (5-ton/hr), a sand-preparation process line (40 m3/hr) and a rubber belt conveyor system (40 m3/hr) for transferring the prepared sand. The capacity of this plant will be increased during Phase II of the project. 11. The sand preparation plant, which serves the automotive castings molding line, includes a sand-loading device (5-ton/hr), a rotary dryer (5-ton/hr), a sand-prgparation process line (40 m3/hr), and a rubber belt conveyor system (40 m /hr) for transporting prepared sand to molding machines. During Phase I of the project, this plant will be rearranged. ANNEX 2-2 Page 3 Core-making 12. Facilities for the making of cores consist of two core rooms located adjacent to respective molding lines. The core room near molding lines Nos. 1 & 2 comprises a core sand conveyor system (3-ton/hr), sand-preparation equipment (3-ton/hr), necessary core-making equipment for oil sand, hot box and shell cores, sand distribution systems, conveyor for core handling, and chamber drying ovens for cores. Cores are supplied to the fitting-molding line through a monorail system; a second monorail is available for the trans- portation of cores within the core room. During Phase II of the project, some minor alterations and modifications would be made in this core room. 13. The core-making facilities adjacent to the existing molding line No. 3 comprise one 2-ton/hr sand preparation equipment, core-making machines and a rotary dryer (5-ton/hr). These facilities will be rearranged during the implementation of Phase I of the project. Casting Finishing 14. To insure adequate cooling of castings, they are stored temporarily near the shake-out grate. From this area, castings are transported to the cleaning room by fork lifts. Cleaning Room 15. In this section, de-finning, finishing, cleaning and initial inspec- tion of castings are done. This section is equipped with 16 double-end grinders, 3 large blasting machines, 4 small blasting machines, a number of benches for manual chipping and grinding operations, 2 straightening presses and an elec- tro-magnetic testing apparatus. Some of the cleaning room equipment was pur- chased in 1968/69, During the implementation of Phase I of the project, this section will be relocated. Heat Treatment Facilities 16. There are two elevator annealing furnaces for tempering and stress- relieving. One has a capacity of 8-ton/charge and the other 10-ton/charge. Apart from this, there is one low temperature continuous furnace (0.7-ton/hr), one high temperature continuous furnace (0.7-ton/hr) and four chamber furnaces. At the end of the continuous furnaces, oil bath and water bath facilities are available. The continuous furnaces were installed in 1969. No changes in this section are envisaged. Observation 17. The present facilities in the malleable iron foundry are well kept and well maintained even though some of the equipment is very old and needs replacement. The entire foundry is operated on two shifts per day (5 days per week plus one Saturday per month) with the exception of some parts of the cleaning room with a capacity for only one shift working per day which ANNEX 2-2 Page 4 is sufficient for present production level, and of the heat treatment facil- ities which are working 3 shifts per day owing to capacity constraints. The bottlenecks which prevent higher production in the malleable plant are the limited heat treatment and molding capacities. B. Gray and Nodular Iron Foundry Melting Plant 18. The gray and nodular iron foundry has only melting plant which con- sists of one battery of two hot blast cupola furnaces of 4-5 tons/hr capac- ity. These furnaces operate alternately to meet the liquid iron demand for gray and nodular iron casitngs. In the first two shifts, liquid iron for nodular castings is produced and, in the third shift, liquid iron for gray castings is produced. The melting plant includes sufficient charging carts and devices. A vibrating desulfuring unit (2 tons) is mounted next to the cupola furnaces. Molten iron is charged into this unit where calcium carbide is used to lessen the sulfur content and to improve the ductility of castings. Slag is removed and base iron is added to the 4-ton coreless induction hold- ing furnace (500 KVA) for superheating and corrections. Molten metal is poured from this furnace into a delivery ladle; ferromagnesium is added, under control, to the ladle if the metal is meant for nodular castings. Bridge cranes, with a capacity of 15 tons, in the main bay, are used for the liquid iron transfer. Molding Lines 19. There are three molding lines - two machine-molding lines for nodular castings and one hand-molding line for gray castings - which are presently operating; and one more machine-molding line is currently being installed. 20. (a) Molding Line No. 1: This line is a hand-molding line capable of producing castings up to 900 TPY and has a slinger station for the gray iron castings, for the machine tools. Total area covered by this line is about 460 m2. A sand conveying and ramming device of 10 m3/hr of sand capacity is also available. Since gray iron is produced only in the third shift, this line is operated only in the third shift. The molten metal is transported to this line by overhead bridge crane (5.5 tons). 21. (b) Molding Line No. 2: This is a cope and drag type molding line with two pairs of molding machines (70 molds/hr) and has a capacity of 1,700 TPY. This line consists of two roller-conveyor lines for core-setting, mold-assembly, pouring, cooling and flask transfer to the molding machines. Various sizes of flasks are used in this line. The sand for making molds is transported to this line by overhead rubber conveyor belts and is stored temporarily in over- head sand bins. Two shakeout grates (0.5 ton) are located at the end of each roller path conveyor. Castings are separated from the sand at these shakeout grates and are stored temporarily at this area for cooling. The used sand is transported out of this area through conveyor belts. This line will be dismantled during project implementation. ANNEX 2-2 Page 5 22. (c) Molding Line No. 3: This line has a capacity of 2,800 TPY of cast- ings and is equipped with 2 pairs of molding machines (25 and 30 molds/hr). This line comprises four roller-conveyor lines for core-setting, mold-assembly, pourings, cooling and flask transfer to the molding machines. Prepared sand is brought to the molding machines through overhead conveyor belts (30 m3/hr) and is temporarily stored in overhead sand bins, from which the molding machines are fed. The molten iron is poured into the molds by using an overhead hand-pushed monorail system. Two shakeout grates (0.3 ton and 0.5 ton) are used to separate castings from the molds and the used sand is transported out of this area through conveyor belts. Even after the comple- tion of the project, this line will be used without any major alterations. 23. (d) Molding Line No. 4: This line under construction is expected to be completed by the end of 1973. This is a Shell molding line and is different from the other lines in the sense that it uses dry pre-coated sand while the others use wet sand. Therefore, the sand preparation unit is also a part of this line. This line also has its own cleaning room facilities. Ti,e capacity of this line is 3,000 TPY; however, it can be increased up to 4,000 TPY depend- ing upon the type of castings produced. In this plant, sand from a 2-ton/hr. sand preparation process facility is transported to two shell molding machines (30 cycles/hr) by a 2-ton/hr. sand handling elevator. There are four Shell core-making machines (40 cycles/hr.) capable of producing up to 390,000 cores per year. Sand fur core making is stored in four sand bunkers each with 0.7 m3 capacity. The molding line is equipped with a cooling tunnel which has a 10,000 N m3/hr gas suction device. The molds are brought to the molding line through an overhead monorail system. Molten iron is transported to the mold- ing line from the holding furnace by monorial. Metal pouring and initial cool- ing is done in the molding line and the castings are separated from the mold at a 0.5 ton shakeout grate. With the use of a 0.2 ton console crane, cast- ings are transferred from the molding line to a cooling conveyor line which takes the castings to a cooling tunnel. Total cooling time is about 2.5 hours. After cooling, the castings are removed from the conveyor for clean- ing. The cleaning section of this plant has work benches for cutting of castings, special grinding machines for cutting and grinding, double end grinding machines, belt conveyors and electromagnetic separators. Finished products are then sent to the storage area. Sand Preparation Plant 24. The sand preparation plant for the three molding lines (Nos. 1, 2 & 3) has a capacity of 40 m3/hr of sand. This piant consists of a sand loading device (5 m3/hr.), a rotary dryer (5 m3hr.), two sand mixers (15 m3/hr. each) and conveyor belt systems for transporting prepared sand. This plant was in- stalled in 1969 and will continue to operate, with slight modifications, even after the proposed expansion. Core-making 25. The core-making plant serves molding lines Nos. 1, 2 & 3 and is equipped with core sand preparation devices (2-ton/hr), a 15-liter core-making machine (50 cycles/hr.), a 7.5-liter core-making machine (60 cycles/hr.), a roller path for cores handling, chamber dryers for cores and sufficient core storage shelves. ANNEX 2-2 Page 6 Casting Finishing 26. The facilities for finishing is primarily used for castings from the molding lines Nos. 1, 2 and 3. Cleaning facilities include a chamber blasting machine (2 x 6 m), a continuous blasting machine for nodular castings, console-type grinding machines, cut-off grinding machines, necessary work benches and floor cleaning area. 27. For the heat treatment of castings, there is an elevator annealing furnace (12-ton/charge). The castings are charged into this furnace with the use of a charging cart and are moved to this area by an overhead bridge crane (2.5 ton). No changes in this section are envisaged in the project. Observations 28. This plant is fairly new (installed in 1969) and is well operated and maintained. With the addition of the new molding line - no. 4-Shell molding line - the present production constraint regarding molding capacity will be eliminated. However, the melting shop capacity willl be a bottleneck for increasing production beyond 7,500 TPY of nodular iron castings in two shifts. C. Fitting Finishing Shop 29. The fitting finishing shop is located in a separate building adja- cent to the machine tool plant (see Annex 4-2). The total capacity of this plant is about 3,800 to 4,000 TPY of pipe fittings ranging in size from 3/8" to 2". Fitting castings from the malleable iron foundry are weighed at the fitting finishing plant before any finishing operation is done. Initial Finishing 30. In this section, most of the initial cleaning and finishing work is done prior to final machine work. This section is equipped with nine double- head grinding machines with supporting roller paths for initial grinding work, 19 tumbling drums for surface cleaning, and one pressure testing equipment. Final Machining 31. After the initial cleaning and finishing, the fittings (elbows, T-pieces, couplings, etc.) are transported by a monorail system to the re- spective machining areas. Machines for final machining comprise 20 lathes for final machining, 18 internal thread-cutting machines, 2 grinding machines, 10 outer thread-cutting machines, 1 elbow thread-cutting machine, 1 T-piece thread-cutting machine, 10 column-type drilling machines, 1 tool-sharpening machine, and auxiliary equipment. Most of this equipment will be relocated during the implementation of the project. After the final machining opera- tions, most of the fittings are transported to the cleaning section for prep- aration for galvanizing and the remaining are moved to the continuous con- servation line for black fittings. All inplant transportation is by mono- rail systems. There are adequate facilities within the plant for semi-finished and finished product storage. ANNEX 2-2 Page 7 Cleaning Room 32. Prior to galvanizing the fittings, they are thoroughly cleaned and dried. Equipment and other facilities included in this section are 2 caustic soda vats, 4 water vats, one acid vat and lye vat. After proper cleaning, the fittings are transported to the galvanizing section by a monorail. During the project implementation, very minor alterations to this section are envisaged. Galvanizing Section 33. The cleaned fittings are received at the continuous dryer (0.5 ton/ hr.) which controls the capacity of this section. This unit also includes one 40-ton zinc melting furnace, one 10-ton zinc melting furnace, zinc baths, heated tables, console crane (0.2 ton) for loading and unloading, water vats and a centrifuge. Present capacity of this unit is about 1,260 TPY. After galvanizing, products are transported to the final finishing and packing section. Final Finishing and Packing 34. This section includes two continuous varnish coating machines, con- veyor belts for transporting the final product to the packing section, a few roller conveyors for packing, control tables, packing tables and sufficient space for cardboard box and finished product storage. From here, cartons containing the finished fittings are shipped out. Observations 35. Present production of fittings is limited to 4,000 TPY due to the capacity limitations of this plant. The layout of the machine tools in this plant will have to be slightly altered to bring about an increase in produc- tion. Even though some of the equipment and machines in this shop are fairly old (installed in 1957) and need replacoment, these facilities are maintained properly and operated efficiently. Due to the capacity restrictions in the galvanizing section, the produciton of galvanized fittings, which have a good demand, is limited. D. Machine Tool Plant 36. The machine tool factory is also located in a separate building with all essential staff departments except the quality control department. It has its own plant management, which is responsible to the Managing Director. 37. The layout of the machine tool factory, originally made for the production of lathes, drills and surface grinders, was done on a functional basis - all milling operations in one section, turning operations in another, etc. Now that the plant has discontinued making lathes and has undertaken the production of various types of grinders, the old layout is not suitable for optimal material flow for the present production. ANNEX 2-2 Page 8 38. The following sections are in the plant: steel storehouse, steel cutting section, machine preparation and store for small parts, store for large parts, tool room, casting store, sections for grinding, milling, drill- ing, and turning operations, cleaning of castings, locksmithing and welding, marking of casings for machining, electric fittings, hardening, painting, sub-assembling and assembling, assembling and testing of hydraulic parts, assembling of electric control devices, final assembly of the machines, fi- nal painting, final adjusting and delivery. The equipment in the plant con- sists of: 28 Universal lathes (installed in 1957-62; 10 of them would be put out of use); 3 Revolver lathes (recently installed); 20 Milling machines (installed in 1957-62; 7 of them would be put out of use); 5 Gear Tooth Mill- ing Cutters (installed in 1962); 14 Drilling Machines (installed in 1957-62; 3 of them would be put out of use); 26 Grinding Machines (installed in 1958- 62; 5 of the would be taken out of service); 7 Boring and Milling Machines (installed in 1957-62; 2 of them would be put out of use); 6 Planning Machines (installed in 1960; 1 of them would be taken out of service); 1 Grinder for Guide Rods installed in 1960; it would be put out of use); and 4 Cutting Machines (installed in 1957-60; 1 of them would be taken out of service). The machine tool plant also includes sufficient auxiliary equipment to sup- port the present level of production. Observation 39. At present, in the machine tool plant there are certain problems primarily due to the use of old machine tools which are no longer sufficiently accurate and are not geared for mass production. Furhermore, the internal transport of assembly parts, semi-finished products and. finished products is also a problem since the present layout of the plant was made when the company was producing different types of products. Therefore, to improve the efficiency of the plant even for the present production, new machines as well as relocation of equipment are necessary. Relocation of machine tools is envisaged in the project. E. Quality Control Department 40. The quality control department, a self-contained department directly under the General Manager, observes strict control of all phases of production (melting, core-making, molding, final control of products in the cleaning shop, and material control of raw materials and supplies). The quality control lab- oratory is very well equipped. It consists of a spectograph for 12 elements, a wet-chemical laboratory, a physical laboratory, and necessary supporting units. No additions and alterations in this laboratory are planned under the project. F. Utilities Electric Power and Distribution 41. All power for Kikinda is purchased from "Elektrovojvodina' of Novi Sad. The plant is supplied with power from a main 35/10 KV transformer sub- station. Because of the subsequent additions of new facilities in different ANNEX 2-2 Page 9 phases plus the depreciated condition of the transformer, the distribution system as it now exists is hampered by overload at the transformer station. Although the company has taken measures to rectify this situation, power is distributed (through closed loop system) to different plants by underground cables (10 KV) and is stepped down from 10 KV to 0.4 KV before feeding elec- tric motors and furnaces. Sub-stations with 10/0.4 KV transformers are lo- cated near each plant. The total installed electric power at Kikinda is 12 MVA and the annual electric power consumption is about 20 million kwh. Considerable changes, additions and alterations to the power distribution system are proposed in the project. Gas 42. Natural gas for the plant operation is purchased from NAFTAGAS, which has its central distribution station close to the plant. From the Gage Control station (25 atmospheric pressure) which is adjacent to the plant, gas is brought to the distribution station through a 3-1/2" pipe- line after reducing the pressure to 4.5 atmospheric unit. From this sta- tion, the gas is supplied to various production plants, where the pressure is further reduced to 1 atmospheric unit prior to distribution within the plants. Gas is being used in the malleable iron foundry (for the heat treatment plant and core making shop, nodular and grey foundry), for cupola air heater and core-making shop, and fitting finishing shop (for galvanizing lines). Moreover, gas is used for cooking and heating boilers. The consump- tion of gas is about 1,250 NW3/h. The present gas pipe system does not ade- quately satisfy the requirements; this problem is to be rectified under the project. Compressed Air 43. The present compressor station is about 12 years old and has 5 piston compressors each with a capacity of 20 m3/hr. Apart from the expan- sion of castings plants which operate exclusively with compressed air, the machine tool plant expansion would also increase the need for compressed air. The compressed air requirement has increased more than three times in the last 10 years. The present consumption rate is about 96 NM3/hr (at 7 times the atmospheric pressure). The existing capacity and the distribution system - mostly worn out due to age - is very tight for the present production. In the project, major changes are planned for the compressor station. Water 44. The present water distribution system was built during the last 10 years to meet the needs of different phases of plant expansion. With the 4 existing wells, which have a capacity of 920 lit/min., most of the present water requirements are met. By adopting recirculation systems, the water shortage is minimized. Further, an overhead water tank (50 m3) is also available as reserve and can provide water at required pressure. The plant is also connected to the city water system, which supplies water exclusively to annealing furnaces and induction furnaces. Additional water distribution systems are envisaged in the project. ANNEX 2-2 Page 10 Heating 45. All plants are centrally heated by steam. The steam boiler room has two boilers wirth a capacity of 13 tons of steam per hour. The present steam pipeline system needs replacement since its capacity is not adequate to supply sufficient steam to different plants. This problem is aggravated by the need for greater quantities of steam to compensate for the heated air going out of the plant due to air cleaning ventilation. The present system of heating will be replaced by hot water heating systems under the project. Industrial Projects Department June 1973 AMNE 2-3 YUGOSLAVIA - KIEKINDA IRON FOUNDRY PROJECT HISTORICAL INCOME STATEMENTS(1968-1972) (Din million) Years Ended December 31, 1968 1969 1970 1971 1972 Net Safl es!/ 115.8o/ 173.3 ~~ 159.0 234.2 296.0 Cost of Goods Sold Materials, Supplies and Utilities / 59.9 98.7 83.5 116.7 114.4 Labor 21.9 32.7 33-3 42.0 53.2 Cross Profit 34.0 41.9 42.2 75.5 98.4 Operating Expenses Selling and Administratyonr/ 5.4 7.3 7.6 8.4 13.3 Maintenance amd Repair= 1.5 1.9 2.2 4.2 4.4 Depre ' tion 5.4 8.9 11.5 21.1 30.2 OtherLta_ 3.2 5.2 6.2 11.1 12.2 Operating Pr2Iit 18.5 18.6 14.7 30.7 38.3 Other Incomea- 0.7 1.1 1.3 2.9 5.9 Other Expenses Intere> 6.7 7.3 7.2 10.2 9.3 Sundry_) =2.0 2.9 1.9 9.0 7.4 Income Before Taxes and (ontributions 10.5 9.5 6.9 14.4 27.5 Taxes and ContributionsW 2.2 2.6 2.2 0.7 0.5 Net Income ("Dobit") 8.3 _T;39 4.7 13.7 27.0 Distribution of Net Income - Appropriation to Reserve Fund 0.9 1.0 0.6 0.8 2.1 - Appropriation to Business Fund 7.0 5.5. 3.6 9.9. 21.3. - Appropriation to Collective Consumption Fund j/ 0.4 0.4 0.5 2.8 3.0 - Appropriation to Mutual Reserve Fund - - - 0,2 o.6 1/ Including revenue from services (machine tool servicing, etc.) and internal company sales.. 2/ Includes part of the costs of "maintenance and repair" and "selling and administration". Excluding office supplies, etc. which are included under "material costs". Excluding material costs of medium-scale repair and maintenance costs. Includes land and water tax, water contribution, insurance, contributions to associations and chambers of commerce. 6/ Interest on receivable%interest from obligatory loan contributions, etc. 7/ Extraordinary expenses including start-up expenses of the previous project andthe preoperating expense for the project. 8/ Interest on Business Fund (abolished in 1971), contribution for the development of areas hit by natural disasters.etc. 2/ Since 1971, it is treated as a loan to Federal Government. Previously, it was treated as a tax ' Includes sales invoiced in previous years, but not yet paid. Industrial Projects Department May, 1973. ANNEX 2-4 YUGOSLAVIA -KIKINDA IRON FOUNDRY PROJECT HISTORICAL BALANCE :H7ETS(196b-1972) (Din Million) Dec. 31,1968 1969 1970 1971 1972 ASSETS Current Assets Cash and Bank 10.5 8.9 1.6 8.1 16.1 Receivables 28.3 39.6 46.8 43.6 56.0 Inventory 38.3 45.0 59.2 60.o 71.2 Sub-total 77.1 93.5 107.T 111.7 143.3 Gross Fixed Assets 73.2 10V77 112.6 165.2 T7T. Less: Aecumulated Depreciation 29.3 38.2 48.7 97.9 124.6 Net Fixed Assets 43.9 ;772 63.9 70.3 -TTT Rinancial Assets 3.0 6.o 10.3 12.2 19.5 Other Assets 7.3 6.3 12.9 13.5 18.0 TOTAL ASSETS 131.3 172.0 1-9T7 207.7 2-327.I LIABILITIES Current Lia,ilities Accounts Payables* 44.2 59.1 72.8 59.2 53.6 Current Portion of Long-Term Debt 4* ** ** .7 7.7 Sub-total 49.1 7-27 63.9 61.3 Long-Term Debt 33.1 50.7 54.2 51.4 51.5 Equity Business Funds 45.9 52.0 55.7 79.1 100.8 Reserve Funds 3.4 4.3 4.9 5.5 7.6 Collective Consumption Funds 4.7 5.9 7.1 7.6 10.4 kHutual Reserve Fund - - - 0.2 0.3 Sub-total 7 62 92.4 11 79.6 TOTAL LIABILITIES 131.3 172.0 194.7 207.7 __27_ Current Ratio 1.7 1.6 1.5 1.7 2.3 Long-Term Debt/Equity Ratio 38:62 45:55 46:54 36:64 30:70 * Including short-term borrowing from other enterprises. ** Current portion of long-term debt is included in long-term debt. Note: For explanation of terms used, refer to Annex 7-3, page 2 Industrial Projects Department May 1973 ANNEX 3-1 YUGOSLAVIA; KTKtNDA IRON FOUNDRY PROJECT MARKET FOR IRON CASTINGS A. Industrial Setting 1. Yugoslavia has a dynamic industry sector which in 1971 contributed to over 30% of the Gross National Product estimated at approximately US$15 billion. Industrial production has been expanding at a real annual rate of about 10.5% during 1952-1971, and nearly one-fourth of total labor force estimated at 8.3 million (1971) is engaged in the industrial sector. 2. Unlike the case.in many developing countries, industrial develop- ment in Yugoslavia has been outward-oriented and, on the whole, competitive. Industrial exports have grown at an average annual rate of 14% during the decade 1961-1971, faster than the rate of growth in industrial production. Industry, along with mining, accounts for over 85% of the total exports of US$$t,81O million (1971). 3. Since widespread reforms of 1965, there has been a general reduction in quantitative restrictions and import duties and a better alignment of domestic prices with world prices. By the end of 1971, only 20% equipment imports, 25% of raw material and semi-finished goods and 37% of consumer goods imports fell under the restrictive commodity quota and direct licensing schemes. Between 1965 and 1971, the average duty on all imports was lowered from about 14% to about 12% and on equipment imports from 24% to 18%, with further reductions in 1972 and 1973. Compared to most developing countries, these rates are quite moderate. They are increased, however, by customs and border taxes (together 3-4%) and, since 1971, by a special surtax of 6%. The highest average duty protection applies to metal products (25%) and electrical equipment (22%), two of the fast-growing subsectors. 4. The current Five-Year Plan (1971-75) target for the growth of industry (including mining and quarrying) is 8% a year. Crude steel pro- duction is expected to grow at an annual rate of 14%, reaching about 5 million tons in 1975. Equipment and durable consumer goods industry, which currently accounts for about 26% of the total industrial output, is expected to grow at the rate of 8.5% a year. Main Users of Castings 5. The main users of castings are motor vehicles, agricultural machinery, electrical and non-electrical machinery, machine tools, construction industry, rail wagons, shipbuilding, and consumer durables. Past trends and future projections of production in some of these industries are shown below: ANNEX 3K-1 Page 2 Units 1967 1970 1975L/ 19801/ Motor Cars Nos. 47 8 110,709 210,000 250,000 Trucks Nos. 9,654 12,901 25,200 32,050 Buses Nos. 2,421 3,856 5,750 5,000 Tractors Nos. 8,793 12,0h7 27,000 4o,000 Machine Tools Tons 9,8^1 12,180 16,100 20,000 1/ UMI estimates based on the Social Ple-n B. Structure of Foundry Industry 6. There are about 250 foundries in Yugoslavia of which approximately 50 accounted for nearly 90% of the production of castings in 1972 totalling about 453,300 tons. The following table shows the structure of the foundry induis try: Structure of Foundry Industry (1972) % of Production Total (in tons) Production I. Iron Castings Malleable 12,927 2.8 Pipe Fittings 7,408 1.6 Gray 341,571 75.4 Nodular 11,000 2. Sub-total 372,906 82.2 II. Steel Castings 51,959 11.5 III. Total Ferrous Castings 424,865 93.7 (I + II) IV. Non-Ferrous Castings 28,422 6.3 V. Total Castings (III + IV) 453,287 100.0 7. Only 12 foundries have an annual capacity of over 10,000 tons each (see Tables 1 and 3). Majority of the foundries (162) produce less than 500 tons a year. An international comparison (Table 4) shows that Yugoslav production of castings is low. For example, in 1971 the production of Yugoslavia was only 9% of the castings output of the Federal Republic of Qermany. ANNEX 3-1 Page 3 C. Production of Castings 8. In 1960, the total production of castings was nearly 231,670 tons. During 1960-1972, it increased at an annual rate of 5.8%. The following table shows the growth of production during this period and the projection for 1977 (see also Table 2): Production of Castigs (Tons) 1960 1972 1977 kverage Annual Growth(%) ___Actual--__ Proj. 1960-1972 1972-1977 Iron Castings a. Malleable Iron Castings 1 and Pipe Fittings 4,,400 20,335 28,750- 13.6 7.0 b. Gray and Nodular Castings 188,031 352,571 546,250g./ 5.4 9.5 c. Total Iron Castings 192,431 372,906 575,000 5.6 9.0 d. Steel Castings 23,320 51,959 83,000 7.0 10.0 e. Total Ferrous Castings (c + d) 215,751 4214,865 658,000 6.0 9.0 f. Non-Ferrous Castings 15,915 28,422 48,500 5.0 11.0 TOTAL 231,666 453,287 706,500 5.8 9.0 1/ Including about 10,000 tons of pipe fittings. 2/ Including about 24,000 tons of nodular castings. Source: Foundry Association of Yugoslavia and Bank. 9. Considering the expansion programs of various foundries, it appears that during 1972-1977, total production of castings would grow at an average annual rate of about 9%, reaching 706,500 tons in 1977. Iron Castings 10. The production of iron castings accounted for 82% of the total castings output in 1972. The percentage is expected to decline slightly to 81% by 1977 because of the faster rate of expansion of steel and non-ferrous foundries. Among iron castings, gray and nodular castings are the most important followed by malleable castings and pipe fittings. 11. Gray and Nodular Castings: There are 100 and odd gray and nodular iron foundries in Yugoslavia of which less than half accounfUd for nearly 90% of the total production estimated at 352,600 tons in 1972. Production in the next five years is expected to increase by about 55% mainly because of the expansion of the following five foundries: FOB, Kikindat Zrenjanin, Ilias and Store. ANNEX 3-1 Page h Dur;ing 1972-7 4 FOB, a leading producer of gray castings, plans to increase its production of gray and nodular castings from 34,000 tons to 90,000 tons; Kikinda's output of different products is expected to jump from 13,260 tons to 37,000 tons; and the Zrenjanin foundry which produces mostly radiators for heating buildings, plans to expand its production from 15,000 tons to 30,000 tons. FOB and Kikinda are bound by a technical and production de- marcation agreement signed in 1971. According to this agreement, FOB would concentrate on the production of gray castings for the motor vehicle and tractor industries, while Kikinda would confine its gray castings production to meet its internal requirements to produce machine tools. In the case of nodular castings, Kikinda would expand its production on a large scale (from 3,310 tons to 16,000 tons) during 1972-1977 while FMB would undertake only minor expansion from 4,150 tons to 9,250 tons. Further, FOB would not produce malleable and pipe fittings, while Kikinda would expand its production of such castings. 12. Currently, the production of nodular castings is low at 11,000 tons with Kikinda accounting for 30% of the total production. Kikinda's production of these castings is expected to increase to 16,000 tons in 1977 when the Company would account for about 67% of the total of nodular output. Apart from Kikinda and FOB, there are three nodular casting producers: Store Steel Plant in Slovania; Torpedo at Rijelca in Croatia; and Dalit at Daruvar, also in Croatia. These three plants, which also produce gray castings, had the following production capacity in 1972: (in tons) Nodular. av Store 2,500 12,500 Torpedo 500 3,500 Dalit 400 3,100 Of the above three foundries, only Torpedo has plans to expand and double its production of both gray and nodular castings. 13. Malleable Castings: There is a trend towards the use of nodular castings in the place of malleable iron castings in the main automobile producing countries. As a result, nodular iron castings are likely to gain importance in the future. However, it is very unlikely that the complete substitution of malleable castings by nodular castings would take place within the next decade. Currently, there is a shortage of malleable castings in Western Europe where the production of such castings -has decreased steeply. In this context, Kikinda, the major producer of malleable castings, feels that the prospect for malleable castings are good at least for one decade. Under a carefully planned expansion program, Kikincla is expanding its malleable castings production from 9,198 tons to 19,500 tons during 1972-1977. While doing this, sufficient flexibility would be built into the expanded facilities to switch over from malleable to nodular and gray castings production com- pletely if future market conditions necessitate such a measure. ANNEX 3-1 14,. Kikinda currently accounts for about 40% of the total malleable castings production in the country. Other important producers of malleable castings are: MINEL at Topola in Serbia; Novi Zivot at Zenica in Bosnia -- Hercegovina; and Titan at Kamnik in Slovenia. These three foundries have the following expansion programs: Malleable Casting s Capacity (In tons) 1972 1977 MThEL 17,00 2,000 Novi Zivot 4,000 5,200 Titan 4,000 5.200 Total 9,500 12,400 15. Malleable-Pipe Fittings: In 1972, Kikinda accounted for 56% of the total malleable pipe fittings produced in Yugoslavia. Apart from this ComparVr, which plans to expand its production from 4,113 tons to 6,400 tons during 1972-77, there is only one other foundry (Titan) which has major expansion plans to double its capacity to 4,000 TPY. D. Growth of Ca3tings Consumption 16. The main consumers of iron castings (excluding pipe fittings) are industries prodacing agricultural machinery, motor vehicles, machine tools, ships, rail wagons, household appliances, etc. The construction industry is the main consumer for pipe fittings. Currently, as a result of the con- struction boom in Yugoslavia, there is a shortage of pipe fittings and their prices are controlled. 17. The apparent consumption of all iron castings increased at an average rate of 11% during the last four years, reaching 321,000 tons in 1972 as shown in the following table: Past Trend of Apparent Conngumtion of Iron Castings rIn '000 tons) 1. Domestic Iron Casting 1968 1969 1970 1971 1972 Production 2 :5 30 340.0 3 373.0 of which: a. Gray and Nodular 248.0 293.0 324.0 343.0 352.6 b. Malleable (including Pipe Fittings) 12.0 13.5 16.0 17.0 20.4 2. Exports 51.3 50.4 57.0 61.4 66.o 3. (1) - (2) 208.7 256.1 283.0 298.6 307.0 4. Imports 4.0 6.8 9.7 11.0 14.0 5. Apparent Consunption 212.7 262.9 292.7 309.6 321.0 (3) + (4) AMEX 3 -1 Page 6 E. Demand Forecast for Iron Castings by Subsectors 18. According to past experience in Yugoslavia, the average require- ments of castings to manufacture one unit of the followi:g products are: 1 car, 110 kgs; 1 truck,890 kgs; 1 bus,720 kgs; 1 wheeled tractor, 885 kgs; 1 crawler tractor, 1,470 kgs; one ton of machine tools, 830 kgs; one ton of electrical equipment, 100 kgs; one ton of non-electrical equip- ment, 280 kgs; one ton of agricultural machinery (excluding tractors), 100 kgs; one ton of construction machinery, 370 kgs. These normative require- ments are used to forecast the need for castings in the various subsectors. Motor Vehicles 19. Car Production: Zavodi Crvexna Zastava (ZCZ) located at Kragujevac, near Belgrade, is the only car producer in Yugoslavia. It produces five basic models under a license frm FIAT of Italy. It has an annual capacity to prodace 110,000 cars. In 1972, Zastava produced 90,000 cars, with the capacity utilization being 82%. The production of the company is expected to increase to 225,000 in 1977. Based on the normative of about 110 kgs of castings per car, the total requirements of Zastava would be,about 24,800 tons in 1977. The company relies mainly on the FOB (at Belgrade), Kikinda (130 Im from Belgrade) and MINEL (at Topola) foundries for the supply Of castings. 20. Car Assembling: There are three enterprises which assemble cars. They include: Industrija Motornih Vozil (IMV), at Novo iesto, operating in collaboration with Renault of France; Tovarna Motornih Vozil (TOMOS) at Koper which collaborates with Citroen of France; and Udruzena Netalna Industri,ja (UNIS) at Sarajevo which has collaboration agreement with Volks- wagen of Germary. Their total assembly production was about 20,000 in 1972. It is expected to remain constant at this level up to 1977. Therefore, the demand for oastings byQcar assemblers would continue to be at the 1972 level of 2,200 tons. 21. Truck and Bus Producers/Assemblers: The main truck and bus producers/ assemblers are FAP-FAMOS (Priboj and Sarajevo), Ikarus (Zemun), TAM (Maribor), Torpedo (Rijeka), and Zastava. Their total production is expected to increase as follows: (Nos.) 1972 1977 (Actual) Trucks and Vans 15,000 27,ooo Bases 4,000 6,000 22. Assuming an average of 890 kgs of casting per truck and 720 kgs per bus, the total castings requirements for their production/assembly would increase from 13,770 tons in 1972 to 28,130 tons in 1977. ANIEX 3-1 IPage 7 Tractors 23. Wheeled Tractors: The product:Lon of wheeled tractors is projected to increase from 17,0t5in 1972 to 38,850 in 1977. Assuming about 885 kgs of castings per tractor, the total requirement of castings for the production of wheeled tractcrs would be 33,500 tons in 1977 compared to 15_,800 tons in 1972. 24. Caterpillar Tractors: The output of caterpillar tractors is projected to increase from 545 in 1972 to 1,150 in 1977. Assuming 1,470 kgs of castings per unit, the total requirement of castings for the production of caterpillar tractors would be 1,700 tons in 1977. Agricultural Machinery (excluding tractors) 25. These machinery including harvesters, combines, etc. consumed a total of about 5,50G tons of castings in 1972. T1heir production is projected to increase to 72,000 tons in 1977. Assuming an average of 100 kgs of castings per ton of machinery of this type, the total requirement of castings by this subsector would be about 7,200 tons in 1977. Machine Tools 26. 11achine tool production in 1972 was 13,125 tons when 10,160 tons of castings were required. The production is expected to reach 17,990 tons in 1977, when the total castings requirements, at the rate of 830 kgs per ton of machine tools, would be about 14,900 tons. Electrical Machinery 27. The production of electrical machinery in 1972 was about 24,500 tons when the total castings used in their manufacture was nearly 2,450 tons. This subsector is growing at the rate of about 9% a year and its production is ex- pected to reach 37,700 tons in 1977. Assuming 100 kgs of castings per ton of electrical machinery, the total requirement of castings by the electrical machinery subsector would be 3,770 tons in 1977. Non-Electrical Machineer 28. In 1972, about 24,000 tons of castings were used to prodace about 85,700 tons of non-electrical machinery. The production of non-electrical machinery, presently growing at the fast rate of about 10.5% a year, is expected to reach about i41,200 tons in 1977. Assuming 280 kgs per ton of non- electrical machinery, the total requirement of castings by this subsector would be about 39,500 in 1977. Construction -achinery 29. The manufacture of ccnstruction machinery required over 16,100 tons of castings in 1972. Assuming 370 kgs of castings per ton of construction machinery, the total requirement of castings by this subsector would be about 29,700 in 1977 when the total production of construaction machinery is projected at 80,300 tons. ANNE 3-1I Page 8 Consumer Durables 30. The production of consumer durables required about 33,500 tons of castings in 1972. This subsector is growing at the rate of 8.5%. Assuming the same growth rate for the castings requirements of this subsector, the total requirement of castings would reach about 50,400 in 1977. Other Users 31. Other users of castings include ship building, railway rolling stock, housing, etc. as well as the replacement market for various motor vehicles and machinery. These users required about 185,200 tons of castings in 1972. Looking at the projections for the growth of these subsectors, it seems realistic to assume that their castings requirements would increase by at least 15% a year. Based on this assumption, their casting needs would be about 372,300 tons in 1977. F. Total Demand and Supply Commarison 32. From the above estimates, it appears that the total demand for castings in Yugoslavia would increase between 1972 and 1977 as follows: Total Demand for Castings by Subsectors 7 (in rO tons) 1972 1977 Car Prodaction 11.8 Truck Production 13.8 24.1 Bus Production 2.7 4.0 Tractor Production 16.6 36.0 Agricultural Machinery (excluding tractors) 5.5 7.2 Machine Tools 10.2 14.9 Electrical Equipment 2.5 3.8 Non-Electrical Equipment 24.0 39.5 Construction Machinery 16.1 29.7 Consumer Durables 33.5 50.4 Other Users 185.2 372.3 Total 320.9 608.7 The above table shows that the total demand for iron castings would grow from about 321,000 tons in 1972 to 609,000 tons in 1977, reflecting an average annual growth rate of around 13.5%. 33. Currently, the shares of gray, nodular and malleable castings (including pipe fittings) in total demand are around 91%, 3% and 6% respectively. This is borne out by the experience in other countries as well, with minor variations. However, by 1977, the share of malleable castings is likely to go doiwn to 5% and the share of nodular castings would go up to 5%, with the share of gray castings declining slightly to 90%. This change in the proportional ANNE 3-1 Page 9 shares of the three types of castings would result mainly because nodular castings are gradually replacing malleable castings. Assuming these shares, the total demand in 1977 by t;ype of castings would be as follows: Total Domestic Demanld in 1977 by Type of Castings tin '000 tons) Gray 548 0 Nodular 30.5 lalleable (inclu.ding pipe fittings) 30.5 Total 609.0 G. Domstic Production and Demand Coa2arison for 1977 34. As noted earlier, the total production of tron castingr would be 575,000 tons in 1977. However, the domestic demand would be higher than the production by 34,000 tons as shown below. Domestic Production and Demand_for Ironc0astins in 1977 (in '000 tons) Domestic Surplus Production Demand (deficit) Gray 52- 2 No&ular 24.0 30 .5 - 6.5 Mal-leable (including pipe fittiigs) 2_.8 30.5 - 1.7 Total 575.0 609.0 - 34. 0 The above table shows that the domestic production of all types of iron castings would fall short of domestic demand. Inorts 35. Yugoslavia imports certain types of iron castings (i.e. valve bodies, large pipe fittings etc.) which are either in short supply or not made in the country. Inports were at the low level of Ik000 tons in 1968 but they rose sharply by 37% a year, reaching 14,000tons in 1972. In the ftture, they are projected to rise at an annual rate of about 12%, reaching 25,000 tons in 1977. Exorts and Total Domestic 36. Yugoslavia is a significant exporter of iron castings. In 1972, its exports reached 66,000 tons, 5 times the imLorts. The main export markets are Germany, Italy, France, Hungary, Romania, Balgaria, and the U.S.S.R. Exports grew at the rate of 6.5% a year during 1968-72. Durina the next 5 years (1972-77), they are projected to grow at an annual rate of 8.5%, reaching 100,000 tons in 1977. It is most likely that this export level ANNEX 3-1 Page 10 would be reached. In that case, castings available for internal consumption would be 475,000 tons. To this, if the projected imports of 25,000 tons are added, the total domestic supply would be 500,000 tons compared to the in- ternal demand for about 609,000 tons. This reflects that by 1977, the actual deficit between total demand and supply would reach 109,000 tons. Therefore, foundries in Yugoslavia will have to expand at a faster rate to bridge the widening gap between supply and demand. H. Market for Kikinda Castings 37. Kikinda is the largest producer of malleable and nodular castings for cars and commercial vehicles,, and pipe fittings for the construction industry. It also produces gray castings in a small quantity for its own machine tool production. 38. During 1972-77, Kikinda's production of malleable castings would increase from 5,085 tons to 13,100 tons. During the same period, the pro- duction of nodular castings would rise from 3,310 tons to 16,000 tons; pipe fittings, from 4,113 tons to 6,400 tons; and gray castings from 750 tons to 1,500 tons. The following table compares the share of Eikinda in the poroduction of various castings in Yugoslavia between 1972 and 1977: Share of Kikinda in Yugoslav Froduotion of Castings by types Type of Kikinda Production Country's Production % Share of Castings (tons) (tons) Kikinda 1972 1977 1972 1977 1972 1977 (proj.) (proj.) (proj.) Malleable 5,085 13,100 12,927 18,750 39.3 70.0 Nodular 3,310 16,000 11,000 24,000 30.1 67.0 Pipe Fittings 4,113 6,400 7,408 10,000 55.6 64.0 Gray 750 1,500 341,571 522,250 0.2 0.3 The above table shows that during 1972 and 1977, the share of Kikinda in the country's production would increase greatly from the already high level in the case of malleable and nodular castings as well as pipe fittings. But, in the case of gray castings, Kikinda's share would continue to be insignificant. For Kikinda's malleable castings, the main customers are the Yugoslav car manufacturer, Zastava, as well as car assemblers; Opel AG of the German Federal Republic; and car manufacturers in the German Democratic Republic. Inquiries for supply of malleable castings have been received from Volkswagen and Ford of Germany, Alfa Romeo of Italy, and also from some U.S. car pro- ducers. For Kikinda's nodular iron castings used mainly for trucks and buses, the main customers are the two Yugoslav truck manufacturers, TAM (a joint venture with Klockner Hambolt Deutz, Germany), and FAP-FAMOS (a joint venture with DMB, Germany); and the truck manufacturers Raba and Cepel in Hungary and MAN of Germany. Further, inquiries have been received from Volkswagen (Germany) and sone U.S. producers. 1. Malleable Iron Castings 39. As already noted, Kikinda sells most of its castings by entering into long-term supply agreements with major automotive manufacturers. The Company has agreed to deliver 2,000 tons of malleable iron castings to Zastava in 1973 and, with the projected more than doubling of car production by 1977, ANNEX -31 Page 11 its castings requirement from Kikinda is likely to increase by at least 30% by 1977. As for exports, the Company has a long-term contract with Cpel AG (Germany) to supply about 5,000 tons in 1977. These two customers alone would account for nearly 58% of Kikinda's market for malleable iron castings in 1977. The existing contracts with several other customers in Yugoslavia would result in the sale of an additional 2,700 tons per year. The following table shows the agreed deliveries to and projected requirements of Kikinda's main customers: Agreed Deliveries Agreed Deliveries Plus Inquiries 197- 1977 1977 7in tons) Domestic Market Zastava 2,000 2,600 FAP-FAMOS - - 600 Cimos 100 - 1,700 Others 100 - 400 Sub-Total 2,200 5,30 Convertible Market Opel AG (Germany) 3,800 5,000 5,000 Alfa Romeo (Italy) 150 - 1,000 VW (Germany) - - 1,000 Ford (Germany) - 2 ,000 U. S. (inquiry) - 2,000 Sub-Total 11,000 Clearing Market _ ___ Grand Total 510 5,000 __3_0 40. According to these projections, the expected total demand of 16,300 tons will exceed Kikinda's projected available capacity of 13,100 tons t'y 3,200 tons in 1977. 2.,Nodular Iron Castings 41. Kikinda has already contracted for 5,000 tons which it will not be able to meet fully with its current 4,500-ton capacity. The following table shows the agreed deliveries for 1973 and the expected demand in 1977s Agreed Deliveries Inquiries Received 1973 1977 (in tons) Domestic Market _ 33,600 FAP-FAMOS 500 1j000 TAM and others 500 500 Sub-Total T7W 5,100 Convertible Market DMB (Germany) 400 400 KHD ( ) - 2,000 VW (It) 200 MAN ('') 100 2,000 U.S. 1,400 6,800 Djer (Hungary) 1,000 Cepel (Hungary) 500 2,000 Sub-Total 3,400 13, o0 Clearing Market 100 l,OO Grand Total 4,500 19,400 ANNEX 3_1 Page 12 42. According to the above table, the expected total demand of 19,400 tons will exceed the projected available capacity of 16,000 tons of Kikinda by 3,400 tons in 1977. 3. Kikinda Pipe Fitti,ngs Domestic Ma,rket 43. Table 7 shows domestic sales of fittings according to republics. Sales of fittings in 1972 reached 1,882 tons. The current commitment to domestic wholesalers for 1973 is 2f,000 tons of finished fittings. With the expectation of increased available capacity, sales of 3,300 tons are pro- jected for 1977. This represents a 12.5% annual average growth of domestic sales which appears realistic as sales have grown in the past at an annual average rate of about 15%. This appears to be a reasonable assumption, given the housing shortage in Yurgoslavia and the present construction boom especially in the private and social sector apartment projects. E,xport Markets 44. Convertible currency ,areas: The main export markets for Kikinda fittings are Italy and the German Federal Republic. In May 1969 Kikinda signed a 10-year supply contract with Locatelli, Italy, for minimum deliveries of castings of 1,800 tons annually. By 1977an additional 3,100 tons are expected to be sold to foreign customers. 145. Clearing Currency Areas: Kikinda entered into an agreement to supply, together with the only other Yugoslav producer (Titan) up to 1,300 tons annually to the German Democratic Republic. Agreed quantities for 1973 by Kikinda to the clearing area were limited to 200 tons; it is expected to increase to 1,000 tons in-1977. Sales Projection 46. Kikinda projects the following sales of pipe fittings: Agreed or Empected Demand (tons) Deliveries (tons) Inquiries Plus Contracts .i27.~ 1977 1977 Dome stic - wholesalers 2,000 3 000 3 300 Export - Convertible areas 1,800 _____ of which: - Locatelli (Italy) 1,700 1,800 3,000 - Induco Handel. (Germany) 100 - 1,000 - Others - - 900 E1port - Clearing Area 200 600 1 000 Total Export 2,500 Total Sale:s: Domestic and Eaot 4,000 ANNEX 34_ Page 13 47. As against an anticipated demand for 9,200 tons of Kikinda pipe fittings,, the Company's production would be only 6,400 tons, this indicating a gap of 2,800 tons in 1977. I. Price Tariffs and Competitive Position in Export Markets 1. Castings Prices 48. For castings (except pipe fittings), Yugoslav foundries are free to set domestic prices taking into account the prevailing market conditions, the international price level, the natiQnal development policy, and the stage of development of the enterprises. The Federal Council for Prices has the power to review the prices set by the enterprises. Export prices can also be freely set, although in several cases, foundries enter into long-term supply contracts with automotive manufacturers which specify the quantities required and the minimum prices that can be expected. Table 5 shows for 1973 com- parative ex-factory prices for some typical automotive castings. Direct price comparisons are difficult as the casting piece weight, size and intricacy influence the price structure of individual castings. The prices per ton of castings, therefore, give only a very limited basis for comparison as the product mix of one enterprise differs from another, and the price per ton reflects such differences. This is particularly true of the Yugoslav foundries where relatively simple castings have been chosen for price comparison with those of export markets. However, the overall average price for the German malleable and nodular castings pertains to more intricate castings. 49. Kikinda has a good rating with its major export customer, Opel AG; the rejection rate is hardly 2%. As a result of uniformly good quality, Kikinda exports command good prices. Its prices are on the whole internationally, competitive. Imports and IMport Tariffs 50. The official customs duty of 15% on the import of unfinished iron castings plus 10% in import taxes give an overall protection of 25%. Imports of unfinished ferrous castings are not controlled; however, the total imports to Yugoslavia of unfinished gray and malleable iron castings are low. Imports of finished automotive castings by automotive assemblers are also not directly controlled, but are allowed only on the basis of the foreign exchange retention quota earned by enterprises. Exports and E^,ort Incentives 51. Exports of castings are encouraged by the Government especially to convertible currency markets. The enterprise receives a direct incentive to export through the foreign exchange retention quota system whereby 20% of the foreign exchange earnings is available to the enterprise for free use. 52. Cooperation agreements between foreign car manufacturers and Yugo- siav assemblers require that the Yugoslav assemblers export a certain amount of automotive components before receiving an import permit for CKD car parts. ANN~ 31 Castings are one of the important products available for such exports and this is one of the reasons for the German, Italian and French car manufacturers' interest in importing castings from Yugoslavia. Quality and Delivery Performance 53. To ensure continuity and quality of supply, automotive manufacturers set strict standards. The major Western automotive manufacturers give their supplying foundries quality ratings based on their adherence to metallurgical quality specifications and delivery schedules. Ch this basis, order sizes and prices are set. For instance, for foreign suppliers German car manu- facturers allocate a maximnu per foundry of between 20% to 30% of their total requirements of specific types of castings. Prices are set on the basis of competitive bids, and the quality rating of a foundry determines the price offered by the customer. Iw-rated foundries are unlikely to receive long- term orders; hence the need for a foundry to establish good rating with customers. Domestic Prices 54. Kikinda's average domestic price per ton for malleable iron castings compared to those of its major export markets is about 30% lower than the domestic prices of Germany and over 10% lower than Italian prices. (Table 5). While, for reasons discussed in Para. 48, these prices are not strictly com- parable, they do indicate a sufficient price advantage for Kikinda to expand exports for malleable iron castings. 55. lKikinda's average domestic price for nodular iron castings does not have any price advantage when compared to the average price for a sample of castings from Italy, but it is over 10% lower than the average domestic price in the German ?ederaL Republic. Anticipated supply shortages in Italy due to the expansion projects of Alfa Romeo are expected to increase the domestic prices of castings and improve the export prospects of Kikinda to that counbry. Export Prices 56. Table 6 shows that Kikinda's export prices per ton of both malleable and nodular castings are tyypically lower for sales to convertible markets than for domestic sales. This is due in part to the need to compete with other foreign suppliers. 2. Pipe Fittings Prices 57. Domestic prices for pipe fittings are controlled by the Federal Government. The last increase in pipe fitting prices was 18% in 1971. As for imports, the present customs rate of 12% plus 10% import taxes gives an overall protection of 22%. Pipe fittings of very small diameter which are not produced in Yugoslavia are imported. Currently, as Yugoslavia is ex- periencing a shortage of fittings, Kikinda expects that the Government will reduce the import duty. Kikinda, therefore, projects a drop in average price per ton of fittings froma 25,000 Dinars in 1972 to 23,500 Dinars in 1977. ANNEX 3-i Page 15 58. Export prices for the clearing area are expected to rise at a higher rate than for the convertible area due to continuing shortage conditions in the former. Convertible mrwket prices for Kikinda are determined largely by its sales agent, Locatelli, Italy. The 10-year supply contract with the firm specifies minimum annual delivery quantities, but the price is to be determined according to market conditions. While Kikinda could possibly realize higher prices by independent sales) the sale of fittings is largely controlled by groups of suppliers, and entry to this market is difficult. Pricing is based on quantity discomnts from certain recognized catalogues. J. Kikinmda's Marketing Organization for Castings For Automotive Castins 59,. For the domestic market, sales are made directly to customers. Supply agreements are entered into with the automotive manufacturers, Zastava, TAM and FAP-FAiqS. 60.. Export sales are now increasingly made directly to customers by the sales staff of K*ikinda instead of depending entirely on export-infort firms as in the past. However, such firms are encouraged to bring in new orders and inquiries. Those firms inwclude: Invest-Inport in Belgrade for German Federal Republic sustomers; Masino-Impeksin Zagreb, and Dinara in Belgrade for Hungary; FAF-FAMOS in Belgrade for Mercedes Benz, Germany; UNIS-TAS in Sarajevo for Volkswagen, Germany; and Kosn*S in Ljubljana for MAN, Germany, and Alf'a iiomeo, Italy. 61. To insure closest cooperation with export customers especially on technical and quality matters, Kikinda maintains direct contacts with the customers concerned. For exanple, Kikinda's resident representative (sales engineer) in Frarkfurt, Germany, maintains close contact with their main purchasing agent, Reinhalt Huppert, for supply to the German automotive manufacturers. For Pipe Fittings 62. On the domestic market, 90% of Kikinda's fittings are sold through wholesalers, ani the remainder directly to customers. The wholesale out- lets are located in Novi Sad, Belgrade, Skopje, Maribor and Split. 63. E:xport sales are made through fittings dealers such as Locatelli (Italy) and induco Handel (German Federal Republic) and by trade agreements to clearing markets. Eport invoicing is handled by Invest-Iiport in Belgrade for the German Federal Republic, and by Yeta£ia in Ljubljana for the German Democratic Republic. Sales to the lebanon are handled by Zeljpohon in Zagreb, and to Bulgaria by Unis Kormre in Sarajevo. Tndustrial Projects Department July 1973 ANNEX 3-1 Table 1 Table 1 YUGOSLAVIA - STRUCTURE OF FERROUSAND NON-FERROUS FOUNDRIESI'(1972) (B-y Capacity Groups In Tons Per Annum andZ by Re=publics) (1972) -------------tons -------1 ----- Up to 500 500-2,000 2-5,ooo 5,lo,ooo Over 10,000 Republic Slovenia 19 10 3 3 3 Croatia 59 10 il 1 3 Serbia & Vojovodina 66 12 10 8 5 Bosnia - Herzegovina 10 3 4 1 1 Nacedonia 5 - 2 - - Montenegro 3 _ _ I - Total Number'/ 162 35 30 14 12 Annmual Production Capacity* (1972): -458,4o0 tons total, ferrous and non-ferrous of which: 354,200 tons gray iron 22,700 tons malleable iron 11,500 tons nodular iron 40,000 tons steel castings 30, 000 tons non-ferrous castings * Approximate, varying according to product mix; based on two-shift operation. 1/ Approximate capacity data derived from statistics provided by the enterprises FOB and Kikinda, and the Yugoslav.Founrdry 6ssooiation. 2/ The total number of operating foundries is approximate. Industrial Projects Department June, 1973 Table 2 YUGOSLAVIA - IRON CASTINGS PRODUCTION - HISTORY AND FORECAST-/ ('000 Tons) 1967 1968 1969 1970 1971 1972 1973 1974 1975 1978 Gray 242.0 246.8 290.8 321.3 337.3 341.6 371.5 403.5 437.0 566.5 Malleable (including pipe fittings) 10.5 12.0 13.5 16.0 17.0 20.3 22.0 23.5 25.o 30.5 Nodular 1.0 1.2 2.2 2.7 5.7 11.0 13.0 16.0 21.0 30.0 TOTAL 253.5 260.0 306.5 324.0 360.0 372.9 406.5 443.0 483.0 627.0 1/ Based on production data and forecasts supplied by the Yugoslav Foundry Association. Industrial Projects Department June, 1973 ANNTX 3-1 TA3LE 3 Tabl. 3 1/ YUGOSLAVIA - MAIN FOUNDRY CAPACITIES - 1973 FERROUS: Approximate Curremt Rspubli Location Producer Foundry Type Typical or Main Product Cs acitv Slovenia Crnomelj Belt gray auto castings 7,000 Jesenice Zelesarne gray and steel ingot molda 3,500 Ka:=ik Titan malleable and gray appliances snd fittings 7,500 L,ijblJans Litostroj gray aiid steel marine engines, machine tools 7,000 Ma ibor TAM gray air cooled ngines 2,000 Muc* ob Drevi Hut& gray flywheels L,o00 Nova Gorics Gostol gray stove plates 32000 Ravne no Koroskem Zelesaraa gray * d steel alloys Store Zelesarna steel md nodular ingot molds, auto castings 27,000 Croatia Bjelovar Tomo Vinkovic gray implements 2,000 Daruvar Dalit gray aid nodular construction equipment 4,000 Osijek Olt gray aid malleable motors, implements, baths 15,000 Pula Uljanik gray marine engines 3,000 Rijeka Torpedo gray and nodular engines & crankshafts 4,000 Rijeka .3 may gray marine engines 3,000 Rijeka Vulkan steel valves 4,000 Sisak Zeljeasra steel snd gray industrial *nuipment 8,000 Slavonaki Brad D kovic gray machine tools & construction eeuipment 3,000 Slavonsks Pozegs Lieveonica gray radiators & sanitation castings 20,000 Split Brodogradiliste gray marine engines 3.000 Varardin MIV gray pives and fittings 10,000 Virovitca Rapid malleable automotive castinga 1,000 Zagreb J. Crelelj gray brake shoes (railvays) 2,000 Prvomajska gray machine tools 4,500 Tekstil stroi gray textile mashines 2,000 Vulken steel marine parts 4,000 Serbia & VoJvodina Ada GE-GE gray machine tools 1,000 Belgrade ILR gray and steel railway castings 5,000 FOB and IMR gray and nodular automotive castings 34,000 "Beograd" gray sewerage pipes & fittings 20,000 Dekovica D*ovica grey sewerage pipes 1.000 Gura Industrijki Kombinat gray pipes and fittings 10,000 Kikinda LZT gray. malleable auto castings, machine tools. and nodular fittings 16,503 Knjsrevec FYI gray tractor parts 1,000 Kraljevo Fabrika Vagona gray stove plates 4.000 KNosevac 14 October steel caterpillar trartor castings 1,000 Leskovac Rode Metalac gray textile machinery 5,000 KMldenovac Petar Drapsin malleable & gray piston rings 2,000 Nis S. Paunovic MIN grey railway castings 5,000 Novi Sad 27 March gray piston sets, auto castings 6,000 Novi Sad MAG-Podeds gray & malleable machine tools, implements, fittings 2,000 Prijewolje FAP-PAMOS gray truck brake drums 4,000 Sineerevo Fagramii gray machine tooli & compressors 3,000 Smederevo Ze1jaaxrs. ael dsteel csstinso 5,000 Surdulica Mackatica steel steel castings (manganese) 2,000 Svetosorevo N Mijat !Covic gray (gray and nonferrous) 2,000 Topola INfEL malleable auto castings 1,500 Valjevo Krusik gray precision castings 1,000 Vraac "Beograd" gray spun pipes 5,000 Zrenjanin Frab. Katl i rad, gray radiators IvOO0 Bosnia - Herzegovina Banjaluka Jelsingrad gray & steel machine tools 4,000 ilijas Zenics grey & steel pipes, fittings, ingot molds 60,000 Sarrjevo Energoinvest gray & steel vaslves & fittings 2,000 Varrs Zenica gray pipes & fittings 5,000 Zertic Novi Zivet melleable auto castings 4,000 Zenica Zeliesara steel steel castings 4,000 Macedonca Bitola L. Bitola grsy appliances 3,000 Skopje Zsvodi Tito gray machine tools 3,000 Montenegro Nikaic Boris ltidrtc steel & gray construction 3,000 NON-FERROUS Slovenia Skofja Loks LTH aluminum atuto components n.e. Croatia Makarska Energoinvest alum,inum n.e. .a. Rijeka A. Mumic bronge marine parts & fittings n.e. Rijeka Bencic bronze n.e. n0. Zagreb Sila Serbia & Voivodina Belgrade 1PM zinc statues n.e lula Istra (oon-ferroua) n.. na. lula Vulken (non-ferrous) n.e n.a, Mladarovac Pater Drapsin aluminum & bronee piston sats 5,000 Nis KFN bronse n.e. n.a. Nis Novkabel (non-ferrous) cables n.e. Novi Sad 27 March aluminum piston sets n.e. Savojco Sevojno copper cables n.a Sombor Bare Sakulia (non-ferrous) n.e. n.e Zv can Irepca lead n.e. n a. Bosnia - Her.ssovina Zenics Novi Zivot (non-ferrous) n a. n.e* Macedonia Skopje AluminA aluminum n.a n.e. Montenegro Titograd R Daki (non-ferrous) n.e. n.e. 1/ Partial listing only, based on information supplied by Yugoslav Foundry Aasociation and interprises FOB-Belgrade and LZT-Rikinda. Industrial Projects Department Kay 1973 ANNEX 341 Table 4 Table 14 INTERNATIONAL COMPARISON OF FOULDRY PRODUCTION ('000 Tons) Per Capita 1967 1968 1969 1970 1971 ProdUction(1971) Gray Iron Castings Inrgsj Germany 2,898 3,259 3,602 3,763 3,277 55.6 U.K. 3,278 3,248 3,408 3,395 2,921 52.0 France 1,829 1,824 2,015 2,0o45 1,926 37.4 Italy 1,193 1,265 1,244 1,421 1,198 -22.1 Yugoslavia 242 247 291 321 337 16.2 Nodular Iron Castings Germany 204 326 398 428 421 7.2 U.K. 129 173 198 231 232 4.1 France 232 274 310 400 400 7.8 Italy 35 40 75 70 68 1.3 Yugoslavia 1 1.2 2.2 2.7 5.7 0.3 Malleable Iron Castings Germany 205 247 281 295 272 4.6 U.K. 196 201 210 206 192 3.4 France 74 80 93 98 93 1.8 Italy 72 85 87 94 73 1.3 1/ Yugoslavia 10.5 12.0 13.5 16.0 17.0 0.8 1/ Including pipe fittings. Source: Geisserei Verlag 1972and YugoSlav FoUndry Association. Industrial Projects Department June, 1973 ANNEX 3.1 Table 5 Table 5 YUGOSLAVIA - KIKINDA IRON FOUNDRY PROJECT COMPARISON OF AUTOMOTIVE CASTINGS PRICES (EX-FACTORY) - - ' ~~~(Dini A~g Kikinda Germany Italy U.S. Hungary MalleableCastings Differential Casing 9.70 11.00 9.79 9.86 - Axle Casing 10.85 11.25 10.19 11.05 - Wheel Hub 8.20 10.67 9.01 9.01 - Averaae Price for ~ 9.30O._. la.!2/ 9.663/ 9.973/ - N odular Castings Transmission Case 9.52 10.67 9.35 - 11.05 Axle Casing 8.56 10.15 8.8h - 10.20 Wheel Hub 8.0o 9.92 8.50 - 10.03 Average Price for Nodul i i0.0IF2s3 l1.4g/ 8.892/ - - 1/ Conversions to Dinars made at the following rates.prevailing up to June 12, 1973: 1 US$ = 17 Din. 1 DM = 6.03 Din. 2/ Average price for all such products sold by the enterprise. 3/ Average price of selected items. Industrial Projects Department June, 1973 ,TABLE 6 - KDWA IPUI OUY PR0IWT A&0Eum uy sALFm ra=s - Amu" AND JOBGASe? (Dinars Per Ton) -- -- - ~~Autua1… ------Projeated …------- 1968 1969 1S lS71 ~~192 273. 27 V76 U t7 Dom eticy Nodular Iron Castings-- - 89DO 10000 20800 1}000 12500 130 13200 NodUeable rn Casti6 5800 60 6740 759 9X0) 980o s40( 1700 D0 11660 Fittings WO63C 15360 18.60 22670 25000 25000 2!000 21.000 23500 23500 Convertible areas or Iron Castings - - - - 9900 9620 10200 ID800 10800 1000 Malleable Iron Castings _ _ 7.500 8200 10300 11200 11200 11800 12270 12270 Fittings 7509 8200 8700 9800 12600 1.LtVO 14000 14600 1;30. 5312 Clearing Areas n g s - C - 98o0 10250 wo0 12000 1250 130 230 Malleable Iron Castings 7140 9500 9800 - - - - 12880 Fittings 8300 9100 9500 11000 15600 16600 17600 18700 19000 20790 1I/ 3ry castings produced for internal use only. / Nodular iron castings first produced in 1971. Industrial Projects Departmmt May, 1973. ANNEX 3-1 Table 7 Table 7 YUGOSLAVIA: KIKINDA IRON FOUNDRY PROJECT DOMESTIC SALES OF PIPE FITTINGS BY REPUBLIC (Tons) 1968 1969 1970 1971 1972 Republic Serbia 450 470 500 540 550 Croatia 330 352 358 376 382 Slovenia 270 300 308 330 330 Bosnia - HersegovinA 200 210 210 280 260 Macedonia 180 190 190 240 260 Montenegro 81 80 82 100 100 Total 1,511 1L602 1,648 1,866 Industrial Projects Department June, 1973 X 3-2 Page 1 YUGOSLAVIA - KIKINDA IRON FOUNDRY PROJECT MARKET FOR MACHINE TOOLS A. Demand and Supply Introduction Yugoslavia started producing machine tools after World War II. Since then, it has emerged as an important producer of a wide range of machine tools such as drilling machines, milling machines, lathes, semi-automatic and automatic machines, planing/shaping machines, gear-cutting machines, grinding machines, etc. Machine Stock 2. At the end of 1970, Yugoslavia had a machine tool stock of 125,000 units of which lathes accounted for the largest share of 39% of the total. The following table shows the structure of machine stock in the country: Structure of Machine Stock (1970) Ty,e of Machines Nos. Percentage Share (%) Lathes 48,750 39.0 Semi-Automatic and Automatic Machines 3,750 3.0 Milling Machines 17,500 14.0 Gear Cutting Machines1 625 0.5 Drilling Machines 26,250 21.0 Planing/Shaping Machines 12,250 1.0 Grinding Machines (Including Sharpening Machines) 10,000 8.0 Other Machines 185 3. For the exi3ting 8tock of machine tools in 1970, the replacement demand is estimated at about 8350 units, assuming an average life of 15 years per machine tool. 4. Of the total machine tool stock, grinding machines (including sharpen- ing machines) accounted for 8% of the total in 1970. The structure of grinder machine stock is shown separately below: Structure of Grinding Machine Stock (1970) Typ,e of Machine Nos. % Share in Total Round External Grinders 1,500 15.0 FJ.at/Surface Grinders 600 6.o tnternal Grinders 100 1.0 Sharpening Machines & Others 77800 78.0 10 000 100.0 ANNEX 3-2 Page 2 5. Based on the same assumptions made earlier (i.e. an average 15- year life per machine tool), the replacement market for grinders alone would be for about 670 units. Per Capita Consumption 6. The machine stock in Yugoslavia is fairly high but compared to advanced countries, its annual per capita consumption of machine tools is low as shown in the following table: Per Capita Consumption of Machine Tools (in US$)l/ Switzerland 15.5 U. S. 12.0 Federal Republic of Germany 9.5 U. K. 7.5 France 7.0 Belgium 5.0 Yugoslavia 2.0 1/ 1968 figures. Source: Masino-Union, Yugoslavia The above table shows that the per capita consumption of machine tools in Yugo- slavia is approximately 1/8 of that in Switzerland and 1/6 of that of the U.S. Structure of Demand 7. In the field of machine tools, there is a growing trend in demand toward more sophisticated machines, incl~uding automated machines, from simple machines. The changing demand with respect to different machines during 1962-71 is shown below: Structure of Demand for Machine Tools Percentage of Total Demand 1962 1971 Lathes 45.0 31.0 Drilling Machines 4.0 5.5 Planing/Shaping Machines 8.7 0.7 Milling Machines 20.5 21.8 Grinding Machines 0.9 9.4 (Including Sharpening Machines) Special Purpose Machines * 9.2 Metal-Pressing Machines 9.3 10.4 Others 11.6 12.0 100.0 100.0 * Negligible ANX 3.2, Page 3 The above table shows that the share of lathes in total consumption has declined sharply from 45% to 31% while the share of grinding machines has jumped from 0.9% to 9.4% during 1962-1971. This has come about mainly because of the need for increasing accuracy and higher tolerance demanded of machine tools has established a trend away from turning operations to grinding operations. 8. According to the Masino-Union, the share of lathes and grinding mach- ines in total demand would change in the future as follows: --Liathes Grinding Machines 1971 (actual) 31.0 9,4 1977 25.0 14.o 9. In advanced countries, the percentage share of grinders in total demand has already reached 25% compared to 19% for lathes. In view of the experience in developed countries, it is realistic to expect that the percent- age share of grinders in total machine tool demand would rise to 14% in 1977 as forecast by the Masino-Union. Trend of Consumption 100 Machine tool consumption has increased at an average annual rate of 16% during 1968-1972, reaching 25,952 tons in 1972 as shown below: Growth of Consumption of Machine Tools. (196b-1972) 1968 In Tons 1968 14,296 1969 15,309 1970 15,158 1971 19,786 1972 25,952 1977 (Projection) 39,200 11. Starting from a low base, the machine tool consumption has been grow- ing fast in the past. However, in the future, the consuption would grow at a slower pace, increasing in step with the growth of the metal-transforming and equipment industries. On this basis, Masino-Union has forecast that the demand for machine tools would increase at the rate of about 8.5% a year, reaching 39,200 tons in 1977. 12. As already noted earlier, the share of lathes and grinders would be 25% and 14% respectively of the total demand for machine tools. On the above assumptions the demand for lathes and grinders in 1977 would be as follows: lathes, 9,800 tons; and grinders, 5,500 tons. Assuming that on an average, one grinder weighs 2.5 tons, the total number of grinders, including sharpening machines, requaired in 1977 would be 2200 units. Out of these, universal, ANNEX 3-2 Page 4 surface and internal grinders would account for about 570, i.e. about 25% of the totail demand for total grinders. This is consistent with the Masino-Union forecast that the total demand would reach 485 units in 1975 and beyond that it would increase at the rate of 8.5% a year. No attempt has been made to forecast the demand for other machine tools as they are not of much relevance for assessing the project under appraisal, the Kikinda Foundry, which wants to specialize in the manufacture of grinders while giving up gradually the production of drilling machines. However, in the immediate future, Kikinda would increase its drillirn machine production from 60 units to 80 units to help alleviate tne shortage of such machines in Yugoslavia. The existing short- age is obvious from the fact that the net imports of drilling machines reached 817 in 1972 compared to 263 units in 1968. Production and Trade 13. The production of machine tools is expected to increase from the level of 13,125 tons in 1972 to 17,990 tons in 1977, representing an annual growth rate of 6.5%. The following table shows the development of the machine tool industry in the past (see also Table 1) and projections for the future: Trend of Machine Tool Production and Trade (1968-1977) (in tons) Average Pnzual Growth 1968 1969 1970 1971 1972 1977 Rate W Iltl6-72)(1972-77) Production (tons) 9,167 9,871 12,180 12,381 13,125 17,990 9.3 6.5 Export (tons) 2,219 2,622 3,587 4i,055 3,648 6,700 13.0 13.0 Imports (tons) 7,350 8,060 6,565 11,460 16,475 27,910 22.0 11.0 Consumption (tons) 14,298 15,309 15,158 19,786 25,952 39,200 16.0 8.5 Exports as % of Production 24.2 26.6 29.5 32.8 27.8 37.2 - _ Imports as % of Consumption 51.4 52.7 43.3 57.9 63.5 71.2 During 1968-1971, exports increased rapidly, reaching the peak of 4,,055 tons in 1971 before declining slightly in 1972 because of sharp increase in domestic demand which also resulted in steep rise in imports. The share of imports in consumption has risen from about 51% in 1968 to 64% in 1972, and is expected to increase to 71% in 1977, thus indicating the widening gap between supply and demand. B. Kikinda Machines Production Development 14. The Kikinda Iron Foundry is the only producer of grinders in Yugoslavia. It started production of grinders under a license from the flFortuna"Compary of the German Federal Repiblic, and later added grinders of its own design. Kikinda's pro- duction program for machine tools included lathes, radial drills and universal external grinding machines. However, partly because of changes in machine tool technology and partly because of strong competition, the enterprise decided to AhEX 3-2 Page 5 discontinue its production of lathes in 1969 and to widen instead its product- ion program of grinders. Under a well thought out product development program, it decided that the next logical step,would be to produce special external grinders and then to start producing intarnal grinders. 15. Though Kikinda has acquired sufficient experience in the production of external grinders, it has no experiences in the production of internal grinders. After careful consideration of its product development strategy, Kikinda entered into a 10-year license agreement with the Bryant Grinder Corporation of Spring- field, Vermont (the U.S.) in February 1973. The contract provides for know-how and technical training required for the manufacture, sale and service of the licensed product against an initial cash payment plus a royalty per machine sold. Sales and services by Kikinda are licensed for most East European and Middle East countries and all Western European countries. However, the product- ion is expected to be initially for the domestic market only. Past Performance 16. The important domestic user of grinders are the automotiveAtractor-,- ball bearing and machine tool industries. rable 3 shows the sales trend of grinders by republics in Yugoslavia.The followi-ing table shows the growth of production of and trade in grinders: l/ Yugoslavia: Production, Export and Iport of Grindersy- (Units) 1968 1269 1O 1971 L972 Production (Kikinda): 2/ - External grinding machines- 87 150 155 164 210 - Surface grinding machines 37 30 30 48 61 Total 124 180 185 212 271 Exports (Kikinda) - External grinding machines 5 31 77 78 21 - Surface grinding machines 2 9 1 _ Total 7 40 78 78 21 Import - External grinding machines 53 45 25 68 40 - Surface grinding machines 17 50 30 50 30 - Internal grinding machines 20 10 60 17 20 Total 90 105 115 135 90 Total addition to grinding machine stock 207 245 222 269 340 1/ Excludes hand- and bench-grinders 2/ Includes universal and special models ANNEX 3-2 Page 6 The above table shows that during 1968-72 Kikinda production of grinders more than doubled. As a result, imports of grinders have come down sharply in 1972 from the peak level of the previous year. Demand for Grinders 17. The replacement demand alone would be for about 190 grinders a year. In addition, an additional 380 grinders would be required, thus raising the total demand to 570 grinders annually by 1977. According to Kikinda, the share of various grinders in total demand in 1977 would be as follows: Universal grind- ers, 50%; surface grinders, 25%; special grinders, 20%;and internal grinders, nearly 5%. Based on these assumptions, which seem reasonable, the demand for various types of grinders would be: Universal Grinders, 285; surface grinders ,145; special grinders, 115 (including centerless grinders); and internal grinders, 25. Planned Expansion 18. After completion of the expansion project in 1977, Kikinda will have a capacity for -bout 460 machine tools a year. Of these, about 20% will be radial drills,17 leaving a capacity for 380 grinders a year. (Table 2 shows details of the projected trend of sales of Kikinda in the future.) 19. The following table compares the demand for grinders with the estimated production of Kikinda: Demand and Production of Grinders (1977) (in units) Kikinda Type of Grinders Demand Production Deficit Universal 285 190 -95 Surface 145 100 -45 Special 115 70 -45 Internal 25 20 Total 5 The deficit would be higher at 330 if projected exports of Kikinda are taken into account. In order to meet its foreign exchange and contractual obligations, the Comparn plans to export the following number of grinders: Type of Grinders Convertible Area Clearing Area Total Universal 40 25 65 Surface 20 20 40 Special 10 25 3 Internal _____ 1/ The Company is increasing its production of radial drills from 60 units to only 80 units, for which there J5 adequate demand. Ultimately, Kikinda wants to give up the production of radial drills while concentrating on grinder production. AM'EX 3-2 Page 7 20. Kikinda exports a number of grinders to the clearing area, mainly Poland and the U.S.S.R. (Table 4). Twelve special grinding machines would be sold to U.S.S.R. during 1973. A trade agreement with the U.S.S.R., concluded in September 1972, provides for the supply of 50 grinders a year by Kikinda starting in 1975. Therefore, it appears realistic to assume that grinder sales to the clearing area countries will be on average about 15% of total grinder production. In addition, Kikinda exports hydraulic systems for grinders to Rumania under a 5-year contract valid until 1976. (Table 2) 21. Exports of grinders to convertible currency countries were directed in the past to mainly the German Federal Republic (Table 4), under a contract with Kikinda's licensor, Fortuna, which had exclusive distribution rights in that market. However, this contract expired at the end of 1971 and since then Kikinda has been trying to promote exports on its own. It has signed a sales contract with a trading companr in Frankfurt in order to gain new customers and replacement orders. Kikinda expects to sign a similar sales agency agreement with a trading firm in Milan, Italy. Through participation in trade fairs, contacts with importers, and a sales agreement with a machine tool sales and service agency in New Jersey, the U.S., Kikinda hopes to increase sples to the North American market. An order from the U.S. for 12 grinders was received in November 1972. 22. On the basis of contracts already signed or under discussion the Company plans to sell about 20 machines annually to Germary and Italy, and 50 machines a year to the U.S. Prices, Tariffs and CoMpetitive Position 23. Domsestic prices (Table 5) of Kikindats machine tools are controlled by the Government. The last price increase granted in December 1972, amounted to 15%. Table 6 compares the prices of various Kikinda grinders with those of two more important foreign competitors. It reveals that the Kikinda prices are considerably lower. *While prices for the planned production of internal grinders have not yet been set, it is expected that they would be about 30% below the prices for comparable machines in Western Europe. Therefore, price is un- likely to impede Kikinda's export sales effort. 240 NIominal tariff protection (customs duties and taxes) amount to about 30%. Further, import permits by the Government and permission by Kikinda are required for their imports. 25. Product quality has been an important Kikinda objective, and the pro- duction of well-known licensed machine tools has helped establish this image. The production of internal grinders under license is consistent with this strategy. Delivery time is agreed with the customer at the placement of the purchase order. Universal grinding machines are typically available in 6 months, while special grinding machines require a longer period for additional attachments and settings. 26. Kikinda sales service in Yugoslavia and Western Europe includes a guarantee covering parts and necessary repairs during the first year; and repairs on a service charge are undertaken for up to 10 years after the sale. ANNEX 3-2 Page 8 Customers usually send machine operators to the Kikinda plant to get operat- ing instructions prior to delivery. Kikinda engineers pay regular visits to customers to give assistance and get customers' views on the products purchased. These services are also extended to customers in the U.S. and the U.S.S.R. through local sales agencies appointed in those countries. Marketing Organization for Machine Tools 27. Kikinda's sales director is based at the plant in Kikinda. Reporting to him are the deputy director for sales also based in Kikinda, and the sales director for machine tools based in Belgrade where the main sales office is located. Field representatives in the various Republics of Yugoslavia report to the Kikinda office on a regular basis. Export inquiries are handled mainly through the Belgrade office, while technical questions are handled at the plant. It is planned to strengthen the number of sales engineers working in the domestic representat:Lve offices. The enterprise works closely with the Masino-Uniony Belgrade, in preparing long-term studies on the machine tool requirement and product development needs of the Yugoslav market. 28. In order to secure export sales and to develop new customer contacts Kikinda has its own sales engineers in Germany (Frankfurt) and in the U.S.S.R. (Moscow) and agency representatives in Italy (Milan), and the U.S. (New York). Kikinda has a fairly sophisticated sales organization and is aware of the importance of continuous marketing efforts in developing customer relationships Domestic import-export firms used by Kikinda for casting sales provide additional contacts. Regular attendance and exhibits at trade fairs such as those held in Milan, Chicago and Zagreb help develop and maintain customer contact and keep in touch with product technology developments and price trends. Industrial Projects Department July 1973 Table 1 YUGOSLAVIA - KIKINDA IRON1 FPOUNDR~Y PROJECT TRWJ OF SUPPLY AND !KNAU FM J(AG&J -TOOIS -IR-UGOSIAVIA, L16-1972) (Tons and units)1/ 1968 1969 1970 1?971 1972 = Tons_. Tont o__ Un_ts Tons Ts Tons Machine Tools Domestic production 1h607 9167 6630 9871 6705 12180 6812 12381 7221 13125 Less. Exports 990 2219 1681 2622Z 38 11 1 Domestic SaLes 3617 Z91I7 9 79 9 76 5 Oa, N26 5702 9477 + Imports 1398 7350 1058 8060 1673 65765 2302 11460 2638 16475 Total addition to machine tool stock ' - 5 14298 6007 15309 769 1 70 86 40 25952. Grid~jnch~ines Damestic production 124 b34 180 630 185 648 212 700- 271 949 Less: Exports 7 214 41 1 0 78 27 78 237 21. 7L Domestic sales 117 l 170 4 T 107 375 3T3 63 2 7 + Imports 90 297 105 347 115 36)0 135 446 90 330 Total addition togri~nd- ing rachine stock 207 707 ? D 222 755 269 909 34 1205 1/ Based on data from Kikinda and Miasino-Unions Belgrade. 2/ Machine Tools include the following type categories: planing and milling machilies, lathes, drilling machines, thread milling and gear-tooth cutting machines, and all types of grinding machines. Industrial Projects Department - May, 1973 TABLE 2 YUGOSLAVIA - XIKINDA IRON FOUNDRY PROJECT SALES OF MACHINE TOOLS - ACTUAL AND FORECAST (Units) - - - - - - - - - -Actual - - - - - - - -- - - - - - - Projected - --- - - - - - - 1968 1969 1970 1971 1972 1973 1974 1975 11976 1277 Domestic Radial drills 52 51 62 43 60 50 50 50 50 60 Universal grinding machines 82 119 72 86 189 122 120 120 120 125 Surface grinding machines 35 21 29 48 61 40 40 40 50 60 Special grinding machinee - - 6 - - 10 15 25 35 35 Internal grinding machines!/ - - - - - - 10 10 20 20 Total 169 191 169 177 310 .222 235 245 275 300 Exports Convertible Areas Radial drills - - - - - - - 10 10 10 Universal grinding machines - 27 73 78 11 32 40 40 40 40 Surface grinding machines 1 9 1 - - - - 10 10 20 Special grinding machines - - - - - - 3 5 10 10 Internal grinding machinesV - - Total ;1 36 74 78 11 32 43 65 70 80 Clearing Areas Radial drills - - - - 10 10 10 10 Universal grinding machines 5 5 4 - 10 - 20 20 20 25 Surface grinding machines 1 - 10 10 20 20 Special grinding machines 1/ - - - 10 12 20 25 25 Internal grinding machines- - - - - Hydraulic Parts - - - 92 - 252 350 400 400 - Total-/ 6 ~ ~ ~~5 4 10 ~12 52 60 75 80 | Total Machine Tool & le / 176 232 247 255 331 264 330 370 420 460 1/ Internal grinder production under BryanE license expected to begin in late 1973. 2/ Excluding hydraulic parts, special contract with Rumania. Industrial Projects Department May 1973 TABLE 3 YUOOSLAVIA - KIKICNDA IRON FOUNDRY PRO0JECT DOMESTIC SALES OF GRINDING MACHINES BY REPUBLIC Tunits sold on cash and credit basisY ) 1968 199 ___ 197 1971 1972 Total Sales Credit Sales Total Sales Credit Sales Total. Sle s Credt Saaes SaCredt Sales Serbia 14 12 46 16 39 9 62 4 112 7 Slovenia 33 8 36 10 27 7 21 3 60 9 Croatia 23 10 30 24 24 3 29 2 39 1 Bo3nia- Her2egovina 12 3 18 6 13 3 18 2 27 5 Macedonia 5 1 7 2 3 1 4 - 9 1 M4ntenegro - - 3 - 1 - - - 3 Total Sales 117 34 1140 58 107 23 134 11 250 26 1/ Typical 1973 credits are for a maximm of 10 years at 12% interest with 20% down payment for new investment projects, and a 50% downpayment for current purchases. Prior to December 1972, credit was available with no down payment. Industrial Projects Department May, 1973. ANNEX _.2 Tabtle Table 4 YUGOSLAVIA: KIKINDA IRON FOUNDRY Export of Grinders (units) 1968 1969 1270 1971 1972 Clearing Currency Areas Poland 2 3 2 - - USSR 2 - - - 9 German Demnoratic Republic 1 1 - Egypt 1 - - _ _ Czechoslovakia - - 2 _ 1 Hungary - _- - Romania - 1 Sub-total 10 Convertible -xrrency Area U.S.A. 1 9 2 2 2 Italy - 1 - - 1 Federal Republic of Germany - 26 70 75 8 Mexico - - 2 - - China (Mainland) - - - 1 _ Pakistan - _ _ _ Canada 1 I Sub-total 31 -7 :7 III Total 7 4i1 78 78 21 Industrial Projects Department May, 1973 YUGOSLAVIA - KK fA IR01' FOUNDRY PROJECT Kikinda Machine Tool Prices Actual and Forecst CDinars per unit) Machine Type 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 _-__.____----- Actual --------^ - --ca Radial Dri-iIs 48,5oo 48,500 61,300 64,IOC 70,o500 79,000 83,700 88,800 94,100 99,700 Universal Grinders 158,000 185,650 234,000 244,000 244,000 256,800 272,200 288,500 305,900 3214,200 Surface Grinders 108,000 108,000 113,260 129, 400:) 139, 30 156,600 166,000 176,000 186j5oo 197,700 Special Grinders2 - o 410,000 5 800,000 848,000 899,000 953,000 1,010,000 Internal Grinders-' - - 504,000 534,200 566,300 600,00o Convertible Areas Radial Drills - - - - 72,000 76,300 79,400 82,500 85,900 Universal Grinders - 117,490 139,724 184,260 206,250 231,000 244,900 25500 0 264,800 275,400 Surface Grinders 75,000 81,028 84,414 - 135,000 143,100 148,8oo 154,800 161,000 Special Grinders - - - - - 620,000 657,200 683,500 710,800 739,300 Clearing Areas Radial Drills - - - - - 79, 000 83,700 79,400 82,500 85,900 Universal Griniders 166,387 169,860 168,553 - 217,400 250,000 265,000 278,300 292,200 306,800 Surface Grinders 81,500 - - - 156,000 165,400 173,600 182,300 191,400 Special Grinders - 720,000 763,200 801,400 841,400 883,500 1/ Average prices of all basic machine models. 7/ Production of internal grinders under Bryant license expected to begin in late 1973. Industrial Projects Department May 1973 TABLE 6 YUGOSLAVIAi KIKINDA IRON FOUNDRY PROJECT PRICE COMPARISON BETWEEN KIKI1IWGRINYENT ANDOOMPARABE GRINDES OF MAJOR FOREIGN COMPETITORS, DECEMBER 1972 (Dinars per ulit) Major Foreign Competitors Kikinda Grinders Price C ison =nda Tinder Ki Customz Versus Foreign Versus Foreign Brand and Designation Country Price Free eand rT-aces Selling Designation of Selling Competitor at Competitor at of Grincter Border -. _(3g%) EEen) Kikinda Grinder Erice(d1n)Free Borcler Price Selling Price Rcund Grinders .tortana BF-500 Germcny 252,000 15,600 327,600 AFB-5001/ 164,850 65% 5J 2. Fortuna AFC-1000 Gcrmavliy 387,000 116,100 503,100 AFC-1000_/ 235,260 66% 4'i% 3. Fortuna AFD-1000 Germany 472,500 141,750 614,250 AFD-10001/ 316,137 69% 51% 4. ZOcca RU-20OO Italy 344,720 103,l15 448,135 UFC-2000 294,532 93% 65% 5. Si a T R4-2000 Italy 395,940 118,760 514,720 UFC-2000 294,532 81% 57 % 6. Siarp Rh-5b Italy 273,030 81,910 354,940 UFB-500 180,700 66% 51% 7. Studer PRJr-500 Switzerland 270,000 81,000 351,000 UFB-500 180,700 66% 51% £i:rface Grindcrn r.Y- - WfTC. Sjex 5 Grr.n !y 150,600 45,180 195,780 URB-550 114,000 76% 58 % 2. Alpa RW-450 Italy 386,020 55,800 241,820 URB-550 114,000 61% 47% 3. 3B 722 USSR 161,700 48,510 210,210 URB-1000 151,200 93% 72 % 4. ABA FF Germaany 150,000 45,000 195,U0 URB-550 114,000 76% 58% 5. Blohm Sirplex 7 Germany 170,370 51,110 221,410 URB-750 129,600 76% 59 % I7TicEnse fron ttFoz{unat. Industrial Projects Department May 1973 I0,% ANNEX 3-3 YUOOSLAVIA - IKtINDA IRON FOUNDRY PROJECT * HISTORYun ANfl) FORECAST _-- ------- - AotU& --------- ----- ---------- _ _w e.t~ --------- LeRend 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 onwards 1. Malleable Casting6(tons) - 240 1620 1950 2560 2950 3000 3200 53140 9000 CL 50 - 350 250 190 - - - - 600 D 3279 3946 2279 254t5 2335 2200 2200 2000 2500 3500 2. Finiahed Pipe'Pit.tingai T 3291 3910 3705 14113 14113 14000 14000 146140 6160 61400 2. tHoniahed Pipe FlttinCO 1063 1725 1773 1957 1992 1700 1700 1800 2560 2500 (tons) CL 717 583 284 290 239 300 300 340 600 600 D 1511 1602 1648 1866 1882 2000 2000 2500 3000 3300 3. (hay Caatings(tona) I - - - 700 750 900 950 1000 1200 1500 4. Nodular Castinga(tons) T - - - 1200 3310 4500 7500 9900 15000 16000 co - - - - 500 3400 5500 7100 9500 10500 CL - - - 1060 1810 100 500 800 1500 1500 D - - - 140 1000 1000 1500 2000 4000 4000 5. Total Castings T 16&y 8096 7954 10761 13258 14S50 17650 20740 30200 37000 co 1063 1965 3393 3907 5052 8050 10200 12100 17400 22000 CL 767 583 634 16C0 2239 400 800 114D 2100 2700 D 4790 5548 3927 4554 5217 5200 5700 65o0 9500 10800 I - - - 700 750 9C5 950 -15W - I200D 15w 6. Machine Toole (noa.) T 176 232 247 255 331 264 330 370 420 460 co 1 36 74 78 I1 32 43 65 70 80 CL 6 5 4 - 10 10 52 60 75 80 D 169 191 169 177 310 222 235 245 275 300 (a) Drilling Machin e (nos.) T 52 51 62 43 60 50 60 70 70 80 co - - - - - - - 10 10 10 CL - - - - - - 10 10 10 10 D 52 51 62 43 60 50 50 50 50 60 (b) Universal Orindars (no8-) T 87 151 149 164 210 154 180 180 180 190 CO - 27 73 78 u 32 40 40 40 40 CL 5 5 4 - 10 - 20 20 20 25 D 82 119 72 86 189 122 120 120 120 125 (c) 9urfaoe(flat)orind.rA(no8),T 37 30 30 48 61 40 5o 60 80 100 CO 1 9 1 - - 10 10 20 CL 1 - - - - - 10 10 20 20 D 35 21 29 48 61 40 40 40 50 60 (d) 2peoial 'rin4mre(nom.) T _ _ 6 _ 20 30 5o 70 70 co - _ _ - - 3 5 10 10 CL - - - - - 10 12 20 25 25 D . _ 6 - _ 10 15 25 35 35 (e) Bryant Grindere(noa.) T - - - - - - 10 10 20 20 * ~CO - _ - - - _ _ . _ - CL - - - - D - - - - - 10 10 20 20 7. Hydraulic Parte (nos.) T _ _ 195 252 350 400 400 - CO - - . _ _ CL - - - - 195 252 350 400 400 - D . . - -____ cgAgnd D - Domaetlc 8106 co - Convertible Area Beloe CL - Clearing Area 8.lc. I-ntezmSl Sales Tu tr6j'l Industrial Project, Departmnt June 1973 Annex 4-1 Page 1 YUGOSLAVIA - KIKINDA IRON FOUNDRY PROJECT PROPOSED FACILITIES 1. The existing facilities of the Kikinda Plant, described in Annex 2-2, include the facilities under construction which are expected to go on stream by the end of 1973. The project which is described in this section is to in- crease the capacitv of malleable iron castings to 21,000 TPY, malieable fit- tings to 6,400 TPY, nodular iron castings to 16,500 TPY, gray iron castings to 1,500 TPY and machine tool production to 460 units (equivalent to 1,500 TPY). A. Overall Concept 2. The main factors that characterise the expansion program of Kikinda are the following: (a) Increased production of fittings and automotive and other castings in the malleable iron foundry by replacing some of the old equipment, by using electric induction furnaces, the most modern automatic molding lines (Disamatic), and continuous processing in heat treatment, and by increasing the capacity of the existing sand preparation, core-making, and cleaning facili- ties. The present plant building will be expanded to accommodate some of the new facilities to be installed under the program; (b) Increased production in the gray and nodular iron foundry by replacing one molding line; and by installing electric induc- tion furnaces, a mechanized new molding line and supporting sand preparation, core-making and cleaning facilities. In order to install these new facilities the present building will be expanded; (c) Expansion of the production capacity of the machine tool plant by changing the present plant layout and material flow; by replacing old and obsolete machines; and by installing more accurate and sophisticated machines, including numerically- controlled machines. After the expansion, Kikinda plans to produce more specialized external grinders as well as internal grinders. The present machine tool building will be expanded to have a new plant layout and a climatized assembly room for high-precision assembly and testing; (d) With the installation of more specialized machines and some changes in the layout of the existing plant, the capacity of the fitting finishing shop will be increased to 6,400 TPY. The project also envisages new machines to produce an assort- ment of fittings from 2-4 inches in size which are not produced ANNEX 4-1 Page 2 at present. Galvanized fittings production will be increased by adding new galvanizing facilities; and (e) General revamping and remodelling of the existing auxilliary facilities and material handling facilities will eliminate some of the present production bottlenecks and also help improve general working conditions in the plants. 3. Since the expansion of all the existing plants is envisaged, the details of the proposed facilities contained in the expansion program are dealt with on a plant by plant basis. Details of the expansion program of the malleable iron foundry, gray and nodular iron foundry, fitting finishing plant, machine tool plant, raw material handling facilities and utilities, are given below. B. Malleable Iron Foundry 3. In order to avoid production drops during the implementation of the project, this foundry will be expanded in two phases. In Phase I, two Disamatic molding machines, a melting plant, and sand preparation and core- making facilities will be installed between the existing heat treatment plant and the No. 3 molding line. A new continuous annealing furnace will also be installed near the old annealing furnaces and some additions will be made to the cleaning room facilities. A major portion of the building extension work will be carried out during Phase I. After completion of this phase, the molding lines, Nos. 1 and 2, and the supporting cold blast cupola furnaces and changing systems will be dismantled for Phase II of the project. The capacity of this foundry after the completion of Phase I would be 12,500 TPY. Under Phase II, a new moldilI line in the place of the old No. 1 and 2 molding lines as well as four electric induction furnaces in the place of cupola furnaces will be installed. Remodelling of the existing sand preparation and core-making facilities for molding line Nos. 1 and 2 and addition of a new malleabilizing furnace are also planned in Phase II of the project. After the completion of Phase II, total capacity of the malleable foundry would be 21,000 TPY. Phase I The following equipment will be installed during Phase I: 4. Melting Plant: A new battery of two hot blast cupola furnaces, each with 6-7 tons/hr. capacity, will be installed to work alternately. This melting plant will have its own raw material storage facilities: six pig 3 3 iron and steel scrap bunkerc (200 m ), one coke storage bin (30 m ), one limestone storage bin (20 m3), and one charging car to transport raw materials. Charging of the furnace is completely mechanized. The capacity of the melt- ting shop is calculated on the basis of the average weight of cast per mold (15.6 kg/mold), number of molds per hour (400 molds per hour) and 90% ef- ficiency in cupola furnaces. ANNEX 4-1 Page 3 5. The molten iron is discharged into a holding furnace for temperature correction. There will be two electric induction heated channel furnaces - one to serve as a standby while the other works - and each has a 6 ton (500 KVA) holding capacity. Electric power consumption for 100°C temperature correction would be about 50 KW. The molten iron from the holding furnace will be trans- ported to the automatic pouring devices - two of them, one at each of two Dis- amatic molding machines - by 1-ton ladles connected to monorail systems (one for each molding machine). The automatic pouring devices on the machine have 1.3 ton capacity each. 6. Molding Lines: There will be two similar Disamatic molding lines for the production of fittings. The capacity of both molding lines would be 7,900 TPY on a 2-shift operation. Disamatic molding facilities, developed by a firm in Copenhagen, Denmark, is unique in this field since it is a continuous row of vertical molding system without mold boxes. It is well suited for mass production lines because of its high molding capacity, mold rigidity, and easy core placement and fully automatic working. The Disamatic mclding machine proposed in the project will have a steel band length for 88 mold parts for 600 x 400 x 3/300 size molds and the cooling time at 200 molds/hour will be about 22 minutes. Capacity utilization of this line is assumed to be 80% based on the average weight of casting per mold of 5.58 kg and 28.8 pieces of cast- ings per mold. Assuming 8% scrap and 2% oxydation and other liquid iron losses, the total yield would be about 40%. There would be two shakeout grates (0.5 ton) and the castings would be transported by a monorail system to the shot blasting machines through a long cooling tunnel. In order to facilitate the erection of the new Disamatic molding lines, some minor modifications will be made to the existing molding line No. 3, thereby reducing its annual produc- tion capacity to 4,700 TPY. 7. Sand Preparation Plant: Based on the molding capacity of 240 molds per hour and the mold size of 600 x 480 x 300 (0.085 m3), molding sand re- quirement would be about 40 m /hr. A safety margin of about 20% is incorporated in this calculation since the3assumed production of mold is only 200 mold per hour. There will be two 20 m sand mixing and preparation units, 5 m3/hr. rotary sand dryer, four sand bunkers (300 m3), one 2-ton crane for loading sand into bunkers, one sand loading device for sand mixers, and three used sand bins (180 m3). Prepared sand is transported to the new Disamatic molding lines by sand conveyors and used sand is moved out of the molding facilities by rubber belt conveyors. 8. Some alterations and remodelling of the existing sand preparation plant for the present molding line No. 3 is also planned. Sand storage facilities - four bunkers with 300 m3 capacity - will be installed. A 2 ton crane will be installed to load the bunkers with sand and a new charging device is also planned for the sand mixers. There will be two new (20 m3 each) sand mixers and a new 5 m3/hr. rotary dryer. By relocating the present conveyor system, prepared sand will be transported to the existing molding line No. 3. ANNEX 4-1 Page 4 9. Core-making: Hot box process will be used for making cores for the new Disamatic molding lines. Core-making will be semi-automatic and automatic and the cores will be transported to the molding machines by conveyors and will be placed in the molds by automatic machines. Core-making machines' capacity calculations are based on 19.5 cores per mold for 7,900 TPY production of cast- ings, 80% machine capacity utilization and 5% breakage of cores. There will be four 2.5 liter core shooters for fittings under 1" in size and two automatic core shooters for special fittings. Two 2-ton/hr core sand preparation facili- ties will also be installed. The core-making shop will also have sufficient core storage facilities. 10. Casting Finishing: The castings from the vibrating shakeouts of the Disamatic molding lines will be transported to the cleaning room by a cooling conveyor which will pass through a cooling tunnel. Time required for cooling of castings is about 3 hours and the speed of this conveyor would be 0,5 meters/minute (length of conveyor cooling system will be 90 meters). 11. Cleaning Room: the casting and initial cleaning of castings will be accomplished by two continuous shot blasting machines. Degating, knock- out and inspection of castings will be done on two roller conveyor type work tables (19 meters in length). For final cleaning, three automatic grinders and two conventional double-wheel grinders will be added to the existing facilities. The present cleaning room layout will be modified to suit the increased production and material flow. 12. Heat Treatment: Based on 7,900 TPY of fitting productions, 100% capacity utilization and three-shift operation, the capacity of the new con- tinuous annealing furnace is calculated to be 1.4 tons/hr. Heating of this furnace will be by natural gas and final temperature control will be by electric power. Since annealing is accomplished at a temperature of over 860°C, the whole process will be carried out in a protective atmosphere against nitrogen. A protective gas generator will be installed to supply sufficient nitrogen. Phase II 13. After the completion and successful operation of items installed under Phase I, the existing molding lines, No. 1 & 2, and the melting plant supplying to these molding lines will be dismantled. Under Phase II of the project, the production capacity of automotive casting will be increased to 13,100 TPY for which the following equipment will be installed. 14. Melting Plant: The existing two cold blast cupolas will be replaced by four electric induction furnaces with 10-ton (2.1 MW) capacity each, of which one furnace without electrical connection will serve as a reserve. This melting plant will be equipped with storage facilities (12 bunkers with 15 m3 capacity) for raw material, 5-ton loading crane for loading the storage bunkers, scrap preheating furnace (300'C) to reduce melting time and three sets of electrical equipment for the induction furnaces. The melting time required for each furnace ANNEX 4-1 Page 5 is about 40 minutes since 60% of the charge will be preheated prior to charg- ing. The molten iron from the furnace is discharged into 3-ton pouring ladles which are connected to a monorail system for transporting molten metal from the melting plant to the molding line. The capacity of the melting plant is based on the production of 8,430 TPY of good castings assuming 10% scrap and 2% oxydation and other liquid iron losses in the induction furnaces. 15. Molding Line: The new automatic molding line with a capacity of 8,430 TPY will replace the existing molding lines, No. 1 & 2, and will be designed to produce automotive and other similar castings. The molding line will be capable of handling 250 molds per hours with an average weight castings per mold of 17.8 kg and will have 140 molds on the 100 meter long (speed 4 meter/min.) horizontal type conveyor. The flask size in this molding line would be 630 x 500 x 2/300 and one mold will contain on an average about 6.75 pieces with an average weight of 1.61 kg/pieces, and the cooling time at 250 mold/hr would be about 17 minutes. Capacity utilization of this molding line is assumed to be about 80% and total yield about 42% (mold yield 47%). This molding line wlll also have two high-pressure presses (one for the lower half and the other for the upper half), flask transport conveyor system, two sand storage (3 m3) and fitting equipment, and one 1-ton shakeout grate. The castings from the shakeout is transported to the cleaning area by the cooling conveyor through a cooling tunnel. 16. Sand Preparation Plant: The existing sand preparation plant will be reconstructed and extended to provide sufficient sand for the new auto- motive casting molding line. Based on 250 molds/hr with mold size of 630 x 500 x 2/300, the capacity of the sand mixers is estimated at 60 m /hr; 2 new 30 m3/hr sand mixers will be installed, with 20% safety margin. There will be 4 molding sand storage bins (300 m3/hr) equipped with a 3-ton crane for loading sand, a new sand dryer with a capacity of 10 m3/hr will be installed to dry the sand prior to charging into the mixers. Prepared sand will be transported to the molding lines by belt conveyors and the used sand will be transported from the molding area to three 50 m3 used sand bin by a separate belt conveyor system. 17. Core Making: The core-making plant will serve the existing mold- ing line No. 3 as well as the new automatic modling line. Semi-automatic shell process will be used to make cores. New equipment to be installed in the core-making shop are two sand mixing machines (3-ton/hr) for core sand, one 5 m3 sand storage bin, core sand transportation carts, three 5-liter capacity core shooters for small cores, two 7.5 liter core shooters for medium- site cores, two 1.5 liter core shooters for large cores and core transport conveyors for transporting cores to the molding lines. The capacity utiliza- tion of the core-making plant would be 80% and core breakage is assumed to be about 5%. 18. Casting Finishing: Casting from the shakeout would be carried by a cooling conveyor through a 90-meter long cooling tunnel at a speed of 0.5 m/min. to the cleaning section. The time required for cooling is about three hours. ANNEX 4-1 Page 6 19. Cleaning Room: Two continuous blasting machines will be used for initial cleaning and two roller-conveyor-type work bench will be used for degating, knock out and inspection. For panel cleaning, the following new equipment will be added to the existing facilities: 20 grinding machines, 7 cleaning benches and 6 straightening presses. 20. Heat Treatment Plant: One two-channel continuous annealing furnace (1-ton/hr) with high and low temperature sections, will be installed in the new part of the foundry. This furnace will be heated by natural gas, and electric power will be used for final controls. The furnace operates (at 860°C) with a protective nitrogen atmosphere and the required nitrogen will be supplied by the protective gas generator. The capacity of this furnace, based on 3-shift operation and 100% efficency, would be 5,600 PTY. This plant will also have facilities for an oil bath, one water bath, and necessary stotage for semi-finished and finished products. 21. Observations: The extension of the malleable foundry can be implemented without disturbing the present operations. The equipment for the processing of fittings can be erected on an area which is not used at present. With proper operation of facilities under Phase I, the plant will have suffieient capacity to meet its commitments to customers even when the existing cold blast cupola and molding line No. 1 & 2 are dismantled. 22. The proposed plant layout is favorable with regard to utilizing the existing facilities as well as for the future material flow. Internal transport of materials and castings is expected to be mechanized to the extent necessary to improve productivity. The planned equipment and tech- nology are up-to-date and well suited for the manufacture of the intended products. 23. Melting Department: The cupola furnaces for fittings have a capacity of 6-7 tons[hr, whith is about 21% above the average required amount of liquid iron for the Disamatic molding line. Further, there is a possibility for storing 12 tons of liquid iron in the two induction holding furnaces for peak requirements. Therefore, the melting capacity of the cupola is sufficient. 24. The melting capacity of electric induction furnaces for automotive castings is 6 tons/hr, whereas the average liquid iron requirement is about 5.4 tons/hr, i.e., there is only 11% reserve in the melting shop. Further, in order to avoid waiting time for liquid iron when castings which are above average in weight are produced, proper production control is essential. 25. Molding Plants: (a) Fittings production line calculations are realistic. Although the assumed efficiency of 80% is achievable, 75% efficiency assumption would have been more realistic. (b) Automotive casting molding line: The required number of molds and the mold capacity have been calculated correctly. However, ANNEX 4-1 Page 7 the efficiency of 80% for this molding line is rather optimistic. Doubling the present flask size to 1,00 x 630 x 2/300 would provide more flexibility and improved efficiency. 26. The capacities of sand preparation plants, core-making facilities, and cleaning room facilities are adequate for the proposed expansion. 27. A slight modification to the present layout of the heat treatment section is presently being considered, to make it more suitable for further plant expansion. C. Gray and Nodular Foundry 28. The expansion project is an extension of the existing facilities with minor modifications to the present facilities. Since expansion will tot affect the production of the existing plant, it will be carried out in one phase. 29. Melting Plant: No changes or modifications to the existing melting plant are envisaged in the project. A new melting plant consisting of four electric induction furnaces, with a capacity of 12 tons per furnace, 2 melting circuits (2.6 M) and two holding circuits will be installed in the extended part of the building. This plant will be equipped with 8 raw material storage bunkers (150 m3), 8 steel scrap storage bins (300 m3). one 5-ton overhead crane for loading new materials, one charging device including a 5-ton crane and sufficient electrical equipment for the electric furnaces. A scrap preheating (200-300'C) furnace to reduce the melting time by 10 minutes will be installed. The furnace melting capacity would be 5.1 tons per cycle and the capacity of the melting shop would be 10 tons/hr. The molten iron from the electric furnace would be discharged to a 3-ton pouring ladle for transport to the mold- ing line by a monorail system. 30. Molding Line: The existing molding line No. 2 (see Annex 2-1) which has a capacity of 1,700 TPY will be dismantled and the existing building will be extended to install a new automatic molding line with a capacity of 10,700 TPY. This molding line will be capable of producing 250 molds/hr. and the flask size will be 860 x 730 x 2/350. At the rate of 250 molds/hr, the cooling time would be 16 minutes. The design of this molding line includes two high pressure presses - one for the lower part of the line and the other for the upper part of the line, three transverse chassis moving devices and a continuous molding conveyor for molding, pouring and initial cooling. The capacity utilization of this machine is assumed to be 80%. Total yield, assuming 10% scrap and 2% oxydation and other furnace losses, would be about 54% (mold yield 61%). The castings will be dumped into a 1-ton shakeout grate where the cast- ings would be separated from the sand. With the use of a 0.2-ton jig crane, castings will be loaded to a monorail cooling conveyor system which transports the castings to the cleaning room through a cooling tunnel. ANNEX 4-1 Page 8 31. Sand Preparation Plant: A new sand preparation plant will be installed for the new molding line. Based on 250 molds/hr, flask size of 860 x 730 x 2/350 and 20% safety factor, the sand preparation capacity required would be about 95 m3/hr. There will be two sand mixers with a capacity of 50 m3/hr each. This plant will also have the following machines: a sand loading device, an elevator (10 m3/hr) for loading sand into a conveyor (10 m3/hr) which will feed the sandmixers and dryer, a 10 m3/hr sand dryer, a prepared sand conveyor line (100 m3/hr), one storage bin (10 m3)3at each of the molding presses, a "used sand" conveyor system and four 90 m "used sand" storage bins. 32. Core-Making: The core-making shop is intended to serve only the new molding line. The hot-box process will be used for the core-making. A number of core-making machines and their capacities are designed on the basis of 80% capacity utilization of the facilities plus 5% core breakage. The plant will have the following facilities: two 10 m3 core sand storage, two 2.5-tons/hr core sand mixing units, a core sand transportation cart, 7 hot box shooters (two 5-liter, 80-cycles/hr shooters, three 7.5-liter, 60-cycle/hr shooters and two 15 liter, 50 cycle/hr shooters), sufficient storage space for finished cores and a conveyor system to transport to the molding line. 33. Casting finishing: As mentiorred earlier, castings from the shakeout will be brought to the cleaning area through the cooling tunnel by a monorail conveyor system. This section of the foundry will be on two different floors. Most of the initial cleaning will be done on the lower floor and the final cleaning, inspection and heat treatment on the upper floor. 34. Cleaning Room: This section will have a continuous cleaning machine for initial cleaning, one 1.6 in diameter table blasting machine, work places for degating, hoppers for scrap metal, 8 special grinders, 6 simple grinding machines, 12 work places for final cleaning, inspection and control, and a few conveyor systems for material handling. 35. Heating Treatment: The heat treatment plant capacity is based on a 3-shift operation with 100% efficiency. An annealing furnace (14 tons/charge) with charging device will be installed. A protective gas generator (40 m3/hr) for the supply of nitrogen to the furnace will be installed. The heat treatment time in this furnace would be between 16-24 hours and the capacity of this furnace, based on a 3-shift operation, would be about 4,600 TPY. 36. Observations: The expansion of this foundry can be carried out without disturbing the production of the existing facilities. All the existing equipment with the exception of the molding line No. 2 and some old machines in the core shop and cleaning shop will be used even after expansion. 37. The layout of the foundrv with regard to the existing and future facilities and flow of material is favorable. Further expansion of this foundry will not be possible due to lack of adequate space and heat treat- ment facilities. However, the production could be increased by about 10% with minor alterations and additions to the facilities. The intended facilities and technology are suitable for the production of nodular iron ANNEX 4-1 Page 9 casting, with the exception of cooling line which is too short in length for adequate cooling; a longer cooling line would be more appropriate. The capacitv calculations of all the facilities are reasonable and the planned number of machines and capacities are adequate for the proposed production increase. The internal transport will be mechanized as far as possible to increase productivity. D. Fitting Finishing Plant 38. The existing fitting finishing plant will be expanded to accommodate additional equipment to increase the production capacity to 6,400 TPY of which about 4,300 PTY would be for galvanized fittings. Near this plant, sufficient storage space for raw fittings will be provided by installing 300 containers (1 x 0.8 x 0.6 m) for fitting castings, 40 containers (1 x 0.8 x 0.6 a) with fish mouth lids. 39. Initial Cleaning: No major changes are envisaged for this section excepting the installation of a new drum for greasing. The existing 19 tumbl- ing drums are adequate for the increased production level. 40. Final Machining: The present layout of this section will be altered to suit the proposed production level. Moreover, the following new machines will be added to the existing facilities: six special automatic machines for elbows and "T" pieces, four automatic machines for couplings up to 1", three automatic machines for couplings pairs 1" to 2", 6 lathes for automotive casting, 7 work tables for joints, 7 fittiWg testing equipment, and sufficient inplant storage area for work-in-process. New monorail systems will be installed to improve the internal material transport. 41. Cleaning Room: Additional equipment to be installed in the exist- ing cleaning room are: 13 preheating chambers, one caustic soda vat, water vat, one lye vat and the extension of the existing monorail system. 42. Galvanizing Section: A new galvanizing section (1.7-ton/hr) will be added to this plant. Machined fittings will be transported to this new section by a monorail system. A 1.2-ton/hr continuous dryer for drying the fittings will be installed. This section will also include 4 sets of zinc smelting furnaces (15 tons of melted zinc), 0.2-ton dipping crane, 1.5 x 2 m heated table, 1.5 m3 water vat and 0.2-ton centrifuge. The capacity of this galvanizing section would be about 3,100 TPY. 43. Final Finishing and Packing: Four new surface finishing lines and one additional packaging facility will be installed, and the existing surface finishing and packaging lines will be relocated. For the final finishing lines, four 1-ton loading equipment, 4 surface finishing lines (varnish coating machines), 2 new belt conveyors and 2 new tunnel type dryers are planned. The new packaging line which will be very similar to the existing line, will have a roller type conveyor system, control tables for counting and final checking, ANEX 4-1 Page 10 packaging tables, labelling equipment and sufficient storage area for cardboard boxes and finished products. 44. Observations: The layout of this plant is satisfactory for the material flow and the utilization of the existing as well as proposed facilities. The calculation of machine and plant capacities are based on the experience df Kiki-nda with its present facilities and are considered realistic. Most of the existing facilities will be utilized even after expansion. With the instAl- lation of fully automatic machines and mechanized internal transport systems, the productivity of this plant is expected to increase. E. Machine Tool Plant 45. In the expansion program of this plant, major emphasis is given to the production of grinding machines (universal, flat, special and internal grinders) with better precision and automation and also to better quality and productivity, increased production capacity and better material flow. In order to achieve this, the machine tool plant will be extended and modernized with more sophisticated facilities; some of the existing machines which are inaccdrate, old and unproductive will be replaced with new machines, and the present laybut will be altered by relocating some of the machine tools for better material flow. 46. The production capacity of this plant will be increased to 460 machines which would include more specialized and automatic grinding machines. The selection as well as the numbet and3caiacity of machine tools are based on careful calculations of required machining time, accuracy and capacity utilization of machines. The layodt of A)>*%nt, which would basically be on a functional basis, will have some fle'xbi1Rty for adding new products to the proposed product mix. T", general plant layout, main sections and machiiie ,rouns are shown at the end of this Annex. This plant is expected to work 2 shifts per day and its approximate overall capacity utilization would be about 75%, which is considered satisfactory for the type of work Kikinda is planning. 47, The following unproductive and inaccurate existing machines will be replaced with new machines: 10 universal lathes, 7 milling machines, 3 drilling machines, 1 planing machine, 1 special grinding machine, 2 boring machines, 1 grinding machine and t cutting machine. These machites will either be used in the maintenance shop or sold depending on the condition of the machines and the maintenance shop requirements. 48. Kikinda plans to add numerically-controlled boring and grinding machines to its production line to increase the productivity in mass pro- duction of assembly parts. It will also have a new temperature and humidity- controlled insulated area for the mounting of fine and precision grinders. The following new machines and equipment will be added: 4 boring and drilling machines (of which 2 boring machines will be numerically controlled), 13 milling machines, 11 grinding machines (of which one wlll be numerically ANNEX 4-1 Page 11 controlled), 1 planing machine, 1 horning machine, 1 lapping machine, 11 lathes, 2 sharpening machines, 1 cutting machine, 1 annealing furnace, 3 special furnaces, 1 washing device, 1 shot blast cleaner, various tools and devices for production and control, and necessary spare parts. 49. Observations: The basic calculations with regard to the plant capacity, number of machines and required area are satisfactory. The selection of machine types and facilities as well as the plant layout for the proposed production were done carefully. The only exception might possibly be the numerically-controlled machines; Kikinda has no prior ex- perience in operating such machines which require high-skilled operators and programmers. However, facilities are available in Yugoslavia to train people to operate such machines. In the case of the plant layout, suf- ficient flexibility is incorporated to alter the product mix if needed and to add new product lines similar to what Kikinda plans to produce. There is ample space available for further expansion. F. Utilities 50. Electric Power and Distribution: After the completion of the project, the installed electric power would increase threefold from 12 MW to 36.2 MW, while the power consumption would increase from 19.5 million kwh in 1972 to 60 million kwh in 1977. In order to meet the additional power requirement, the present distribution system will have to be modified. According to an agreement reached between Kikinda and the electric distribution company, Elektrovojvodina, the latter will install a new 35/10 KV main transformer, which would replace the existing main transformer station which is expected to be installed by Elektrovojvodina, will be completed by early 1975. With- in the plant site, the present distribution system will be reconstructed and additional distribution lines and transformers will be installed by the Company. In the malleable iron foundry, the three existing transformer sub-stations will be expanded and a new one will be added. In the grey and nodular iron foundry, in addition to the existing sub-station, three new transformer sub-stations will be installed. One sub-station will be erected for the new compressed air station. Further, the machine tool factory will have a new sub-station in addition to the existing one. Expansion of the existing sub-station in the fitting finishing plant is also envisaged in the project. For lighting the plant site, the existing sub-station will be enlarged and modifications will be made to the closed circuit line by installing a 10,000 volt line. Most of the 10 KV distribution lines from the main trans- former station to the sub-stations will be replaced by new cables. The power distribution lines inside the plants would be underground. The cost of the electric distribution system and installation within the plant site is included in the project. 51. Gas: The heat treatment facilities in both the foundries use gas. With the installation of additional heat treatment furnaces, the gas consump- tion would increase. Moreover, the expansion of the existing buildings would ANNEX 4-1 Page 12 also increase the gas consumption, since the boiler at the heating plant operates with gas. The total3gas consumption would increase from the present rate of about 3.9 million Nm to 7.1 million Nm3 after the completion of the project. According to an agreement reached between Kikinda and Nafthagas, the latter will provide sufficient gas to meet the former's needs. 52. An additional 3-12/" pipeline will be provided to transport gas from the gage control station to the distribution station within the plant site. Additional distribution lines will be provided to supply gas to the malleable iron foundry and the gray and nodular iron foundry. By extending the existing line to the fitting finishing shop, the new galvanizing plant will be supplied with adequate gas. The existing distribution stations will be reconstructed to handle the increased gas needs and some of the old dis- tribution pipelines will be replaced by new ones. 53. Compressed Air: Most of the facilities in the existing compressed air station were built in the early 1960's. The compressed air requirement would double upon completion of the project. After exploring the possibility of expanding the existing system with two more small compressor unit (20 m3/mln), Kikinda has decided to install a new compressed air station adjacent to the fitting finishing shop, with four 40 Nm3/hr compressors (including one as a standby), and there is provision for installing one more, if needed. This would give Kikinda more flexibility and an assured supply of compressed air for the proposed production. The new compressors will work in conjunction with the existing ones to meet the plant requirements. The compressed air is mainly used in the pneumatically-operated molding machines (which are run exclusively by it), pneumatic hand core machines, pneumatic lifting devices and blasting and cleaning machines. The compressed air requirement would increase from the pres- ent rate of 95.5 Nm3/hr to 183.8 Nm3/hr (at 7 times the atmosDheric pressure) after completion of the project. The total installed capacity of compressed air would be about 260 Nm3/hr. Some of the existing distribution lines will be modi- fied and additional lines will be installed to meet the expected increase in demaFd. 54. Water: Water consumption is expected to triple from 78 m /hr at present to 205 m3 /hr after the project completion. This would require complete reconstruction of the existing water distribution systems. A new 12" well will be drilled to obtain water from 200 meters below the ground level and the water (1,400 liters/min.) will be pumped into the water tower. The new well plus the existing four wells would be adequate for supplying necessary water for plant operations. The main water distribution will be by underground concrete pipes and the network distribution will be by ferrous pipes with corrosion protective coating. There will be automatic Ph meters, a water neutralization unit and a unit for separation of solid particles for purifying the water before circulation. A recirculation system will also be installed to minimize the water intake. Before the used water is discharged to the Kikinda town sewage system, it is neutralized to avoid corrosion of the sewage pipes. As for drinking water, it is received from the Kikinda town water supply system. 55. Heating: The present system of water heating for steam will be replaced by a new water heating system. Since most of the existing plants ANNEX 4-1 Page 13 will be expanded, the heating requirement would increase from the present rate of 7.9 k cal/hr to 13.1 cal/hr on completion of the project. In order to meet this increased demand, a new 8-ton/hr gas-heated steam boiler capable of supplying 5.6 k cal/hr, will be installed. The present steam heating distribution system will be modified and replaced because most of the exist- ing lines are small to carry warm water for the proposed heating system. 56. Central Storage and Material Handling Facilities: A large control storage for all major raw materials required for the foundries will be built in an area south of the malleable iron foundry. A number of existing build- ings will have to be demolished for the construction of this facility. The storage bins made of concrete will be 200 meters long and 35 meters wide. This bay will be served by three overhead gantry cranes, which will feed the melting shop bins with raw materials as well as unload raw materials into central storage bins. One central sand drying plant and pneumatic delivery system to serve both the foundries will also be installed. 57. Ttandportation: The present Belgrade - Kikinda road is being re- constructed and the road near Kikinda plant is planned to be re-routed by the Province of 'Vojvodina and the work is expected to be completed by 1974. Once the road is re-routed, Kikinda will construct a railroad track connect- ting the existing railroad track and the plant site. The cost of these installations is included in the project. 58. Under the urban development plan of Kikinda town, a new river port, about 1.2 km from the factory, on the branch of the Dunav-Tisa Canal network is being constructed and it is expected to be completed by the end of 1973. In case of emergency, Kikinda plans to use this facility for transporting raw materials and finished goods. Industrial Projects Department July 1973 ANNEX 4-1 Page 14 YUGOSLAVIA: KIKINDA IRON FOUNDRY PROJECT LAYOUT OF MACHINE TOOL PLANT 1. Steel Storehouse 2. Cutting 3. Storage Area 4. Small Part Machining 5. Storehouse for Big Parts 6. IUnpacking 7. Plant MAintenance 8. Storehouse for Casting 9. Treatment of Heavy Castings 10. Cleaning - Annealing - Sand Blasting of Castings 11. Marking Machines 12. Lathes 13. Tools Storing and Preparation for Treatment 14. Grinding Machines 15. Milling Machines 16. Boring Machines and Large Size Lathes 17. Final Heavy Machining 18. Drilling Machines 19. Locksmith's Shop and Storage Area 20. Tool Shop 21, Electrical Power Maintenance and Large Capacity Transformers 22, Electrical Control and Di.stribution 'Cubical Mounting 23. etorehouse 24. Fardening Department - Beat Treatment 25. Sub-assembling and Mounting Department 26. Heavy parts Assembly 27. Painting 28. Tinsmith's and Welder's 29. Hydraulic Systems Erection and Testing 30. Radial Drilling Machines Final Assembly 31. Flat Surface Grinding Machines Final Assembly 32. Turning Grindling Machines Final Assembly 33. Special Grinding Machines Assembly 34. Universal Grinding Machines Assembly 35. Precision Mounting and Testing Department with Constant Temperature Control 36. Final Painting, Adjusting and Packing of Machines 37. Delivery Area ANNE,x 4-1 YUOSLAVIA: KINDA IPRN FOMD PROJECT Page 15 MACHIliE TOOL PL'AN LOT AND MAONIAL s1 $eS,~- ._.o,0-_--__<_ = 4 t'n'--'-X~~1 i ~~~~~~jl~~~~~~~ ~ *- Coitoe -~~~~~~~~~~~~~~~~C- -o -Heavy Casting.i ~~ua~i~~1 Pwojeots Dmpaz'tmw~t Medium and Li.g1t Caetin-ge y ~~~~~~~~~~~~~ -0 Componente YUGOSLAVIA - KIKINDA IRON FOUNDRY AM= 4-2 PLANT LAYOUT C,> *EXISTING PLAN'T POOEDFXPANSION (PROJECT) URECONSTRUCTION OF EXI'STING FACILITIES (PROJECT) World Benk-7725 ANNEX 4.3 YUGOSLAVIA - KIKINDA IRON FOUNDRY PROJECT ECOLOGY A. General Standards and Conditions in Yugoslavia 1. According to the Yugoslav law on protection against air pollution, it is obligatory for all manufacturing enterprises to obtain certification of the provincial administrative body responsible for pollution control as to whether the required conditions for protection against air pollution have been met. According to the Cmpany management, the Kiki.nda town authorities are in full agreement with the current plant location and proposed facilities for the expansion program. 2. A new environment control law has recently been passed. This law stipulateAs that all new projects as well as existing plants should conform to certain minimum pollution standards by the end of 1973 and all set standards by 1977. A summary of the main conditions and standards, which are still rather general as set by the law is given below. (a) Temperature: Work Room lhC (min.) Offices 200C (b) Permissible concentration of harmful matters: Mineral dust with over 50% free SiOo -- 175 particles/cm3 Dust over 70% free SiO2 -- 1 mg/m3 Dust 10 -70% free SiO-2 2 mg/m co ' - 0 cm3/M3W sO2 -- 5000 om3/m ppm 2 --4 mg/re3 Fe2 03 -- Max 15 mg/m3 (c) Lighting: For simple work 50 - 100 Lux For moderate work 100 - 600 iLx Precision work 500 - 1000 Izx There are no clear classifications of the nature of the work. (d) Noise: Permissible noioe in production area 50 - 80 db Permissible noise in office 4o - 50 db (e) Air Pollution: Plants are not permitted to release air containing harmful matter into the atmosphere above the following concentrations: ANIaE 4-3 Page 2' Average daily Individmal Concentration Concentration Sulphur dioxide 0.5 0.15 Soot 0.5 0.15 Carbon monoxide 1.0 3.0 Arsenic 0.003 Ash and inert dust 300 mg/m3 The provincial administrative body in charge of health determines the maxi- mum permissible concentration depending on the type of indastry, location and climatic conditions. B. Pollution Control Devices in Kikinda 3. Certain facilities in the Kikinda plant, as they exist now, may not satisfy the present legal requirements. However, with the facilities proposed under the project it is judged that Kikinda will be in a position to satisfy the conditions set by the new environmental law. The Company plans to have the most up-to-date facilities for pollution control at a total cost of about Din 10 million accounting for about 5% of the total project cost. The major facilities would includes Dust and Fum Extraction 4. Effluent gases from all (existing and new) cupola furnaces in the miialleable as well as the gray and nodular foundries w:il pass through 'LIBX- Scheible'1 filters; these will be procured locally from a Yugoslav firm Which is manufacturing this equipment under a license from ELEB of Switzerland. The gas is then purified by e7traction units before being discharged into the atjaaibhre. 5. The sand preparation plants will use wet cust separators; the air extracted from these plants will be released through filters, which separate the sand fines, into the atmosphere. All major pollution sources - such as mold pouring, cooling tunnel and shake-out - will have local extraction units. Core-making shops, cleaning rooms, painting and varnishing and heat treat- ment sections 52l also have localized extraction and f i stems for purification of thLe air. Water PLftication 6. Water pollution is not a major problem in a foundry because the discharged water does not contain any harmful materials. Nevertheless, the water is neutralized before discharge into the Kikinda town sanitary sever. Industrial Projects Department June 1973 =UGOSIAVIA - KIKINDA IRON F0UNDR PROJECT LABOR FORCE PROJECTIONS 1972 1973 1974 1975 1976 1977 1978 _1979 1980 1981 1982 1983 (Actual3 Foundriie s Highly skilled 87 90 110 149 210 246 246 246 246 246 246 246 Skilled 202 212 222 270 324 384 384 384 384 384 384 384 Sen.-skilled and Unskilled B38 839 870 851 789 706 706 706 706 706 706 706 Sub-Tlotal 1127 1141 1202 12-7 1323 136 131Z 1316 150 1316 134-6 134 II. Machine Tools Highly skilled 179 235 235 253 276 301 301 301 301 301 301 301 Skilled 208 235 235 250 271 294. 294 294 294 294 294 294 Semi-skilled & Unskilled 28 34 34 34 34 34 34 34 34 34 34 34 Sub-Total 15 504 W0 537 581 629 629 629 629 629 629 629 III. Administration and sales Highly skilled 108 108 110 119 121 115 115 115 115 115 15 15 Skilled 166 166 184 194 204 300 300 300 300 300 300 300 Semi-skilled and Unskilled 60 60 40 21 16 26 26 26 26 26 26 26 Sub-Total 334 334 334 334 341 14 41 441 IV. Maintenance Highly skilled 74 85 109 127 138 138 138 138 138 138 138 138 Skilled 130 125 141 157 162 162 162 162 162 162 162 162 Semi-skilled and Unskilled 4 4 4 4 4 a 4 4 _ Sub-Total 20g3 214. 254 2l8 304 304 304 304 304 304 304 304 GRAND TOTAL 2084 2193 2294 2429 2549 2710 2710 2710 271o 2710 2no 2710 Industrial P?jects Department Jtme 1973 YUGOSLAVIA - KIKINDA IRON FOUNDRY PROJECT IMPLEMENTATION SCHEDULE ACTIVITY 1973 1974 1975 1976 77 DESCRIPTION 3 4 6 7 8 9 1011 12 1 2 3 4 5 1 6 1 7 1 8 1 9 110 11 12 1 1 2 | 3 | 4 15 6 5 1 6 | 7 |8 | 9 110 III 12 - 2 IMPORTED X IUUJIIIIIIIIIlIIIIIIIIIIIIIIIIII iiiiiIlhIIill114! m mimi* EQUIPMENT A m _ BUILDING DOMEST. EOUIP. liill liiiiiii iliUilHlltllUli lHitilAAA! R A0 - INSUTtALL__ ; EQUIPMENT A m = 0 BUILDING DOMEST. EQUIP. s ll ii ii ll lll ll ll i ii ii i ill iiiii iiiiiiiiiiiill ll l _ Z INSALL __- IMPORTED FO I mimi] EQUIPMENT a BUILDING DOM4EST. EQUIP-ll lllllllllllllllll AN- INITALL_ A _ II^PORTE *mmD-X X i"M X -llnifiluflllliiililnn,,I i,,i,ii,tn,Ii I uinuuniil EEQUIPMENT OX h BUILDING DOIMEST. EQUIP. I llllh IllHU t* IIrA*I i 1 AND INSTA.LL __ __,_ IMPORTED A a EQUIPMENT z 3 BUILDING DOM EST. EQUIP. lllllllllllllllllllllllllll liiiflll-- AJn INSTAL -- IMPORTED wFWfin *UUIlili lBiIillIlHiimimimiO mum c EQUIPMENT A B 8UI LDING 004EST- EQUIP .llllllllllllllliiiiiiiiiiilIl"^ TENTATIVE PROJECT gU INTERNATIONAL IllIlill EQUIPMENT EQUIPMENT 1131 TRIAL CIVIL ENGINEERING PREPARATION rENERRING AIND DELIVERY ERECTION OPERATION WORKS CONTRACTING IMPORTED EQUIPMENT V DINAR CURRENCY V A FOREIGN CURRENCY FUNDS FUNDS ANNEXIg- YUGOSLAVIA - KIKINDA IRON FOUNDRY PROJECT CAPITAL COST ESTIMATES A. SUwIaiy 1. The capital cost estimates based on the technical studies under- taken by the companr given on page 8 of this annex are Bummarized belowt Din Million Items Local Foreign Total % 1. Buildings and Civil Construction 36.4 - 36.4 6.2 2. Equipment 44.5 173.4 217.9 36.9 3. Duty and Taxes 46.0 - 46.0 7.8 4. Transportation Cost 3.6 3.6 o.6 5. Erection and Installation 21.6 - 21.6 3.6 Sub-total 152-. 173.4 327.5 77.-1 6. Contingency 14.5 21.1 35.6 6.o 7. Price Escalation -29.6 30.3 59.9 10.1 Project Cost 196.2 224.9 21-1.0 71.2 8. Pre-operating and Start-upj' 12.0 4.0 16.0 2.7 9. Engineering17 - 5.0 5.0 0.9 10. Incremental Working Capital 92.5 10.3 102.8 17.4 11. Interest During Construction'-/ 0.6 45.8 46.4 7.8 Total Financing Required 301.3 M" 591. 100.0 % 51 49 100 1/ These items are charged to incaiie statement since, according to Yugoslav law, interest during construction and start-up expenses cannot be capitalized; and the Compar also charges preoperating and engineering expenses to the income statement. 2. The cost estimates prepared by the Comparn are based on the latest information available to it as well as its past experience. These estimates were reviewed by the Bank and are considered realistic. Details of calculations of each cost item are given below: B. Building and Civil Construction (item 1) 3. The building construction cost estimates are based on total new area to be constructed and remodeled as well as the cost per unit area. The follow- ing are the areas to be added, reconstructed, and dismantled during project implementation: Area in m2_ To Be To Be Recon- Disman- Existixg New structed tled Total 1. Malleable Iron Foundry 14,851 3,259 1,050 1,311 16,799 2. Gray and Nodular Iron Foundry 5,455 5,333 354 531 10,257 3. Fitting Finishing Plant 4,044 336 - - 4,380 4. Machine Tool Plant 10,620 5,040 - 170 15,490 5. Central Storage and Other Facilities 8 2 870 112 1 652 9Jj50 Total 433O54686 16 3I694 56,676 ANNEX 5-1 Page 2 4. The cost per unit area (m2) varies from plant to plant and it ranges from about 1,600 Din//m2 in the fittings department to about 2,400 Din/rn in the central storage department. The differences between various facilities are due to the amount and complexity of concrete work required in each plant. For example, concrete bins will be needed in the central storage area whereas the fitting finishing plant will require only a minor amount of concrete and build- ing works. Another reason for cost differences is the differing needs for in- plant installations and foundation work. Taking these differences into account, it has been calculated that the average Cost per m2 would be about 2,000 Din/m2, compared with the prevailing rate of about 1,500 Din/r2 in Yugoslavia. Based on the above, the total cost of building and civil construction is estimated at Din 36.4 million and its breakdown is as follows: Total Building & Civil Construction Cost (000 Din) Malleable Iron Foundry: Phase I 6,343 Phase II 2,718 Gmay and Nodular Iron Foundry: 10,751 Fitting Finishing Plant 542 Machine Tool Siop 8,880 Central Storage and Other Facilities 7J137 Total 36,371 5. The Company has already received quotations from four Yugoslav con- struction firms. These quotations based on fixed-price contracts indicate that the total cost could be lower. But in Yugoslavia fixed-price contracts are not strictly followed because the contractor could increase his price if the Govern- ment allows higher construction costs. This being the case, the cost estimates given in the table are considered realistic. C. Equipment Cost (item 2) 6. For most of the equipment and machinery, Kikinda has received written tenders from 3-6 suppliers from different countries. Most of the quotations are from suppliers in Germany, Italy, the U.K., Sweden, Denmark, and the U.S. The Company has also received quotations from at least three local suppliers for domestic equipment. The quoted prices from different suppliers vary on the average by about 25%. For foreign equipment, in most cases, price quotations were received between January and March 1973. These prices have been used for cost estimates; however, the Company feels that, under international competitive bidding, the actual delivery prices would be about 15% lower than those quoted. However, it should be noted that foreign equipment prices, in dollar terms, have increased by about 20% in the last two years. The following are the cost estimates for foreign (CIF Yugoslav border) as well as local equipment, includ- ing spare parts: Din Million Malleable Foundry Local Foreign Total Phase I: Melting Plant - 8,093 8,093 Molding Line 390 3,861 4,251 Sand Preparation 650 3,776 4,426 Core Room 1,560 1,130 2,690 Cleaning Room 4,649 4,9 Heat Treatment Shop - 13.326 13J26 Sub-total Phase I T0,186 37435 ANNEX 5- Page 3 DnX MLUlon Local ForeIgn TbtaI Phase II: Melting Plant - 12,866 12,866 Molding Line - 13,126 13,126 Sand Preparation 520 2,533 3,053 Core Room 780 1,533 2,313 Cleaning Room 1,685 - 1,685 Heat Treatment Shop - 13,326 13,326 License fee for Convertor - 200 200 Sub-total Phase II 23,985 41042 44,327 Sub-total Phase I & Ua 10,234 71,528 81,762 Gray and Nodular Foundzry Melting Plant - 13,984 13,984 Molding Line - i4i,274 14,274 Sand Preparation 520 4,482 5,002 Core Room 780 1,757 2,537 Cleaning Room 2,941 - 2,941 Heat Treatment - 3,519 3,519 License fee for Convertor - 200 200 Sub-total ____ 38,216 4 Fitting Finishing Plant Machines for Fittings - 4,915 4,915 Machines for Couplings - 10,385 10,385 Galvanizing & Transport Equipment 507 - 507 Sub-total 507 1300 15,807 Machine Tool Plant Major Machining 3,741 29,546 33,287 Light Machining 6,640 11,186 17,826 Special Tools and Other Equipment 673 2,856 3,529 Control Equipment - 663 663 __ __ ___ __ 41,5 5 305 Auxiliary and Transport Equipment Transformer Stations 6,990 - 6,990 Boiler Plant and Heating 2,990 - 2,990 Air Compressor Station - 2,420 2,420 Transport Equipment 8,528 - 8,528 Sub-total lM07 2,420 2_,928 Erection Cost Included in Foreign Equipment Cost1V - 1,717 1,717 TOTAL EIQUIPMENT COST 44,544 173,432 217,969 1/ The cost of foreign specialists for the erection and supervision (1% of foreign equipment value) is added to each equipment package. ANNEX 5-l PaNge 4 7. Of the total equipment cost of Din 218 million, about 45% will be for the malleable iron foundry and the fitting finishing plant, about 20% will be for the gray and nodular iron foundry and about 25% for the machine tool plant. About 20% of total equipment in value would be procured locally. D. Duty and Taxes (item 3) 8. Duty and taxes are calculated based on the prevailing tariff rates (which came into effect on February 26, 1973) for machines and equipment. The present customs duty for foundry equipment varies from 15% to 19% of the CIF value (Yugoslav border) and for machine tools from 19-21%. For the project- ions, 17% duty for foundry equipment and 20% duty for machine tools have been assumed. In addition to the customs duty, there are other taxes to be paid for imported equipment. In addition to the customs duty, a total tax of 9% on the CIF value (Yugoslav border) - 3% import tax and 6% special tax - have to be paid for all imported items. Customs duty and other tax calculations are summarized below: Value of Imported Duty Rate % Duty Taxes Total Items Equipment CIF on CIF Value (000 Din) 9% on CIF (006 Din) Yugoslav Border Yugoslav Value Yugo- (000 Din) Border slav Border Malleable Foundry Phase I 30,186 17% 5,132 2,717 70849 Phase II 41,342 17% 7,028 3,721 10j749 Gray & Nodular Foundry 38,216 17% 6,491 3,439 9,930 Fitting Finishing Plant 15,300 17% 2,598 1,377 3,975 Machine Tool Plant 44,251 20% 8,850 3,983 12,833 Others 2,420 17% 420 217 637 Total 171,71$ 30 1 1 E. Transport Cost (item 4) 9. Transport cost estimates including insurance and handling are based on tne tonnage quoted by various suppliers and the prevailing transportation cost per ton of machinery; they were calculated separately for foreign and local equip- ment. The transportation cost for foreign equipment is from the Yugoslav border to the plant; this cost, including insurance per ton of equipment, is assumed to be 4.0 Din/km. An average distance of 700 km from the Yugoslav border to the plant for foreign equipment and an average distance of 600 km for domestic equip- ment are assumed. Based on these assumptions, total Cost of transportation, including insurance and handling, is estlmated at Din 3,568,0oo broken down as Transport and Related Cost Items (000 Din) Malleable Foundry Phase I 1,434 Phase II 614 Gray and Nodular Foundry 960 Fitting Finishing Plant 150 Machint Tool Plant 352 Others Total 3 ANNEX 5-l Page5 F. Erection atld Installation Costs (item 5) 10. Costs pertaining to these two items were separately estimated; the installation cost estimates are based on the bill of materials plus related assembly costs and the erection cost (including only final mounting and assembly costs) estimates are calculated as follows: (1) For the two foundries, 4% of total equipment value for major eqluipment and 1% of value for small pieces of equipment; and (2) for the machine tool plant, the fitting finishing plant and the auxiliary equipment, 2% of value for major equipment and 1% for minor equipment. 11. The installation and erection cost estimates on a plant by plant basis are as follows: Installation Cost (in 1000 Din) Heating Com- Gas Water Electric In- and Ven- pressed Instal- Instal- Total stallation tilation Air lation lation Malleable Foundry 2,173 1,300 25 300 250 4,273 -Gray and Nodular Foundry 1,186 750 120 80 150 2,286 Fitting Finishing Plant 67 400 70 100 80 717 Machine Tool Plant 1,370 1,254 150 100 100 2,97)4 Others 2,433 1.35o - 200 420 4 403 Total 7,229 578054 m X 1 000 Erection Costs (000 Din) M4alleable Foundry 3,682 Gray and Nodular Foundry 1,659 Fitting Finishing Plant 314 Machine Tool Plant 1,086 Other 202 6, 943 The total installation and erection costs add up to Din 21.6 million. G. Contingency (item 6) 12. To the total cost estimates based on a detailed breakdown into faci- lities and equipment, a 10% contingency (for foreign as well as local costs) has been added to account for minor scope changes and omissions of equipment and civil works. Considering the advanced stage of preparation of the project, this contingency provision is considered more than adequate. This item also includes Din 3.8 million in foreign exchange, resulting from rounding or the Bank loan. H. Price Escalation (item 7) 13. During the past two years, equipment (local as well as foreign) and civil construction costs have been increasing at an annual rate of about 10%, In order to account for future price and construction cost increases, price escalations have been added to the project cost. In view of the steps being taken by the Federal Government of Yugoslavia, the domestic inflation rate ANNEX I5-1 Page6 is expected to drop in the future. Assuming that the measures taken to control inflation will succeed, the following domestic inflation rates have been assumed: 1973, 10%; 1974, 8%; and 6% per year afterwards. With regard to foreign equipment, a 6% inflation rate per year has been assumed. Based on these assumptions, total price escalation is estimated at 59,886,000 Dinars (9,561,000 Dinars on domestic cost and 30,325,000 Dinars on foreign exchange costs) about 14% of total project cost. I. Pre-operating and Start-Up Expenses (item 8) According to Yugoslav law and the Company practiceithese exper8ses are not capitalized; they are charged to the incmie statement as they are incurred. Due to the pecaliarity of the accounting system, a clear picture of these costs has not been obtained. Of the estimated total expenses of Din 16.0 million pre-operat- _nrg costs would be about Din 12.0 million, including approximately Din. 5.0 n illion for training of personnel. Of the total expenses about Din 4.0 million ^-s expected to be in foreign exchange primarily for travel and training abroad. Start-up expenses, estimated at Din 4.0 million, pertain only to the initial start-up of the facilities. J. Engineering (item 9) ..., Since the Company lacks experience in preparing tender specifications and evaluating international bids, it plans to appoint a technical consultant for this purpose. The Cost for this service is estimated to be about 5.0 million Dinars in foreign exchange. This expense will also be charged to income state- ment. K. Incremental Working Capital (item 10) 16. Details of calculations and underlying assumptions are given in Annex 5-2. L. Interest During Construction (item 11) 17. interest during construction is calculated on the basis of the expected disbursement. All foreign interest charges relate to the Bank loan and the smalI amount of local interest is due to the need for the Company to borrow short-term funds in 1975. All interest is charged to the income statement as required by law. M. General Comments The cost estimates on the whole have been well prepared on a plant-by- JL, fnt basis and are considered realistic. However, the investment cost per ton of malPeable castings(US$104. /ton).appears high compared to international cost stand- ards which range from US$750-850/ton. Major reasons for the difference are the needs for: (i) replacement of some existing facilities; tii) revamping of certain ifaciities; (iii) heavy investment in heat treatment equipment; and (iv) additional i,aterial handling and pollution control fac-lities for the existing plant. Investment costs per ton in the gray and nodular foundry and in the L-ting finishing plant, estuimated at US$626/ton and uSMO/ton respectively, K1 Based on the axchange rate U ANNEX 5-1 Page 7 appear to be about in line with those of Western Europe. 20. In the case of the machine tool plant, an international comparison is difficult beQause of the differences in the range of products between plants. However, the investment cost for this plant is also considered realistic since the number of machines and facilities as well as the cost of machines and build- ing construction have been estimated carefully. 2OSLAVTA - IS M r'M5 I tF (O Did MAitssb & ls.o. fw,,dr, er om Fittinp, 1I1i0inais Plant I4sehise ?sot fl. Whe7oTd- Domestic Foreico Totsi DoOstle Fore i Toth Dassttlo ioreip D.t.,' Doeuth Foz,1no to Foreign Tot a 1. Putld 1o s & Clvil CoOstruetion 9,061 9.01l 10,751 _ 10,751 542 . 542 8,880 8,880 7,137 - 7,137 36,371 36,371 2. Eq t5.nt 10,274 71,528 81,762 4,241 38,216 4.,457 57 15,300 15,807 11,054 ak,251 55,,505 18,508 2,420 20,508 445L41 173,Z32J' 217,'f9 3. Dty ..d teos 18,598 - 18,5)3 9.9'0 - 9.930 3,975 - 3,975 1,831 _ 12,b33 G37 - 637 45,973 _ *5,973 k. rTs'sportation Costs 2.0o4 - 2,01o8 960 _ 9Go 150 - 150 352 - 352 5-8 - 58 L5,973 - 39< 5. 1n"taiql.ion. Cost 4,273 - 4,2?3 2,i'. 2,286 717 1? 2,971 2,974 4,403 - 4,403 1 31,653 tlub totsi 7 ~~~~~~~~~~~164 5 -4;g 2- 1 Ir,iWiog@@ ;s 6. Escalation Cost 724. 7;e24 15.08 i7 6,0 452 -. ;2SI ______ 8'~~b4ots.1 1.'I~~~~7. , 2150 , .a1* ,.02 7,.2,*. 7. C"tie.e 158 I. 530 , 37-,2 -2.V20 33,3~s. 15'O ;,';;Ig TOtAL PROJ7C1 C0 6 I.993 <5 1 8.5t1 1.8.770 3,22 62 2 ZL8 1.7.1.6 ° 6 1.0.099 3,117 !±1 6E 4S,'; ° 420.9' / /| Pro.1eet Cost/too (Dtn /Sen)3 16.i56 2..m ul..n ._________________2__315 2_3 _1 ..,s~ c' F2re18.n specialists For ocectio 5.r.4 s4ervision (1,700 1) ilooug 2/ lr.cljles vontisg.scy p.rtainir. to the cost oF- lrciels specillbists so a.i1 as i. azont tes,.tis& s troo ting ett the Isk Isa. s I 7nclds price e/calatioo p/ ts4ig to the coat oP tFor.i.7 spacislist 20 cslot1ntinirtny has bean incl.xded fto acluches sspplle4i by Xikoad (valuel 6,661.000 dirn]~ itself. 2/ Price escaation is allooate4l on a pro Pat r basil. Ilo4strial PStjaata DeparUant 1973 YWOSLAVIA - XIKIIJDA IRON FOiDRY PROJECT WORKING CAPITAL E$UIRUMTS (Wth 2x1aiision) (i'DW ilflion ) 1973 1974 1976 1977 1978 1979 1980 1981 1982 1983 Cash* 10.6 13.5 16.7 23.2 26.4 27.2 28.0 28.8 29.7 30.6 31.5 AccQlmts Receivables 49.5 51.4 58.0 80.5 82.5 84.9 87.5 90.1 92.8 95.6 98.4 t Rw Y4aterials & Supplies - Foundry 13.9 16.7 20.5 30.2 37.3 38.1 39.6 40.7 411.9 43.2 44.5 - Yachine Tools 19.2 27.0 34.1 44.. 1i8.8 50.2 51.8 53.4 55.0 56.7 58.1 - Hydraulic Parts 1.7 2.1 2.7 2.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (b) Sendi-finished Products - Foundry k,1 4.9 6.o 8.8 10.9 11.3 11.6 11.9 12.3 12.7 13.0 - Machine Tools 20.9 15.3 19.3 25.0 27.7 28.4 29.4 30.2 31.1 32.1 33.1 _ Hydraulic Parts 4-. 5.5 6.9 6.9 0.0 0.0 0.0 0.0 0.0 0.0 O.u (c) Finished Products (Foundry, machine tools and hydraulic parts) 4.o 4.9 6.1 8.5 10.0 io.4 10.9 11.3 11.7 12.5 13.0 (d) Stores 1.6 2.0 2.5 3.5 1L.0 4.1 L:.2 4.3 4.5 L.6 4.7 Total Inventory 59.4 78.4 90.1 129.7 138.7 3112.8 1147.5 151.8 156.5 161.8 166.7 Total Current Assets 119.5 143.3 172.8 233.4 217.6 254-9 263.0 270.7 279.0 288.0 296. Lesst Accounts Payable .29.5 ; .T . . 5ol.6 6.11 *665.3 Other Payables 12.0 12.0 12.0 12.0 12.0 12.0 12.0 12.0 12.0 12.0 12.0 Sub-Total 47 3W7 w 7-01 71.8 4 60 70.1 ?7T.83 WorkLng Capital 78.0 98.7 126.2 173.4 180.8 186.5 192.9 198.9 205.4 212.6 219.3 Changes in Working Capital -7.4 +20.7 +27.5 *47.2 +7.4 +5.7 46.4 46.0 46.5 +7.2 +6.7 Note: For assumptions used in projections, refer to Annex 5-2, Page 2 * Excluding Surplue Cash. YUGOSLAVIA KIKTNDA IRON FOUJNDRY PROJECT ASSUMPIONS fOR ;ORKING CAPITAL ESTIMATES L9Q 1974 1974 1976 1977 1. Cash 4% of Sales;!/- 2. Receivables - Days 67 55 50 50 45 - % of.Sales./ 18.6 15.3 13.9 13.9 12.5 3. Payables - Days 40 35 30 30 30 - % of Salesi/ 11.1 9.7 8.3 8.3 8.3 L. Inventory: (a) Raw Materials - For Foundry - - - - - - - - - - - - - - 7.5% of Salesli (27 days)- - For Machine Tool Plant - - - - -- - - - 30% of Salesl/ (108 days) - - - - For Hydraulic Parts --9% of Sales!/ - (32 days) - - (b) Semi-Finished Products - For Foundry -- - - - - - 2.2% of Sal Y/ (8 days) - - For Machine Tool Plant --17% of Sales_ (61 days) - - - - - - - - - For Hydraulic Parts - 23% of Sales!,/ (83 days) - - - (c) Finished Products (for all iteims) - - - About 2% 2/ of Voal Production Cost - - - - - - - - - - - - (a) Stores- - - - - - - - - - o.6% . of Sales. (d Strs% o - - - :les excludes revenue from servicing (of machine tools, machining of castings, etc.) 2/ Te pfeetage was 1.2% in 1972. S/ This was the percentage in 1972. It is assumed to remain constant. ,lote: 1) Because of a new law passed in 1973, regarding working capital, the receivables and payables position is expected to improve considerably in the future. 2) Working capital requirement in foreign exchange is estimated to be about 1l% of the total. Inft3td.al ProJects Depart;nt l MaY 197-3 AEX 5-3 YUO,LAVIA - KIKINDA IRON FOUNIRY PROJECT EQUIh-NT TO BE i-NANrFD By TBE BA-Nx Amount of Loan Allocated Categor (exprWsein = quivaent) (000 US$) I. Material Handling Facilities and Auxiliary Equipment (includes air compressr station) 190 II. Malleable Fbundry (Phase I), includes melting plant, disamatic maolding lines, sand preparation and core room facilities and heat treatment shop 2,270 III. Malleable Foundry (Phase II)i mzcludes melting plant, molding line, sand preparation and core room facilities, heat treatment shop and convertor 3,150 IV. Gray and-Nodular Foundry, includes melting Plant, molding line., sand preparation and core room facilities, convertor and heat treatment shop. 2,900 V. Fitting Fin:shing Plant, includes maceines for fittings and couplings 1,160 VI. Machine Tool Plant, includes borings grinding, milling, drilling and planing machines; climatised assembly room; heavy and light treatment shop; control tools and devices; and various other assembly tools and devices 3,3'30 VII. Ilhallocated ;i4 Total 14,500 Iadustrial Projects Department July 1973 ANNEX 5-4 YUGOSLAVIA - KIKINDA IRON FOLUNDEY PROJECT DISBURSEMENT SCHEDULE OF US $13 MILLION IBRD LOAN (In '000 US$) Disbursement Amount Undisbursed Outstanding Amount 1974 I Quarter 1,213 1,213 13,287 II Quarter 1,987 3,200 11,300 III Quarter 2,008 5,208 9,292 IV Quarter 1,362 6,570 7,930 1975 I Quarter 1,861 8,43± 6,069 II Quarter 2,018 10,449 4,051 III Quarter 1,659 12,108 2,392 IV Quarter - 12,108 1976 I Quarter 265 12,373 2,127 II Quarter 1,093 13,466 1,034 III Quarter 363 13,829 671 IV Quarter - 13,829 671 1977 I Quarter 671 14,5o0 Industrial Projecus Department June 1973 YUGOSLAVIA - KIKINDA FOUNDRY PROJECT EX-PLANT 5EING PRCE ASStT0NS (Dinars Per Unit) 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1. Mallea-Lle Castings (per ton)- (a-ctni) CO 11200 11200 11800 12270 12270 12640 13020 13410 13810 14220 14650 CL - - - - 12880 13268 13665 14o8o 14490 14930 15375 D 9800 10400 10700 11000 11660 12010 12370 12740 13120 13505 13920 2. Finishing Fittings for Pipe (per ton) CO 13400 14000 14600 15300 15912 16390 16880 17385 17905 18440 18995 CL 16600 17600 18700 19800 20790 21415 22060 22720 23380 24080 24800 D 25000 25000 24000 23500 23500 24205 24930 25675 26445 27238 28055 3. Gr&y Castings (per ton) I 8600 8760 9953 10510 10510 10825 11150 11485 11830 12185 12551 4. Nodular Castings (per ton) co 9620 10200 10800 10800 11000 11330 11670 12020 12380 12750 13130 CL 11500 12000 12500 13000 13000 13390 13790 14200 14230 14655 15095 D 10800 11000 12500 13200 13200 13595 14000 14420 14850 15295 15755 5. Machine Tools 'per unit): al Drilling Machines CO 72000 76500 79373 82548 85850 88425 91080 93810 96620 99520 102505 CL 79000 83740 87930 92920 96940 99860 102850 105940 109115 112350 115760 D 79000 83740 88764 94090 99735 102727 105808 108982 112251 115620 119096 b) Universal Grinders CO 231000 244860 254650 264840 275430 283700 292210 300970 310000 319300 328880 CL 250000 265000 298250 292160 306770 315970 325450 335220 345270 355630 366300 D 256800 272208 288510 305850 324200 333930 343950 354260 364890 375840 387110 c) Surface (Flat) Grinders CO 135000 143100 148820 151780 160970 165800 170770 175890 181170 186600 192200 CL 156000 165360 173630 182310 191420 197170 203080 209170 215450 221910 228570 D 156600 165995 175955 186510 197705 202635 209745 216040 225510 231280 239250 d) Special Grinders CO 620000 657200 683490 710830 739260 761440 784280 807810 832045 857005 882715 CL 720000 763200 801360 841430 883500 910005 937305 965425 994380 1024210 1054940 D 800000 848000 898880 952810 1009980 1040280 1071490 1103630 1136740 1170840 1205965 e) Bryant Grinders Co -- -- -- -- CL -- -- -- -- -- -- D -- 504000 534240 566295 600270 618280 636830 655930 675610 695875 716750 f) Hydra4lic Parts CL 68000 68000 74800 74800 -- -- -- -- -- -- -- 1 The Company wall start selLizig malleable castings to the clexrir.g area ir 1977. 2/ Sold internally at prodVetion cost to the machine tool plant. Note: CO - Convertible Area Sales CL - Clearing Area Sales D - Domestic Sales I - Internal Sales ANNEx 6-1 Page 2 YUGOSLAVIA KIKTNDA IRON FOUNDRY PROJECT SALES REV3ENUE FORECASTS (Din Milllion) 1973 1977 1983 1. Castings Malleable Castings T 54.6 163.8 195.5 G0 33.0 110.5 131.9 CL - 12.5 14.9 D 21.6 40.8 48.7 Malleable Pipe Pittings T 77.8 129.9 155.0 CO 22.8 39.8 47.5 CL 5.0 12.5 14.9 D 50.0 77.6 92.6 Gray Castings I 7.7 15.8 18.8 Nodular Castings T 44.7 187.8 223.5 CO 32.7 115.5 137.9 CL 1.2 19.5 22.6 -l D10.8 52.8 63.0 Total Castings T 184.8 497.3 592.8 co 88.5 265.8 317.3 CL 6.2 44.5 52.4 D 90.1 187.0 223.1 2. Machine Tools Drilling Machines T 4.0 7.8 9.4 cO - 0.8 1.0 CL - 1.0 1.2 D 4.0 6.0 7.2 Universal Grinders T 38.7 59.2 70.8 cc 7.4 11.0 13.2 CL - 7.7 9.2 31.3 40.5 48.4 Surface Grinders T 6.3 18.9 22.8 OD - 3.2 3.8 CL - 3.8 4.6 D 6.3 11.9 14.4 Special Grinders T 15.2 64.8 77.4 co - 7.4 8.8 CL 7.2 22.1 26.4 D 8.0 35.3 42.2 Internal Grindef D - 12.0 14.3 Hydraulic Par ta( CL 17.2 - - Total Machinie Tools T 81.4 162.7 19l4.7 CO 7.4 22.4 26.8 CL 24.4 34.6 41. D 49.6 105.7 126.5 3. Ogiof Rsnu4?/ D 31.7 52.6 62.7 4. grand Ttal 1' 297.9 712.6 850. 2 GO 95.9 288.2 3144.1 CL 30.6 79.1 93.8 D 171.14 3145.3 412.3 jdrul pai =c=urelycd to Roania on a 5-year centract endin in 1976. Mainly rm achine tool srvicing. Legends T Total 00 * O6nertible Area Sal*a CM Clearing Area Sles D w D7metio Sales I - Interoal Ooivn Sales Industrial Projoets Deparbmnt June 1973 ANNEX 6-2 YUGOSLAVIA - KIKINDA IRON FOUNDRY PROJECT RAW MATERIALS AND UTILITIES A. Raw Materials for Foundries 1. The supply situation regarding the main raw materials for the production of castings and machine tools is not expected to be a bottle- neck for Kikinda expansion as reflected in the followiing account. 2. Foundry Pig Iron: There are three steel plants wh.ch produce, among other items, foundry, pig iron. Their production in 1972 is shown below: Foundra Pig Iron Production in 1272 (in Tons) Zenica (Bosnia-Herzegovina) 140.,000 Store (Slovenia) 35,000 Sisak (Croatia) 5,000 Total 10,0 00 3. By 1975, the three steel plants are expected to increase their foundry pig iron production to 2,000 tons and the existing steel plant at Smederevo (Serbia) has plans to start producing 100,000 tons of foundry pig iron a year, thus raising the annual Yugoslav production to 300,000 tons. 4. In 1972, Yugoslavia consiwed 220,000 tons of foundry pig iron of which 40,000 tons (19% of the total) were imported, mainly from the Soviet Union, Canada and West Germany. With the expansion of the local production, however, the country is expected to be self-sufficient in foundry pig iron *by 1975. 5. In the case of Kikinda, its requirements of pig iron are met partly from the Store Steel Plant and partly from imnports. Kikinda officials expect that the Store Steel Plant, after its expansion, would be able to meet all pig iron needs of Kikinda by 1975. 6. Scra: The total scrap consumaption by Yugoslav foundries in 1973 is expected to be 180,000 tons of which 10,000 tons (5.5% of the total) would be from imrports. According to the Foundry Association of Yugoslavia, imHports of scrap for foundries would not grow in the future, because of the availability of more foundry pig iron. For the industry sector as a whole, scrap imports are expected to decline from about 490,000 tons in 1973 to 230,000 tons in 1975.-1 7. In the case of Kikinda, the plant is not expected to. encounter problems in getting adequate scrap supply for its expansion program. In March 1972 it signed a 10-year contract with Otpad, a scrap supply company of Zrenjanin, near Belgrade, to meet approximately 70% of Kikinda's annual needs. 1/ According to Yugoslav Steel Producers' Association. ANNEX 6-2 Page 2 Other sources of scrap for Kikinda are: Ferrotex, a scrap supplying company of Kragujevac, near Belgrade; and the Zastava Auto Plant. 8. Coke: Annual coke consumption by foundries in Yugoslavia is at present about 130,000 tons of which about 40,000 tons are imported mainly from Czechoslovakia, Poland, West Germany, France and Holland. Yugoslavia has plans to build two new coke plants at the following locations: Baker (a 800,000-ton/year plant) on the Adriatic Coast; Zenica (a 1.4-million-ton/ year plant) in Bosnia. Further, the capacity of the only existing coke plant at Lukavac is expected to be increased to 1.4 million tons by 1975-76. When these projects are completed, no further coke imports, particularly for foundries, are expected to be needed. 9. The lukavac plant is the major source of coke for the Kikinda Foundry. However, it has not been able to meet the foundry's needs fully. Kikinda has, therefore, invested some funds in the expansion of the lukavae plant so that the latter would be able to meet a larger part of the former's requirements. 10. AnthracIte; A local firm is able to meet all the anthracite require- ments of Kikinda. The firm has plans to expand its production in line with the expansion of Kikinda. 11. Quartz Sand: Currently, Kikinda is able to meet almost all of its requirements of quartz sand from four domestic suppliers. However, these suppliers would not be able to meet Kikinda's needs fully after its expansion. Therefore, Kikinda is encouraging the opening of a new mine by the Yugoslav firm, Radnici Nemetala Valjevo. Kikinda has offered to sign a long-term contract with the firm to purchase sand from the new mine. 12. Lmstone: The local mine, Veljko Dugosevic at Kucevo, would continue to be able to meet all the limestone requirements of Kikinda. 13. Bentonite: Production of bentonite by the local firm, Bentomak, would continue to be adequate to meet Kikinda's needs. However, this firm is showing more interest in exporting than in selling at home because local bentonite prices are lower than export prices due to Federal price controls. Kikinda has approached the Federal Government to allow the local bentonite prices to rise to the level of export prices. 14. Resins: Resins are mostly imported from West Germany. 15. Ferroalloys: Kikinda would continue to cover part of its ferro- alloy needs from the local supplier, 8 Mart, at Ada. Eikinda provides technicaI assistance to this supplier and also has a three-year supply contract with it. Part of the ferroalloy needs have to be met by imports. 16. Zinc: Most of the zinc requirements of Kikinda are met by the local firm, Zorka, with which Kikinda has a 10-year contract. Kikinda has also invested Din 1 million in the expansion of Zorka. No bottleneck is foreseen in the zinc supply to Kikinda. ANxEI 6-2 Page 3 B. Raw Materials for Machine Tools 17. All the gray castings required for macl4ne tools would be provided internally by the foundry at cost. Apart from gray castings, machine tool production requires mainly various steel productsi including flat steel and steel pipes as well as electrical equipment (e.g. electrical motors, switches, wiring, etc.) In the case of grinders, in 1972, on an average about 13% by value of their needs of steel products and 40% of their requirements of electrical materials were imported. These percentages are expected to decline to less than 10% and 25% respectively by 1976 with the expansion of steel and electrical equipment industries in Yugoslavia. 18. At present, there are 8 steel plants in Yugoslavia with a total capacity of about 2.6 million tons per year of crude steel equivalent. Their capacity is expected to increase to about 5 million tons by 1975, and 7 million tons by 1980. As for electrical equipment, this is a fast-growing industry in Yugoslavia. It shows one of the mnost successful and profitable performances mainly because of the achievement of economies of scale, cooperation and trading agreements with some leading international producers, creation of a number of research and development centers, strong domestic demand and fav- orable raw material costs (e.g. copper and lead prices are lower than world prices). C. Raw Material Import System 19. Raw material imports are allowed under three main systems:. (a) the GDK system; (b) the RE system, and (c) the LB system. Under the GDK system, companies which export are allowed to inport about 25% of their requirement of raw materials for export production. Under the RK system, imports of specific items (steel scrap, ferroalloy briqueette4pig iron, foundry coke, etc.) are allowed to be imported in quantities approved by industrial associations. Under the LB system, no limits are imposed on the import of specific items such as limestone, quartz sand, coal dust, zinc, etc. In addition, companies which export can use their retention quota to import freely the things they need. This quota amounts to 20% pf the annual total exports of a company. However, the depreciation quota'cannot be used for the import of raw materials. 20. The following table shows the customs duties on the import of main raw materials by foundries and the import system under which they fall-. Customs duties JImort % System Fig Iron 3 RK Steel Scrap 3 RK Coke 8 RK Anthracite - LB Quartz Sand 3 LB 1/ Ten percent of total depreciation could be changed to foreign exchange at the National Bank to import equipment and spares, and also to repay foreign credits. ANNEX 6-2 Customs Duties Import % System Limestone - LB Bentonite 3 GDK Ferroalloy Briquettes 3 RK Zinc 3 LB Resins 10 RK Steel Products 10-13 GDK Electrical Equipment 19 GDK D. Utilities 21. Electricity: The Company has already held negotiations with the electric power distribution agency, Electrovojvodina, to ensure adequate power supply for the expansion. The agency has agreed to meet all the power requirements of Kikinda by installing a new transformer station at its own cost. 22. The power requirements of Kikinda are expected to increase three- fold daring 1973-77 as shown below: In Million KWH Price Per KWH (Din,-) 1973 21.6 0.29 1974 24.5 0.30 1975 40.0 0.32 1.976 45 0.35 197V 60.0 0.37 23. Gas: The existing gas line has a flow capacity of 2,450 Nm3/h. The Companyplans to install a new gas line to supplement the existing one and raise the capacity to 3,750 Nm3/h, including a 20% stand-by. These expanded facilities would be adequate to meet the need of Kikinda after expansion. 24. Water: The excisting wRter supply system would be supplemented with additional facilities so that the needs of the expansion program estimated at 905 m3/hr could be met fully. Industrial Projects Department June 1973 ANNEX 6-3 YUGO&JAVIA - KIKINDA IRON FOUNDRY PROJECT PRODUCTICN AND PRODUCTION COSTS A. Production Production in the various foundry units of Kildknda is expected to increase as follows: Production of Castings (in tons) 1973 1971± 1975 1976 1977-1983 MaP eablel gy 5,150 5,200 5,200 7,840 13,100 Pipe Fittings-V 4,0'000 4,ooo 4,64o 6,160 6,400 Nodular 4,500 7,500 9,900 15,000 16,000 Gray / 900 950 1,000 1,200 1,500 1/ Excluding castings for pipe fittings. Excluding losses from machining. ~ Exclusively for internal production of machine tools. The table shows that, as a result of the proposed expansion, production of malleable castings for the automotive and other industries mould increase by over 2½ times; pipe fittings by about 1_ times; nodular castings for automotive and other industries by more than 2 times; and gray castings by about 1½ times. 2. Output figures have been calculated on the basis that at full production, the various foundries could operate at 80% of rated capacity; and the machine tool department at 75% of rated capacity. These assumptions are in line with results achieved by Kikinda and the experience of similar plants elsewhere. Further, the following assumptions have been made regarding yield in various departments: Average Yield (in percentage) 1972 1977 (Actual) (Projected) Malleable castings 41 42 Pipe fittings 36 4O Nodular castings 50 54 Gray 76 76 The average yield in a foundry depends on the size and complexity of castings produced. The yield is higher in the case of large castings than in the case of small ones. As gray castings produced by KNkinda for its machine tool production are large, their yield is higher than in the case of other types of castings. As a result of the expansion program, the yield in the malleable and gray foundries is not expected to increase; however, in the case of pipe fittings and nodular castings, there would be significant yield increases mainly because of better material handling. In pipe fittings, the yield increase is also due to the installation of the Disamatic molding line and the proposed production of larger fittings. ANNEX 6-3 Page 2 B. Principal Production Costs 3. Production cost forecasts for Kikinda are cumbersome mainly because of the following factors: (a) peculiarities of the accounting system; (b) a vide range of products produced; and (c) lack of effective cost centers. However, based on the Company's past experience, the following cost projections have been made: Foundry Products 4. Major raw materials required for foundry operations are pig iron, steel scrap, ferro-alloys, coke, sand, limestone and resins. On the average, prices of metal groups are expected to increase annually by about 5.5%; of coke by 3%; of sand by 8.5%; of limestone by 6% and of resins by about 7%. During 1972-77, the consumption of major raw materials, based on the pro- jected production volume, would be as follows: Conesuption of Najor Raw Materials (in tons) 1972 1973 1974 1975 1976 1977 onward (Actual) 1. Metals 1/ 14,664 15,260 18,170 20,980 30,490 37,340 2. Coke 1,91 4 2,050 2,550 2,520 2,360 2,730 3. Sand 24)4,h10 25,870 31,560 37,200 54,180 66,000 4. Limestone 671 710 870 1,020 1,480 1,800 5. Resins 344 350 420 480 710 980 j Includes pig iron, steel scrap and ferro-alloys but excludes internal iron scrap. / Drop in coke consuxption in 1975 is attributable to the starting of electric furnaces in the melting shop. 5. Based on the above assueptions, total Input cost of production (per ton of casting) including utilities, would be: * Input Cost Per Toni! 1972 1973 1974 1975 1976 1977 1983 (A=ul) ------ Malleable 3,528 3,860 4,167 4,4h4 4,786 5,029 6,738 Pipe fittings 7,601 8,038 8,662 9,224 9,687 10,371 13,900 Nodular andgray. 4,735 5,212 5,554 5,775 6,184 6,502 8,712 j/ Includas direct raw materials and utilities but excludes labor cost. '-'6. Total direct production cost of all foundry projects including indirect naterials and labor is calculated to bet ANNEX 6-3 Page 3 Direct Production Cost of Foundries (Din million) 1972 1973 1974 1975 1976 1977 1983 (Aual) - - - Direct Materials-/ 70.3 80.3 103.3 128.9 197.4 246.1 329.7 Xndirect Materials 12.5 13.7 17.1 21.0 32.0 40.7 54.5 Labor 30.8 32.7 40.5 41.7 47.7 51.5 69.0 Total 113.6 126.7 160.9 191.6 277.1 338.3 453.2 21 Including utilities. Machine Tools 7. The main raw materials required for the production of machine tools are castings, various steel products, electrical equipment and acces- sories. and small assembly parts such as bearings, screws, etc. The entire gray iron castings produced by ICldnda are meant for internal sales at cost for the manufacture of machine tools. Price increase of raw materials for machine tools are also expected to increase at a rate of 5.5% per year - gray castings 6% per year, steel 4% per year, electrical equipment 3.5% and other materials 4% per year. Based on the quantities required per machineJ, which is based on Kildnda's past experience, and the projected price increaee, the following direct material costs per machine have been calculated: Direct Material Cost per Machinel/ (w90 Din) 1972 1973 1974 1975 1976 1977 1983 (Actual) Universal Grinders 84.0 87.8 91.8 95.8 100.1 1o4.6 137.9 Flat Grinders 55.2 57.7 60.4 63.2 66.1 69.1 90.7 Special Grinders I 180.1 188.0 195.0 203.9 211.8 220.7 284.1 Special Grinders II 119.7 125.5 131.1 137.3 143.5 149.6 197.0 Internal Grinders - - 114.0 118.9 124.1 129.3 167.0 Radial Drills 35.3 37.1 39.0 41.0 43.1 45.3 61.2 Hydraulic Parts 16.3 17.0 18.3 18.9 - - - 2/ Including utilities. 8. The total direct production cost of the machine tool plant is as follows: ANNEX6-3 Page 4 Total Direct Production Cost of Machine Tool Plant (Din million) 1973 1974 1975 1976 1977 1983 Direct materials-' 25.2 33.9 40.3 47.8 46.o 60.5 Auxiljiary materials 1.6 1.6 1.8 1.9 2.2 2.8 Services i/ 14.9 17.6 18.3 28.4 31.0 49.4 Labor 18.0 18.9 21.2 24.2 27.5 36.9 Total 59.7 72.0 81.6 102.3 106.7 149.6 y Including utilities. j/ Cost associated with services rendered by Kikinda. 0. Total Direct Production Costs of Kikidnda 9. Taking all the above costs - foundry costs as well as machine tool costs - into sosideration, the total direct production cost for the entire enterprise can be wwmarised as follows: Total Direct Production Cost of :WcindA (Din million) 1973 1974 1975 1976 1977 1983 Material Cost:i/ Foundry 94.0 120.4 149.9 229.4 286.8 384.2 Machine tool plant 41.7 53.1 60.4 78.1 79.2 112.7 Sub-Total 135.7 173.5 210.3 307.5 366.o 496.9 Labor: Foundry 32.7 40.5 41.7 47.7 51.5 69.0 Machine tool 18.0 18.9 21.2 24.2 27.5 36.9 Maintenance Shop 8.1 102 .3 13.7 14 19.3 Sub-Total 58.8 69.6 2 85.6 125.2 Total iT3 273.1 -23. 17 5nludes raw mterils, supplies and utilities. Industrial Projects Departiet June 1973 GOB1LALA - KIKID IROi FouJDBY PROjECT lW:!3 M4 Pft178 M 2 11 32 1983 Net Sales: Dastic 195.2 171.5 196.0 -31.9 310.8 345.4 355.5 366.4 377.4 388.9 399.3 412.4 Clearing Area IA.3 30.5 52.0 70.5 92.8 79.0 81.2 83.8 86.4 88.3 91.0 93.7 Convertie Ar f m 95.9 3 3,6.6 27I 288.2 296.9 34.9 33 1 344.1 29S.0 297.9 373.3 459.0 631.O -73-2 73. 756.0 778.7 SEX B4. f507.2 Cbst of Goods Sold: meterlal, supplies & Utilities 144.4 135.7 173.5 210.3 307.5 366.o 385.5 401.9 421.5 433.1 463.o 496.9 labor 53.2 58.8 69.6 .-_2. -826 _93.4 _98.1 103.0 108.31 1 .119. 1 2 Groes Profit 98.41 103.4 130.2 173.5 237.9 253.2 250.0 251.1 249.1 255.0 242.2 228.1 Operating Expenses: Seoling and Muiistrattixz Espeases 13.3 14.1 114.8 16.i 18.3 22.3 23.4 24.5 25.7 27.0 28.2 29.6 Naintenneae 9 Rtir 4.4 5.6 6.o 6.5 6.9 6.9 7.3 8.0 9.0 10.3 Ul.9 13.8 Depreciation" 30.2 4.3 6.o 20.9 39.8 46.1 45.3 45.9 44.2 444.9 45.8 44.6 Other perationsl Expenses 12.2 12.5 13. 1 18.7 _1. 19.1 P: 19.6 1.31 20.2 20.5 Operating Profit 38.3 66.9 90.1 111.5 154.2 158.9 154.9 153.4 150.6 152.9 136.1 119.6 Other Tnem 5.9 3.5 3.5 3.6 3.6 3.7 3.7 3.8 3.8 3.9 4.0 4.1 Other Expenses 7.4- 3.5 14.0 h.5 2.8 0.9 0.9 1.0 1.0 1.0 1.0 1.0 Financial Caeresm 2- 4.6 8.8 18.1 23.7 22.2 20.0 18.0 16.0 13.8 12.0 Incem efre Taxes & CQntribmtiar 27.5 62.3 8D.8 92.5 132.7 138.0 135.5 136.2 135.4 139.8 125.3 110.7 yaxes & Ogtrlmti 0.14 _ ,5 0.6 0.6 0 0.7 0.7 -2 0.8 o.8 0.8 Net ince 27.0 2 6 . 921.0 132. 137.4 _3a 5- 1 7 139.0 1214-.5 L02 2 Dixtrihetion of Net Izm Ainess Punds 21.3 53.5 70.2 B.14 117.5 121.9 1190. 119.6 118.5 2.1 108.2 914.0 Reserve Fufnd 2.1 2.9 3.5 4.2 5.2 5.5 5.6 5.6 5.7 5.9 5.7 5.7 Colective Commption uda l 3.0 2.8 3.1 3.4 3.7 4.1 4.4 4.5 4.7 5.0 5.2 5.5 NRtital Reserve Fun 0o.6 2.7 3.5 4.o 5.7 5.9 5.8 5.8 5.8 6.o 5.4 4.7 Note: Eplanatim of teas used nd sutions for projections are given Pn Annex 7_3 pas 2 to 7. Y For preJes=Iau drp iatima rxast oinpabiB to those of feumwries in de4awlped cOuntries have been assw3d, K.ikidra "aa bwm udsen amSInr*A dipU.datim zubs (So oz 7-3 Pg 7) Thduw~a1 Pojcts &Dmba Nay 1973 YUGOSLAVIA - KIKINDA IRON FOUNDRY PROJECT SOURCE AND APPLICATION OF FUNDS (with expansion) (Din million) q 19Ak 1275 1976 1 1978 1979 1980 1981 1982 1983 Sources Net Irnj,m 61.9 80.3 92.0 132.1 137.4 134.8 135.5 134.7 139.0 124.5 109.9 Depreciation 4.3 6.o 20.9 39.8 46.1 45,3 45. 44.2 44.9 45.8 44.6 ';; o6.3 112.9 171.9 1I3.5 180.1 181. 1789 183.9 1T0.3 1iW35 Loans Foreign Currency (IffD) - 101.8 85.8 26.7 10.5 _ _ _ _ _ Short term (local) g - - 13.5 - - _ _ _ Recovery of Investment Deposit / - 1.6 7.7 7.6 2.6 - Decrease in Financial Assets 5.3 - - - - - - _ _ _ Decrease in Working Capital 31 7.4 - - - - - - - _ _ _ Total 7 266 S 1919-6 .6 18_ 1BT 1 170.3 155 Applications Fixed Investments (a) Project: Foreign l 1O0.8 85.8 26.7 10.5 - - _ _ Domestic 16.3 77.3 26.3 Sub-total 16.3 179.1 162.1 53.0 10.5 - - - - - (b) Replacement Investments 5.0 5.0 5.0 5.0 5.3 5.6 6.0 6.7 7.5 8.8 10.2 Investment Deposit on the Project 1.6 7.7 7.6 2.6 - - - - - - - Repayments of loans: (a) Foreign Exchaage:IBRD(Project) - - - - - 22.5 22.5 22.5 22.5 22.5 22.5 IBRD (Old) j.8 2.0 2.1 2.2 2.3 2.5 2.7 2.9 1.6 - - Others O.4 0.5 0.5 0.4 0.0 - - - - _ _ (b)Local Currency (Fixed Assets) 1.5 2.8 2.6 2.7 2.0 1.3 _ (c)Local Currency (Working Capita4 4.0 4.5 2.4 2.3 1.3 1.0 o.4 0.2 0.2 0.2 0.2 (d)Local Currency(Short-Term) - - - 1 - - _ Sub-total 7.7 7 . 6 21.1 5 . rT5 7s 7 Z Z7T Appropriations: Reserve funds 2.9 3.5 4.2 5.2 5.5 5.6 5.6 5.7 5.9 5.7 5.7 Collective Consumption Funds 2.8 3.1 3.4 3.7 4.1 4.4 4.5 4.7 5.0 5.2 5.5 Mutual Reserve Funds 3/ 2.7 3.5 4.0 5.7 59 .8 5.8 j 6.o 5.4 4.7 Sub-total Th 10.1 W1 6 15.5 15.8 15.9 16.2 1 16.3 15.9 Increase in Working Capital _ 20.7 27.5 47.2 7.4 5.7 6.4 6.o 6.5 7.2 6. Cash Surplus (deficit) 32.9 (4 2.7) 5) 62.7 1 125.7 127.5 124.4 128.7 115.3 gg. Total 219.9 2 20. 176.6 i Surplus Cash B.O.Y. 1" Z 30-.7 468.2 52 721. 83ib. Surplus Cash E.O.Y. 44.2 1.5 0.0 62.7 215.0 340.7 468.2 592.6 721.3 836.6 935.6 / 10% of the total annual local cost of the -kr6jebt is defnsi7ed idth the National Aocounting Service at the beginning of each yenr. The amount is returned the next year if rne tonal domesiic investment on the prujt:cc i. bivrt: Lhan 100 million dinars. 2] Project needs local borrowing only in 1975. 3/ Excluding surplus cash. Since 1971, part of Business Funds. Industrial Projects Department May 1973 !UVCOSLAVZA - gnK1L,DA fLO': FtUDRY P8GJECT BALANCE SHEET PROJECTIONS /)in t:a1lion ) 1972 1973 1971 1975 1976 1977 1978 1979 1980 1981 1982 ASSETS Current Assetst Cash Required 11.8 lo.6 13.5 16.7 23.2 26.4 27.2 28.0 28.8 29.7 30.6 31.5 S~~~.rpiu~~~~~~ C~~~~~~h ~14,3 144.2 1.5 0.0 62.7 21-5.0 340.7 468.2 592.6 721.3 836.c 935.6 Accounts Receivables 56.o 49.5 51.4 58.0 5 62.5 814.9 87.5 0.12. 92.8 Inventory ~~~~~~~~~~~ ~~71.2 59.14 76.14 98.1 129.7 138.7 12.8 2J475 _Ii8 6.,5 16i.8 166.7 Inventory M0~~~73 IZT7 I1i-3, I7"8 2-961 462.6 595).6 7-31.2 863.3 1000.3 12- 6 -22 Gross Fixed Assets 176.2 i97.5 381.6 548.7 606.7 622.5 628.1 634.1 640.8 648.3 657.1 667.3 lesst Acctsulated Depreciation 124.6 128.9 134.9 155.8 195.6 281.7 287.0 332.9 377.1 1422.0 46.8 Net Fixed Arsets 3I 1'' ~ ~ I 8. 4. 0.2 j63-7 -226.3 18-9.3 154.9 Other Assets 18.0 23.7 30.3 37.9 46.8 56.4 66.4 76.5 86.9 97.8 108.7 219.9 Fiancial Assets 19.5 16.9 20.14 2L.4 30.1 36.0 41.8 47.6 53.4 59.4 64.B 69.5 Deposits with SOX for Pro3eot - 1.6 7.7 7.6 2.6 - - - - TOTAL ASSETS 7232K.1 27636 ?8785 2.3 388 14.4 565 LIABILITIES Accuanti Payable 38.0 29.5 32.6 3146 48.0 54.8 56.4 58.1 59.8 61.1 63.4 65.3 Other Payables 15.6 12.0 12.0 25.5V/ 12.0 12.0 12.0 12.0 12.0 12.0 12.0 12,0 Current Portion of L/T Debt 7.7 9.8 7.6 7.6 6 27.3 25.6 25.6 24.3 22.7 22.7 22.5 1;3 5.3 r1 522 67.7 7I 9t 97 9E9W3 7191 Long-Term.Debt 9863 lcng-ThrO- - 101.8 187.6 21h.3 202.3 179.8 157.3 134.8 112.3 89.8 67.3 Others 5 417. 26.5 20.9 16.1 13,0 8.1 7.9 7.7 1.6 Business Funds 100.8 154.3 224.5 301-9 422.4 544.3 663.3 782.9 901.4 1023.5 1131.7 1225.7 Reserve Punds 7.6 10.5 114.0 18.2 23.4 26.9 34.5 40.1 45.8 51.7 57.4 63.1 Collective Cons76ption hnda 10.4 13.2 16.3 19.7 23.14 27.5 31.9 36.4 41.1 46.1 51.3 56.8 Mutual Reerve FUnds 0.8 7.0 11.0 16.7 22.6 28.4 34.2 40.0 146.o 5 U93 i81.5 -3W i.. T39-3-. 1022.3 1167.3140. TOTAL LUBIITIS 2324 271.5 4.9 35.6 786.7 935.8 1044.9 1156.5 1267.3 1383.8 1487.4 1576.5 Curent fatioY 2.3 2.3 2.7 2.6 3.6 2.6 2.7 2.8 2.8 2.9 2.9 3.0 1 Debts Equity Ratio 30:70 19.81 314:66 38:62 33t67 26:74 20.80 16:A 12.88 9s91 7s93 5t95 3/Sbort-tern borrowig- o0f 13-- I ifNT Dinas -i-s icuded. zJ Excluding Surplus Cash Notes For explanation of terw used, see Annex 73, M58e 2- snaitrial Projects Departmet Fa,- 197. ANN 7-3 Page 2 EXPLNA.TION OF ERMS USED AMI) ASSMPTONS MADE IN FNCIAL ROJCTIONS A. Assets 1. CashiJ includes cash in hand, bank doposits and special funds for small inve-slnt (e.g. for repairs and maintenance, etc.) 2. Receivables2/ include receivables from domestic customers (includ- ing those under I2Fiation), and advance payment for imports not covered by commercial bank credits, and prepayments for maintenance, workers' travel, etac Receivables from foreign buyers, and from products sold locally on credit for two or more years are not included because they are covered by cownrcial bank credits at 4% interest per annum. 3 . Invento2zuincludes raw materials, semi-finished products, finishkd products and stores. On December 31, 1971, inventories were revalued as part of the general revaluation of assets. 4. Gross Fixed Assets include land, buildings, machinery and equipment, fixed assets under construction, license fees, etc. Under the Yugoslav accounting system, preoperating and start-up expenses are not capitalized; they are shown as cost items and deducted frm sales revenue in the income statement. On December 31, 1971, there was a complete revaluation of fixed assets (excluding land). S. Depreciation: The legal minimwm depreciation rate for machinery in Vojvodina Province continues to be 7%. But since 1969 companies have been allowed to use higher depreciation rates. With the modification of the law, the Company used a straight line depreciation of its fixed assets at the rate of 20% a year daring 1971 and 1972. Eurther, on December 31, 1971, when there was a general revaluation of assets, the aecumulated depreciation was also revalued. 6. "Other Assets" include collective consumption assets (e.g., cash from rent, credit to workers for housing, current value of assets such as canteen, business office, etc.) and reserve fund assets (e.g. cash, tim deposits for over 5 years, etc.) 7. Financial Assets include investments in other enterprises, batas and chambers of c erce as well as time deposits for more than 13 months and I4utual Reserve Assets. B. Liabilities 8. Accounts P ablesi/ include payables to suppliers, and short-term credit from IotErienterprises. Credits from commercial banks to cover 1/ Assumptions used in the projections are contained in Annex 5-2. ANN3X 7-3 Page 3 receivables from foreign buyers as well as to make advance payments on raw materials imports for export production, are excluded. (These items are netted out from both sides of the balance sheet.) 9. "Other Payables" include overdue payments (to employees, banks, etc.) at the end of a year to be paid in the early part of the following year. 10. Current Portion of Long-Term Debt includes repayment of principal due within the9next t-2 months to ¢reditors - both domestic and foreign. 11. Long-Term Debt includes all outstanding debt (domestic and foreign) excluding current -ma-tuties. 12. Reserve Fund could be used to cover losses; to pay wages and salaries to employees -when the comparn is faced with liquidity problems; and to comply with court decisions to pay overdue debts. Every year, an amount equivalent to 2% of "lDahodak" (i.e. net sales minus cost of naterials, supplies and utilities as well as depreciationT is allocated to the Reserve Fund from the net income ("Dobitn). 13. Collective Consumption Fund is mainly used to build houses and recreational aciIties for workers, to meet travelling expenses during vacation, to defray hospitalization charges, and to pay scholarships to attend Workers' universities, etc. However, the company can borrow without interest from this Pund up to one year for the following urposes: (a) to pay wages and salaries in times of liquidity problems; (b) to comply with court decisions to pay off overdue debts; and (c) to finance inventories and short-term credit sales in case of working capital shortage. In cases of borrowing from the Fund, the company has to contribute 2% of the amount to the Fund for the Development of Underdeveloped Regions. Every year at least an amount equivalent to 4% of the gross personal income of the employ- ees is to be allocated to the Fund from net income ('Dobit"). The rate could be'ligher depending on the decision of the Workers' Council of each enter- prise. In the case a company earns low profit, it has to appropriate money first to the Collective Consumption Fund. Then comes the Reserve Fund appropriation. If the cacpa:ny suffers losses, no appropriation is obligatory to any Fund. 14. Mutual Reserve Fund is meant to cover the losses of the company. Until 1970, the annual a;location to the Fund was a kind of Federal Tax. Since then, it is treated as a loan to the Provincial Goverment to be repaid every third year with about 4% interest. The annual contribution to this Fund is calculated on the following basis: (Net Profit - Reserve Fund Alloca- tion) x 4.5%. As the contribution to the Fund is recoverable since 1970, it ANNEX 7-3 PWe 4 is considered as part of the Business Pund. Each Republic in Yugoslavia sets the rate of annual contribution for the Mutual Reserve Fund. In Vojvodina, out of 4.5%, 4.0% goes to the local com=e and the rest to the Province of Vojvodina. When a compary faces a severe workilng capital shortage and/or -when it cannot get adequate resources from outside for expansion, it could approach both the local commune and the Republic/Provincial governments for loans. However, credit is not available from the Fund to cover losses. In 1968, Kikinlda sought and received a loan of 1 million Dinars from the cormwne of Kildnda to construct a building for machine tools. 15. Business Fund: After making allocations to the Reservre, Collective Consumption., ER Nit Reserve Funds, the remaining amount from the net profit is allocated to the Business Fund which constitutes the main part of the equity of companies in operation. At the end of 1971, Business Fund was also revalued along with fied assets. 16. Interest (Tax) on Business Funds was in force until December 1971. It amounted to 3.5,% of tha Business Fund. 17. Contribution for The Developh ent of Underdeveloped Regions: Since 1971, the Interest on Business Funds has been replaced by an loan to the Federal Goverrxient for the development of underdeveloped regions. It amounts of 1.95% of the Business Fnd. The loan is to be repaid over 8 years at an interest rate of 4% a year, with part of the repayment starting after 3 years. his Fund is considered as a part of the Business Fund. Contribution for the Developmnt of Disaster-Hit Areas: The Cora- pany has to contribute annlly an amount eqUiMent to Q.75% of the gross personal income for the development of disaster-affected areas. C. Income Statement 19. Net Sales exclude comnissions, rebates, etc. 2Q, DomestJ Sales include revenue from machine tool servicing, etc. ads no =aIyaoIu _o about 11 % of total sales. 21 ,*Material Costs include costs of raw materials, pplies (clu cff±SCe slpplies) and-ut-Mities, Material costs of medium-s¢ale repairs are also included. 22. Labor cost is gross personal income received by all employees except thoiei!sa and a,tinistration (excluding extra allocation of in- come to workers). 23 Maintenance and Repair expenses exclude personnel costs and also material costs for noirmal mailntenance. AN= 7-3 Page 5~ 24. Selling and Anistratdon costs include only persornel costs. Costs of office supplies are included in material costs. 25. Depreciation of fixed assets in the past was calculated at the following rates: 1968 - 7% 1969 - 10% 1970 - 10% 1971 - 20% 1972 - 20% However, for projections beyond 1972, the following rates are used: (a) Long-life equipment 10% (b) Short-life equipmentl/ 20% (c) Buildings 3% (d) land 0% 26. Other Operational Expenses include costs of insurance, land and water taxes, water contrIbution, contribution for the Development of Disaster- hit Regions (an annual amount equivalent to 0.75% of the gross personal in- come), payment to industry associations and chambers of cominrce, etc. 27. Other Income includes interest received on: domestic credit sales, delayed payments, loans to other enterprises and the Federal Government, time deposits, etc. 28. Other Expenses include the extraordinary expenses including pre- operating and start-up costs, etc. 29. Financial Charges include interest on all loans, bank fees, etc. D. Foreign Fund Sources 30. Retention Quota: Yugoslav exporters are entitled to a foreign exchange quota equivalent to 20% of their annual export earnings to be used without arn restriction. 31. Depreciation Quota: Companies in Yugoslavia can change 10% of their total depreciation amount into foreign exchange at the National Bank to repay foreign credits and/or to import equipment and spares. 1/ Including pollution control equipment, transport vehicles, office equip- ment, etc. Industrial Projects Department June 1973. YUGOSLAVIA - KIKINDA IRON FOUNDRY PROJECT PROJECTED 1:CtC STATI2ANTL S (Without Expansion) (Din iJllion) 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 (Actual) Net Sales Domestic 195.2 171.5 183.3 188.7 193.5 199.7 205.5 212.0 218.0 225.1 232.0 238.7 Exports: Clearing 44.3 30.5 37.0 40.0 41.0 42.6 44.4 46.1 47.4 49.8 51.6 53.7 Convertible 56.5 95.9 122.8 129.7 133.4 135.8 139.8 11~14.1 2148.3 152.6 157.4 162.0 296.0 §72 3M3.i 7§CD G 97 -77 5797 402.2 413.7 2755 1 EhTO 4J717 Cost of Goods Sold Material Supplies and Utilities 144.4 135.7 161.3 172.0 180.3 196.6 206.5 217.2 227.5 239.4 251.4 268.1 Labor 53.2 58.8 61.7 64.8 68.o 71.4 75.0 78.8 82.7 86.9 91.2 95.7 Gross Profit 98.4 103.4 120.1 121.6 119,6 110.1 108.2 106.2 103;5 101.2 98.4 go.6 Operating Expenses: Selling and Administration 13.3 14.1 14.8 15.7 16.6 17.4 18.3 19.2 20.1 21.2 22.3 23.4 Maintenance and Repair 4.4 5.6 6.o 6.6 7.3 8.0 8.8 9.7 10.6 11.7 12.4 13.0 Depreciation 30.2 4.3 5.0 5.8 6.8 8.1 8.3 9.5 10,0 12.5 114.2 11.6 Other Operating Expenses 12.2 12.5 12.6 12.7 I2.8 12.9 13.0 13.1 13.2 13.3 13.4 13.5 Operating Profit 38.3 66.9 81.7 80.8 76.1 63.7 59.8 54.7 49.6 42.5 36.1 29.1 Other Income 5.9 6.1 5.0 4.6 4.5 4.0 3.5 3.5 3.3 3.2 3.1 3.0 Other Expenses 7.4 2.0 2.0 2.0 2.0 2.3 2.5 2.6 2.8 2.8 2.8 2.8 Financial Charges 9.3 4.6 3.7 3.3 2.9 2.4 2.2 1.9 1.8 1.6 1.5 1.5 Incone before Taxes & Contributions 27.5 66.4 81.0 80.1 75.7 63.0 58.6 53.7 48.3 41.3 34.9 27.8 Taxes & Contributions 0.14 0.5 0.5 0.5 0.5 o.6 0.6 o.6 0.7 0.7 0.7 Net Inccoie 27.0 66.o 80.5 79.6 75.2 62.5 58.o 53.1 47.7 40.6 34.2 27.1 -= _____= _- - Appropriations Kisinei4sWFiids 21.3 57.1 70.4 69.4 65.0 52.7 48.3 43.4 38.1 31.1 24.5 17.7 Reserve Frnds 2.1 3.2 3.5 3.6 3.6 3.5 3.5 3.5 3.5 3.5 3.5 3.5 Collective Consuwption Fund 3.0 2.9 3.1 3.2 3.4 3.6 3.7 3.9 4.1 4.3 4.5 4.8 Mutual Reserve Fands 0.6 2.8 3.5 3.4 3.2 2.7 2.5 2.3 2.0 1.7 1.4 1.1 Notes For explanation of terms used, refer to Annex 7.3 , pagc. 2 Industrial Projects Department May 1973 YUGOSLAVIA: KIKINDA IRON FOUNDRY PROJECT BAIANCE SHEET PROJECTIONS (without expansion) (Din Million ) 1972 1973 1974 1975 1976 1977 1978 1979 D 1981 1982 1983 ASSETS (Actual) Current Assets: Cash 11.8 10.6 11.0 1 .5 11.8 U.5 11.7 12.0 12.4 12.8 13.2 13.5 Surplus Cash 4.3 65.7 125.9 181.3 231.9 282.6 318.6 351.8 379.7 403.9 424.7 439.1 Accounts Receivables 56.o 49.5 42.1 39.9 41.0 35.8 36.5 37.6 38.7 39.9 41.1 42.3 Inventory 71 2 524 62.0 65-0 67.8 64.4 66.3 68.4 70.5 72.9 75.2 77,4 1313.3 185.2 241.0 297.7 352.5 39 I3 433.1 469.8 501.3 529.5 554.2 572.3 Gross Fixed Assets 176.2 181.2 188.2 196.2 206.2 219.0 232.4 246.3 260.5 274.9 289.5 304.2 Less: Accucmlated Depreciation 3128.9 133.9 1397 146.5 154.6 162 172.4 182.4 -9a)a 209.1 220.7 Net Fixed Assets 51.6 52.3 54.3 56.5 59.7 6.4 69.5 73.9 8.1 80.1 83.5 Other Assets 18.0 24.1 30.7 37.5 44.5 51.6 58.8 66.2 73.8 81.6 89.6 97.9 Financial Assets 19.5 17.0 20 .5 23.9 27.1 29.8 3 .6 36.6 31a 329..7 1 40.8 TOTAL ASSETS 232.4 278.6 346.5 415.6 483.8 540.1 593.7 644.5 689.8 (29.4 763.9 794. LIABILITIES Current Liabilities: Accounts Payables 38.o 29.5 26.7 23.8 24.4 23.8 24.2 25.0 25.7 26.5 27.3 28.1 Other Payables 15.6 12.0 12.0 12.0 12.0 12.0 12.0 12.0 12.0 12.0 12.0 12.0 Current Portion of L/T Debt 7.7 9.8 7.6 7.6 5.6 4.8 3.1 31 1.8 0.2 0.2 0.0 61.3 51.3 4I.3 43.4 42.0 40.6 39.3 40.1 39.5 398.7 3 1i3 Long-Term Debt 51.5 41.7 34.1 26.5 20.9 16.1 13.0 9.9 8.1 7.9 7.6 7.6 Equity Business Funds 100.8 157.9 228.3 297.7 362.7 415.4 463.7 507.1 545.2 576.3 600.8 618.5 Reserve Funds 7.6 10.8 14.3 17.9 21.5 25.0 28.5 32.0 35.5 39.0 42.5 46.o Collective Consumption Funds 10.4 13.3 16.4 19.6 23.0 26.6 30.3 34.2 38.3 42.6 47.1 51.9 Mitual Reserve Funds o.8 6 7.1 10.5 13. 16.4 18.9 21.2 23.2 4 26.3 27.4 Total Equity T 185.6 266.1 3 420.9 3.4 541.1 5 642.2 TOTAL LIABILITIES 232. 4 278.6 336.5 15.6 8 540.8 729540 7643. 9 794.5 Note: For explanation of terms used, refer to Annex 7.3 , page 2 Industrial Projects Department May 1973 ANNEX 7-6 YUGOSLAVIA - 1IKINDA IRON FOUNDRY PROJECT ASSUMPTIONS FOR FINA]IAL~ AND EONMIC -RAM 0OF RETURN AN FINANCIAL~ SENSITIVITY NANCIAI. Description Base Case T * icial Re Economic Returi* s_ _ E_t For boTh domesisc 1. Selling Prices (for 1973) Conve Ara and export Malleable (Din/T) 9,800 11,200 11,300 Fittings (Din/T) 25,000 13,4002/ 18,200 Noc2lar (Din/T) 10,800 9,62o 9,720 Machine Tools (Prices given in Annex 6-1) Kikinda export prices to convertible area (c .i .f .Yugoslav border) 2/ In the case of pipe fitting export prices are lover than domestic prioces largely because Kki.nda exports mostly low-quality black fittings mhile using the better qu.ality fittings at home. The use of black fittings is not allowed in Yugoslavia. * As KYdinda produced a wide range of castings and machine tools of different sizes and intricacies, it is diff'icult to find strictly comparable products in other countries and hence the determination of international prices is rather cumersoms. Moreover, most items of the tnxP produced by iWdnda are not i.spcrted to Yugoslavia. Therefore, Kikinda's output has been valued at export prices(C.I.F., Yugoslav border) of the Compaz as these prices are the best approximations available to international prices. 2. Raw Material Prices (for 1973) Financial Econoinc'l/ (Din per ton) Pig Iron 1340 1275 Scrap 920 870 Coke 1250 1060 Sand 250 250 Ferroalloys 7910 7360 Resins 11950 9950 3. Labor (avg Din/man-year in 1973) 31630 28500o- 4. Project Cost (Din Iilion) 524 478-. 5. Construction Period 4 years 4 years 6. Production Period 10 years 10 years 7. Scrap Value zero zero 1/ Comparable international prices. y/ 9% taes aazd contributions to Government has been excluded. / Excluding duties and taxes. rUOBTAVIA - D[MM FM=R FU?S FOR PFMA RCATL RTE OF iDN Without Expasion With Mion - _ _ _ "LUIhtAY -0Dernit'6nW AUMS31 /D tmertay Operating Costy alvenus 4ing GoAe A ue iJsot Other Total go Ot P c 0MtW Fized W.0 5.0 228.7 304.0 17T 0.0 5.0 21.3 230.2 301.4 16.3 0.0 16.3 L .5 -2.6 7.0 256.4 348.1 179.1 20.7 5.0 2M4.8 281.2 376.8 399.8 -2.0 397.8 24.8 28.7 8.0 271.8 363.0 162.1 27.5 5.0 194.6 331.1 462.6 189.6 -3.0 186.6 59.3 99.6 10.0 285.0 372.0 53.0 47.2 5.0 105.2 439.8 634.6 100.2 -5.0 95.2 14.8 262.6 12.8 306.3 382.1 10.5 7.4 5.3 23.2 508.5 716.3 17.9 -7,5 6.6 2C2.2 334.2 13.4 321.6 393.2 - - 5.6 5.6 534.3 737.3 - -7.8 -7.8 212.7 344.1 13.9 338.0 405.7 - - 6.o 6.0 557.7 759.8 - -7.9 -7.9 219.7 354.1 14.2 314.1 417.0 - - 6.7 6.7 584.9 782.5 - -7.5 -7.5 230.8 365.5 14.4 372.5 OM3.7 - - 7.5 7.5 604.8 805.5 - .6.9 -6.9 232.3 374.8 14.6 390.7 444.1 - - 8.8 8.8 643.5 828.4 - -5.8 -5.8 252.8 384.3 14.7 413.7 457.4 - - 10.2 10.2 687.0 854.3 - -4.5 -4.5 273.3 396.9 14.7 430.3 470.7 - - I4.7 14.7 728.2 877.8 - 0.0 0.0 297.9 4407.1 14.7 451.8 484.3 - - 16.2 16.2 771.9 903.3 - L5 1.5 320.1 419.0 34.7 474.4 498.4 - - 17.8 17.8 818.2 929.5 - 3.1 3.1 343.8 431.1 Inoluding 1ihp3ac_t Iw htmu Ecluding Deyreciation, Fincial Charges and Taxea, but including Pro-operating, Start-p and 3DgVieering expes.e. Inc}ludlng Other Incom. For inancial rate of return calculation, the curreut value of the Company's ewdstim fixd assets is aCaumad to be Din 500 million. a ANNEX 7-6 Page 3 SENSITIVITY TESTS ON FINANCIAL RATE OF RETURN 40% 40% Operating Cost / I 78Return J Revenue vs 30% - Retumn _30% a} '3.~ , >Capital Cost CH 20% vs Retum 20% Mj / I \ 2O 10 10 i0 \.017 2 ~ ~~~ / I 30 20 10 0 10 20 30 =Decrease. Bate Increase - Case ,%-Variation inl Input Case Capital Cost Operating Cost Revenue Rate of Return 1. (Base Case) 100 100 100 23.5 2 . 110 100 100 20.7 3. 100 110 100 17.2 l;. 100 100 110 31.1 5. ~~~120 100) 100 18.3 6. 110 110 100 15.5 7'. 100 110 90 7.6 Industrial Projects Depa rtment June 1973 YUGOSLAVIA - KIKINDA IRON FOUNDRY PROJECT FOREIGN FUND SOURCES AND USES (Din Million) 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 Net Exports 1 12 177". 2F7-T 3nT7 37 3 37rTT 3 4L.T h4T7 )475S: 4-7.B 1. Rights Retention Quota(20%)l/ 20.1 25.3 35.5 45.4 64.0 73.4 75.6 77.9 80.2 82.5 85.o 87.6 Depreciation Quota(19)11/ 3.0 0.4 0.6 2.1 4.0 4.6 4.5 4.6 4.4 4.5 4.6 4.5 Total Rights 23. 27.7 "3671 WMTT ZC 75.0 =- 7; BZ7T6 T75. BEZ =9. 2. Funds Available* 23.1 25.7 36.1 47.5 68.0 78.0 80.1 82.5 84.6 87.0 89.6 3. Fund Uses 17.6 25.4 34.9 45.6 51.5 74.2 74.3 74.5 73.2 71.9 72.3 Raw Materials I T 57 ¶ 11" 24 7 30 2 4- 30 3 3.3 35.1 36.9 Spare Parts 1.2 1.6 1.8 2.3 2.7 2.9 3.0 3.2 3.3 3.5 3.7 Interest 1.7 5.5 12.3 15.6 16.7 15.4 13.7 11.9 10.1 8.4 6.8 Royalty Fees - - - 0.8 0.9 0.9 1.0 1.0 1.0 1.0 1.0 Debt Repayment: IBRD(Projects) - - - - - 22.5 22.5 22.5 22.5 22.5 22.5 Others 2.2 2.5 2.6 2.6 2.3 2.5 2.7 2.9 1.6 0.0 0.0 Surplus (deficit) 5.5 0.3 1.2 1.9 16.5 3.4 5.4 7.6 1.0 1h.7 16.9 (2) - (3) * Funds become available in the following year for the rights acquired in a particular year. 1/ For explanation of quotas, see Annex 7-3, page 5. Industrial Projects Department June 1973 ANNEX 7-8 YXUGOSLAVIA -KIKINDA IRON FOUNDRY PROJECT BREAX-EVEN POINT The profit break-even point of the Kikinda plant in 1978 is estimated to be around 57% of the plant's effective capacity (75% and 80% of rated capacity for machine tool plant and foundries, respectively). The year i978 is selected because tlhat is the year in ihich repayment of the Bank loan will begin. In Din Million Variable Cost Fird Cost Materials and Utilities 366.2 19.3 Labor 43.5 54. 6 Selling and Administration 34.6 18.8 Maintenance 6.6 0.7 Other Operating Expenses 3.8 15.3 Financial Charges - 22.2 Depreciation 3 45.3 Total 424.7 176.2 Revertue Din 733.6 million Profit Break-even (capacity %) 57% Debt Repayent Din 27.3 million Cash Break-evn (capacity %) 51% The profit break-even of each plant in 1978 should be the following: % of Effective Capacity 1. Malleable iron foundry 60 2. Fitting Finishing Plant 348 3. Gray and No&aar Foundry 55 4. Machine Tool plant 340 ANNEX 7-8 Page 2 BREAK-EVESN POINT YEAR 1978 733.6 600 Profit 600.9 0~~~~~~~~~~~~~ 0~~~~~~~~~~~~ 400P __ __ __ _Break Even PoiXn4t 200 -2100 to/ I: Co~ ~ I 0 25 50 57 75 100 Percentage of Operation Industrial Projects Department June 1973 AN-'WEX 8-L YUGOSLAVIA - KIKINDA IRON F0JNDRY PROJECT INPUTS FOR ECONOMIC RATE OF IETURN AND ECONOMIC SENSITIVITY ANALYSIS Year Capital Other Operating Revenue Cost Investments Cost < Cl 02 CR 1973 14.7 0.0 1.5 0 1974 173.0 -1.7 29.4 36.3 1975 160.7 -2.8 62.3 92.4 1976 88.5 -4.5 151.3 212.6 1977 16.8 -7.1 195.1 288.2 1978 0.0 -7.3 195.1 288.2 1979 0.0 -7.4 195.1 288.2 1980 0.0 -7.1 195.1 288.2 1981 0.0 -6.5 195.1 288.2 1982 0.0 -5.5 195.1 288.2 1983 0.0 -4.2 195.1 283.2 1984 0.0 0.0 195.1 288.2 1985 0.0 1.4 195.1 288.2 1986 0.0 2.9 195.1 288.2 Note: Assumptions used are given in Annex 7-b. ANNEX 8-1 Page 2 SENSITIVITY TESTS ON ECONOICC RATE OF RETURN 40% 40% Operating Cost / vs Return / 30% _ 30% _ Revenue / vs Return / Capital Cost '20% t~> vs Returm 20% 18% 10% A 10% 3 10 30 Base Case Decrease Increase .% Variation in Input Case Capital Cost Operating Cost Revenue Rate of Return 1 (Base Case) 100 100 100 18.0 2 110 100 100 16.0 3 100 110 100 13.9 4 100 100 110 24.1 5 120 100 100 14.3 6 110 110 100 11.7 7 100 110 90 7.1 8 Industrial Projects Department June 1973 JJ,',_,hi. _ -KIKflNWA IRON F0JNDRY PROJECT -7FIGE EXCHANGE E~ARNINGS (Din Million) !973 1S'9 1 1975 1976 1977 1978 1979 1980 1981 1982 1983 4'1at Position(without exoansion) Gross Varnings 1/ 123 .3 156.1 165.7 170.3 174.1 179.8 185.6 191.0 197.4 203.8 210.3 Less:Raw Materials-foundry 2/ e .4 8.6 8.7 9.2 9.6 10.1 10.6 11.2 11.7 12.3 12.9 -m<>,in ;.-'i t2/ 5) I 6.3 6.6 7.0 7.3 7.7 8.1L 8.5 8.9 9.1 9.8 Spare parts 2/ 1.2 1.5 1.6 1.7 1.8 1.9 2.0 2.1 2.2 2.3 2.4 Interest 1.7 1.4 1.2 0.9 o.8 o.6 0.5 0.3 0.1 - - Amortization 2.2 2.5 2.6 2.6 2.3 2.5 2.7 2.9 1.6 - - Royalty fees ;/ - - - 0.3 0.4 o.6 0.7 0.7 0.7 0.7 0.7 ¢'et Earnfne,s (A) T:r62TJ! 1Jh TWT MI37 151.9iT TT l-T 172 1il i8W77 Expanded Position(with expaLnsion) Gross Earnings 1/ 123.3 172.1 220.0 310.9 359.2 377.2 381.2 392.7 403.9 416.0 h28d1 Less: Raw Materials-foundry 2/ 7.4 9.5 11.1 16.2 20.1 21.1 22.1 23.2 24.4 2> .6 26.9 -machine tool 5.1 6.3 7.1 8.1 8.8 9.3 9.7 10.2 10.7 11.3 11.8 Spare Parts 2/ 1.2 1.6 1.8 2.3 2.7 2.9 3.0 3.2 3.3 3.5 3.7 Interest 1.7 5.5 12.3 15.6 16.7 15.h 13.7 11.9 10.1 8.4 6.8 Amortization 2.2 2.5 2.6 2.6 2.3 25.0 25.2 25.14 24.1 22.5 22.5 Royalty Fees / - - - 0.8 0.9 0.9 1.0 1.0 1.0 1.0 1.0 Net Earnings (B) I577 : T1155 307-7 302.6 306.5 317.8 330.3 343 __7 __ Incremental Net Foreign Exchange Earnings (B) - (A) 0.0 10.9 4o.1 116.7 155.8 146.2 145.5 152.5 158.1 164.6 171.2 1 Price assumptions are same as those used for economic rate of return calculations, but at current prices. 2 Excluding duties and taxes j According to the agreement between Kikinda and Bryant Corporation, Kikinda has to pay minimum of this amount even if the company does not produce internal grinders. v In the case of internal grinder production, Kikinda has to pay 7.5% of the net sales of such grinders to the Bryant Corporation. Industrial Projocto Departient Tune 1973 ANNEX 8-3 JYUGOSLAVIA: EIKINDA IRON FOUNDRY PROJECT INDIRECT EMPLOYMENT GENERATION 1. The Kikinda Iron Foundry produces iron castings and machine tools for about 30 major enterprises, using various raw materials and semi-products from over 20 companies. The proposed expansion of Kikinda will have a ripple effect on the production programs of those 50 and odd Yugoslav enterprises. An attempt is made here to get an approximate estimate of the jobs likely to be created upstream in the supplier industries, and also in the transportation and elec- tric power sectors as a result of Kikinda expansion. 2. The latest data for incremental capital output ratio (ICOR) and incremental capital labor ratio (ICLR) for industry in Yugoslavia are avail- able only for the period 1962-70, expressed at 1966 prices. Such data for selected sub-sectors are given below: Incremental Incremental Capital-Output Capital-Labor Employment RatioT nICOR) 1/ Ratio (ICLR) 2/ Coefficient TCOR/ICLR) Total Industry 2.91 78.0 0.02 Ferrous Metals 15.25 700.0 0.022 Non-ferrous Metals 5.09 414.3 0.012 Metal Products 1.27 83.4 0.015 Electrical Equipment 1.12 48.3 0.023 Non-metallic Minerals 2.26 321.9 0.007 Coal and Coke 5.32 355.4 0.015 Electric Power 7.80 2058.5 0.004 1/ At 1966 prices, gross fixed investment during 1962-1970 is divided by the incremental social product for 1962-1971. 2/ At 1966 prices, gross fixed investment during 1962-1970 is divided by the increment in employment during 1962-1971 and expressed in thousand Dinars. Source: Investicije, 1947-1969 and Statisticki Godisnjak, Jugoslavije 3. Kikinda uses a variety of raw materials and semi-products in the prodciction of castings and machine tools. However, the incremental produc- tion of Kikinda is not likely to stimulate the production expansion of all supplier enterprises. But it is conceivable that firms producing items such as pig iron, steel scrap, coke, anthracite, quartz sand, electrical goods, metal products, and electricity would be expanded considerably as a result of the Kikinda project. In the case of coke, anthracite, and quartz sand supply, Kikinda has invested or is planning to invest funds in the main supplier enterprises to increase production to meet the needs of the proposed project. 4. It is estimated that Kikinda's incremental requirement of the following items because of the project ,would be: pig iron, 7,375 tons; steel scrap, 14,500 tons; coke 680 tons; anthracite, 690 tons; quartz sand, 40,130 tons; electricity, 40.5 million kwh. It is most likely that these requirements would be met entirely from domestic sources considering the expansion program of various supplier industries. Based on 1966 prices, the value of incremental raw material requirements for Kiidnda's expansion of castings production would be: ANNEX 8-3 Page 2 Incremental Price Per Incremental Needs Needs By Ton By Value Quantity (1966 Dinars) ('ooo Dinars) (tons ) Pig Iron 7,375 850 6,270 Steel Scrap 14,500 590 8,555 Coke 6do 820 558 Anthracite 690 480 330 Quartz Sand 40,130 130 5,220 5. The total incremental electric power requirements for castings as well as machine tool production expansion of Kikinda is estimated at 40.5 million kwh, each unit costing 0.185 Dinars per kwh (at 1966 prices). On this basis, the value of incremental power needs of the project would cost 7.5 million Dinars. 6. For machine toclproduction expansion, two important groups of out- side semi-products required are electric goods (i.e. electric motors and components, fuses, wiring, etc.) and metal products 1/ (i.e. ball bearings, fastening parts, jigs and fixtures, forgings, non-ferrous and steel products, etc.). In 1972, the weighted average value of requirements of electrical goods and metal products at 1966 prices per machine toolwere 10,800 Dinars and 32,800 Dinars respectively. Assuming the eame requirements per machine for the future, the total incremental requirements of Kikinda would amount to about 1.4 million Dinars for electrical goods and 4.3 million Dinars for metal products. It is likely about 80p of these requirements would be met from internal sources while the rest would be imported. Based on this asFurnption, the incremental needs of Kiki.nda for local electrical goods and metal products would cost 1.12 million Dinars and 3.5 million Dinars, respec- tively (at 1966 prices), 7. Using the employment coefficients stated earlier for various sub- sectors and the estimated requirements of raw material and semi-products for Kikinda s expansion, the incremental employmental generation in the supplier industries is shown below: Incremental Emloyment Incremental reeds to be Coefficient Employment Supplied Generation Locally ICORWICLR (Nos.) ('000 Dinars at ig66 prices) Pig Iron 6270 0022 138 Steel Scrap 8555 0.022 188 Coke 558 0.015 8 Anthracite 330 0.015 5 Quartz Sand 5220 0.007 37 Electric Goods 1120 0.023 26 Metal Products 350V O.015 53 hlectricity 7500 0.004 30 2-X0xcluding gray iron castings which are supplied within the enterprise. ANNEX 8-3 Page 3 Employment Effect on Transport Sector 8. Kikinda expansion will also have considerable employment effect on the transport sector. It is estimated that the total traffic generated from Kikinda expansion would be nearly 26 million ton Ikm, taking into account the transportation of various raw materials, semi-products and finished products. Assuming that one person is required for every 56,000 ton km of transportation, the incremental production at Kikinda would result in about 465 jobs in the transportation sector. Total Job Creation 9. Thus Kikinda expansion would result in the creation of aDout 950 jobs indirectly in the supplier industries, and electric power and transportation sectors alone, without taking into account the jobs created in the user indus- tries which are difficult to pinpoint. This estimate also excludes employment generation likely to be triggered by increased consumption of goods by those benefiting from the project. Negative Effect 10. Currently, a total of about 34,000 persons are employed in Yugoslav iron found ries. Of them, less than 10 are engaged in the operation of 100 and odd small foundries with less than 500-ton annual capacity each. It is conceivable that some small, inefficient foundries may be adversely affected by Kikinda expansion. But it is difficult to foresee with any degree of certainty what effect this would have on the present employment in small foundries. Industrial Projects Department July 1973 -~~~~~~~~~~~ ~ ~~~~~~~~~- i~~~~~~~~~~~~~~~~~~~ / ~~~~~~~~~~~~~B RD 10504R1 A- ~~~~~~~ / ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ L ~~~~QI4M6A~~~~~~~~~~~k 44~~44~4~4~~ fip~Wk ~~UM4O4~~4~4,~ T %~~~~ f'j~~~~~~~~~~~~~~~~~~~~~4 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 44 ~ ~ ~ ~ ~ ~ ~ ~ i W~~~B4,$~~~44~~~ ~ ~ - - E 2?~FkD '7 ~ ~ ~ ~ ~~~~~2 ?4 ~ A U S T R I A ' DD (BO00 A ~~~~~~~~~~~~~~ 'D*N' ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~' LOCATION OF PLANTYAND RAWt MAEIA OUCSN T0 LOCATION OF PLANT AQ RAW MADTAND AL' DA SOURCES D~ NUGOSLAVIA + 'A At~ ~ ~ ~ ~~~~~~~~1- h 'A N' 7' N' 445N.4",'DDS S~~~~~~~~~~~~~~~~~~~~~~~ SI'~~7