Cement Conundrum

Cement Conundrum

Ashenafi EndaleAugust 30, 20201764

Shortage of cement is one of the identifying characteristics of the Ethiopian economy over the past eight years. Despite completely substituting cement imports by local production, the dynamics of Ethiopia’s cement market have drastically changed since 2018. Cement shortage has become very normal, while unexplained price hikes of the item have shaken the construction industry. Even though the government has taken different administrative measures going as far as price caps, the problem is far from over. EBR’s Ashenafi Endale investigates. 

Birhan Kassa, founder of BK General Contractor, nearly came up with a pioneering idea in the housing market after attaining patents for a new prefabricated product. The innovative product, which can complete a 20m2 house for ETB40,000 in less than a month, eliminates the use of concrete blocks, rebars, and columns, relying on cement as the main input. The company decided to introduce its new business as a strategy to get the construction industry out of a slowdown.

However, the glimmer of hope subsided when cement prices skyrocketed by as much as three-fold, especially over the last eight months. This has doubled the expenses of construction companies. “It is easier to find mercury than cement. When we find it, usually from brokers in the black market, they double the price but give you a receipt as if they sold it to you at the original price. We pay half the price from our pockets and cannot include it in our financial statements,” said Birhan.

Contractors usually purchase cement from retailers rather than directly from cement plants. “Cement factories and distributing brokers affiliated with cement factories take money in advance but do not deliver the cement quickly,” he added. “This ties up our money. We get money when it is released from clients; so, we must use it on other urgent issues like paying for labor. So, we prefer to buy directly from retailers who sell cement informally.”

Contractors and individual builders of houses pay upfront and wait for seven months after ordering cement directly from factories. However, the industry and the market are not delivering. Regional trade bureau heads are especially the first to complain to the Ministry of Trade and Industry (MoTI), pushing for an intervention in the market. The heads in the Southern Nations, Nationalities, and Peoples’ Region (SNNPR), Oromia, and Amhara regions complained that it takes between three to 15 months to get cement after putting in an order.

“We do not know the cement distributors. They are all in Addis Ababa, around Ashewa Meda. When Oromia region orders cement, it does not come directly from the plants. It goes first to Addis Ababa and bringing it back is very difficult,” said Worku Chala, Head of Oromia Trade Bureau. This is despite the fact that two-thirds of the factories in the country are located in Oromia regional state.

The price of a quintal of cement stood in the range of ETB382 and ETB600 in SNNPR, ETB470 to ETB500 in Oromia and between ETB500 and ETB670 in Amhara, according to regional heads.  “Demand has increased in our region, while supply side problems have worsened. It takes a minimum of three months and a maximum of fifteen months to get cement, after putting in an order. This is because the market is controlled by layers of brokers,” Worku complained.

 

Why is Ethiopia facing a cement shortage?

With the addition of Derba, Dangote, and Habesha to the industry, and the expansion project of National Cement five years ago, Ethiopia was able to fully stop cement imports, which stood at 1.4 million tons in 2014. They boosted the installed local capacity to 17.2 million tons per year. With demand around 10 -11 million tons, sector players have been producing close to the actual demand—churning out 8 million tons on average.

The production capacity of Dangote, Messebo, Derba, and Mugher alone totaled 10 million tons per annum. These big players each produce around 70,000 quintals on any given good day. Government even banned new investments in the industry, concluding that enough potential has been reached. Shortages and price hikes in the cement market were unheard of until two years ago.

Currently, only 14 cement factories are active though 21 have been licensed. The active ones produced 8.4 million tons in 2019/20 and 8.24 million tons in 2018/19. The new entrant, Abay, is now under construction and progress has reached 60Pct. Owned by Abay Industrial Development SC, the factory is located in Amhara regional state and has an annual production capacity of 2.1 million tons.

The cement industry has faced layers upon layers of difficulty over the past two years, with this accumulation reaching a boiling point around May 2020, triggering frequent talks between government and industry players. The current scarcity and inflation are at their highest in eight years.

One major reason is power interruptions. Although cement factories have dedicated power lines and special agreements with Ethiopian Electric Utility (EEU), reduced rainfall forces hydropower dams to produce less power and national power shortages occur. Power to the industry was reduced by a whopping 50Pct and they could only operate for 15 days a month. This power rationing and halving of production continued for six months.

“Automatically, cement production declined and the prices skyrocketed. Cement orders from clients accumulated as the industry was unable to deliver,” remembers Haile Assegide, CEO of Derba Cement and President of the Cement Industries Association. Accumulated orders have a harmful impact. For example, after a three-month hiatus for maintenance, Derba resumed production in May 2020. At this point, its accumulated cement orders reached over 1.2 million quintals, according to Haile.

A large majority of electric power in Ethiopia is generated by damming water systems; and other means of power generation are limited in capacity. This situation has contributed to power outages. Hydroelectric power generation declines following a reduction in rainfall. “Energy source diversification and engaging the private sector in energy production is a new trend we are working towards now—allowing private power investors under public-private partnership (PPP) arrangements. Privatizing Ethiopian Electric Power (EEP) is another possible plan that the government is currently working on,” stated Moges Mekonen, Communication Director of EEP.

Shortage of foreign currency to import spare parts also contributes to cement shortages. Almost all plants have been struggling with failed machinery. Derba, Dangote, Habesha, and Mugher, big industry players, stopped production for at least two months in 2019 alone. Ethiopia annually spends between USD180 million and USD230 million to import spare parts for the cement industry.

“Government says it is supplying foreign currency. But that is false. We were availed access eight months after requesting. At Derba, one of our dynamos, which crushes a third of our daily 70,000 quintal production, failed and stopped for eight months,” recalls Haile. The maintenance took Derba much longer than the usual three weeks. Cement factories usually perform full maintenance works during the rainy season, when production stops.

Another reason for the supply gap is logistical hurdles. Cement is commonly transported by trucks owned by the manufacturer, private transport companies, or the end buyer. Cement factories have a total of 1,800 trucks. Derba, Dangote, and Habesha are just 70KM from Addis Ababa but their transport costs are currently ETB80 per quintal—up from ETB25—due to the shortage of trucks.

Private companies move the majority of cement. However, every year in May, government deploys these trucks to transport fertilizer for the agricultural season. They also transport imported basic commodities accumulated at Djibouti port. During this time, cement mobility drops. Due to this shortage of trucks, cement transportation tariffs increased almost three-fold, even when the factory is near major markets. This tariff increment and its knock-down and multiplying effect was key in inflating cement prices.

“We recently requested government to allocate 60 trucks for Derba. We are currently back to producing but we need more trucks to transport faster,” added Haile.

A further problem is that the government’s initiative to replace coal imports for cement producers with locally mined coal brought about inconsistencies in supply and quality. Government is forcing the sector use 80Pct local coal. The big factories are achieving this ratio and local enterprises have started mining coal in Kamashi/ Benishangul, Jimma, Chilga/ Gonder, Debre Birhan, and in some areas of SNNPR. Yet, some are complaining that local coal is of inferior quality, with more ash content. Ethiopia annually spends USD220 million to import coal, with the Ethiopian Petroleum Supply Enterprise the largest importer. NOC, one of the largest oil suppliers in Ethiopia, also imports coal from South Africa. Additionally, the sector is also susceptible to political unrest and illegal settlements on quarry sites.

Going further down the cement marketing line, some say the contribution of distributors, wholesalers, and retailers to the shortage is more to blame. Some insiders conclude that cement factories and big distributors made a secret deal with officials of the former ruling government, aimed at creating an artificial shortage and price inflation, i.e., economic sabotage, as a revolt against the new ruling party and officials. The insiders explain that distributors have huge cash at hand, enough to buy entire production lots and sell it only in the black market on their own terms. Sources also claim distributors are effectively twisting the hands of factory CEOs, transporters, and even government officials.

“Distributors, wholesalers, and retailers abused the problems facing the industry to their benefit by holding product and inducing inflation. They moved the cement market from the formal to the black arena,” said Simegn Degu, Director of Cement Industry Research and Technology Development.

The way forward

The government’s first action to arrest the pricing hike and supply shortage was setting a price cap after failing to find logical reasons for the occurrence. “Power supply to industries was significantly reduced last year but it has improved this year as the rains were better and our dams are holding high water volumes,” said Melaku Alebel, Minister of Trade and Industry.

Since June 2020, the government has begun to determine the retail price of cement throughout the country. It has also ordered five publicly owned and party affiliated enterprises to exclusively engage in PPC cement trading. For Ordinary Portland cement, 50Pct of production must go to the enterprises with the balance permitted through regular marketing chains.

However, the measure has hardly had a favorable outcome. Cement is still accessed from the black market at inflated prices. This is mainly because the five chosen enterprises are lacking in skill and experience in the cement trade and are rather outsourcing their responsibilities to the same existing distributors, wholesalers, and retailers.

“The government’s latest decision can be a solution in the short term, if these publicly-owned enterprises deploy their transport trucks. However, a lasting and long-term solution is to improve production efficiency and modernize the market chain. The secondary market in Ethiopia involves many layers. Informal distributors have vast resources and capacity even in manipulating policy makers—not only manufacturers and the market,” said Fitsum Nigussie, CEO of East African Trading House, sister company and sole distributor of National Cement SC (NCSC).

Fitsum says Ethiopia’s cement problem can be addressed if existing industries utilize 90Pct of their installed capacities. Currently, only NCSC is close to that figure at 94Pct utilization; the industry average is 57.8Pct.  NCSC produces 4,000 tons daily and 1.2 million tons annually.

 “NCSC is currently the top producer,” explains Fitsum, further adding that “logistics is the main problem for us as our plant is far from the central market, in contrast with most of our competitors. Our factory in Dire Dawa is far from the central market but near export routes. NCSC exported to the tune of USD17 million in 2018/19. So, we have preferable accessibility to foreign currency. But we pay a considerable amount for our expatriates. Every cement industry in Ethiopia has 25 to 30 expatriates, including NCSC, usually from China and India. Chemical and Construction Input Industry Development Institute (CCIDI) must work on producing local experts and professionals to replace expats. On the other hand, for the last year-and-a-half, we have reduced our import bill by substituting 80Pct of our coal consumption. On another note, our quarry sites are being occupied by illegal settlers. Government must work on maintaining the rule of law.”

Fitsum stresses government should properly regulate the cement industry and straighten the market chain. “Government left the sector to operate in a free market but a free market cannot operate by itself, not in this economy.” Currently, brokers are profiting more than any other actor in the cement market. They do not have licenses, trucks, warehouses, or issue receipts. Brokers take in ETB100 per quintal, while the factory only profits ETB10. Government still has not decided to whom specifically factories should supply their cement.

Additionally, if distributors in Addis Ababa quit supplying cement, access of all other regions to the product will be negatively affected. Every distributor, wholesaler, or agent prefers to sell in Addis Ababa. “The regional problem cannot be solved without solving the problem in Addis Ababa. However, the high price in the regions can quickly drop if government avails additional trucks,” says Haile of Derba. “We are ready to supply, if the public enterprises bring their trucks.”

“Government must find other options to transport fertilizer and other basic commodities from ports. If factories continuously produce at full capacity, the role of brokers will diminish. We can even export then. So, public development enterprises can engage in distribution but they must bring their own trucks,” added Haile.

The struggles of Ethiopia’s cement industry are painful even for Kassim Bromana, CEO of Habesha Cement since joining in February 2020. He has 30 buyers of experience in the industry in 17 countries, mostly outside Africa. “Growth of the cement industry is critical for Ethiopia’s sustainable growth. Unfortunately, I have seen a shortsighted sector, though I have not been here for long. The market is eyeing only short-term profits and factories rely on external support to run factories,” said Kassim. Habesha cement is far from this ratio target. In 2019, Habesha utilized only 30Pct of its installed capacity. “There are many reasons for this. Our factory selling price is currently ETB250, per quintal and our production cost is also ETB250. We are selling at a loss. I am not asking for a price increment but how to boost efficiency, with government support,” he added.

Kassim stresses Ethiopian cement manufacturers cannot achieve a 30Pct Earning before Taxation and Interest (EBTI) ratio, within the existing situation. “My turnaround plan for Habesha is improving efficiency. We sell only to the Addis Ababa market because our close to 40 trucks are not enough to transport to regional markets. Transport is not a big problem. If it allows me to grow my EBTI, I can deploy a transparent transport system and control the supply from the factory,” he said.

Factories pay around ETB0.25 to transport sub-contractors per quintal. A quintal of cement reaches the market at ETB270, adding on the ETB235 factory cost. Retailers have around ETB30 margin. “Reducing the factory price does not favor the cement industry unless we straighten what is happening in the market.  Either I must be able to directly sell the cement at ETB420 to the end consumer, or the end user must be able to access cement at the ETB235 factory price,” is Kassim’s view.

Haile stresses that the sector substantially requires government incentives and support. “Coal prices increased from ETB3,200 per quintal to ETB4,975 per quintal in just 16 months. Power jumped from ETB0.40 to ETB0.80, per MW. We used to pay ETB10 million to ETB15 million per month, for power. Now that has increased by ETB4 million. Had the power supply been continuous, the impact on the sector could have been less. If government incentivized the sector by providing foreign currency for spare parts, other factories would have been more confident in using local coal,” he added.

The absence of local cement professionals inflicts further harm upon the industry in Ethiopia. Factories hire up to 40 expatriates from China, India, Pakistan amongst others, paying a monthly average of USD2,000 per head. “The Ethiopian cement industry needs to develop its own experts and professionals. Nobody is spending a penny on local human capital. Every industry is running to bring Chinese experts to run their plants. Habesha Cement has 40 Chinese experts in its factory. We pay an average of USD2,000 per head monthly. There is also a translator for each. Yet, the performance is very lousy. This cannot be sustainable,” said Kassim.

Meanwhile, Melaku stated that the government has allocated USD85 million to import spare parts for cement factories. If the spare part problem of big cement factories such as Derba, Dangote, Mugher and others is solved, the actual capacity utilization of the cement industry will slightly improve to 63pct, up from around 45pct since May 2018 when the problem first appeared following a governmental move to cut electric supply for industries by 50pct. Capacity utilization plummeted to as low as 20pct in the last few months. The country’s cement problem would be locally addressed, if the industries utilized 85pct of their capacity. The 14 active cement industries are expected to produce 345,000 quintals of cement daily; however, they are currently producing between 100,000 and 200,000 quintals.

On August 25, 2020, Minister of trade and industry, Melaku Alebel briefed media on lifting the price cap on cement. The Ministry also allowed cement import five years after Ethiopia totally substituted cement import with local production. The government plans to import 3 million tons of cement over the next three months in order to bridge the local supply-demand gap. The Ministry has now lifted the price ban it put in place two months ago after assessing that it has not served the cement conundrum. The Minister attributed the declining local cement supply to lack of spare parts in the factories, power fluctuation, input shortage, skill gap, instability around quarry, and other problems in the market chain.

Although the country has over 17 million tons of annual installed production capacity, actual production stands at 8 million tons. The demand for cement by the construction industry stands at around 11 million tons annually. The planned import of 3 million tons can bridge the demand and supply gap, although import cannot be a lasting solution due to the shortage of foreign currency.

Other administrative measures targeted at solving the cement shortage will be implemented, according to the Ministry of Trade and Industry. But whether such actions would be a panacea to the nationwide problem is yet to be seen.


9th Year  August 30 – September 30 2020  No. 90

Ashenafi Endale


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