Simegn Degu

“Regulation Banning New Investments in the Cement Industry under Amendment”

Simegn Degu is the Director for Cement Industry Research and Technology Development at the Chemical and Construction Input Industry Development Institute (CIIDI). He has been leading several research projects that seek to solve bottlenecks in the cement industry and pave the way for the sector’s development. Simegn believes several factors, including artificial shortages and corporate management problems have contributed to the recent spike in the price of the commodity. He believes the recent administrative measures taken by the government are not going to give a long-term solution to the problem. EBR’s Ashenafi Endale sat down with him to understand what went wrong in the market, especially over the last six months.

What are the reasons behind the shortage in the supply of cement?

Ethiopia has substituted import of the product and there has been no cement shortage for five years. However, cement shortage occurred beginning May, 2018. At this time, the main reason was the power rationing in place for cement industries due to power shortages following the dry rainy season of 2016. The power supply of industries was reduced by 50Pct with the factories only getting power for 15 days a month for six months starting from May, 2018. Only after deliberations with the Ethiopian Electric Utility (EEU) did fulltime power supply resume in September, 2018.

Between September and January 2019, all manufacturers were back in operation and prices stabilized. But again, the price of cement began to soar since February 2019 with the situation worsening over the last few months. This time, the cause can be attributed to Addis Ababa City Administration’s ad-hoc policy that banned non-emergency heavy trucks from the city’s limits during the day with the aim of reducing the capital’s traffic congestion.

Over 70Pct of cement industries are within 100 kms of Addis Ababa and their trucks must cross the city to transport inputs and products. The ban on truck mobility seriously affected production until we talked to the city administration and had the law relaxed. The ban was lifted in September, 2020.

Surprisingly, cement production increased slightly during 2019/20 relative to previous years with total production reaching 8.4 million tons, up from 8.24 million tons in 2018/9. We receive production reports every month from factories. Despite the increase in production, market supply decreased. Many opportunistic cement distributors and wholesalers started hoarding the product, speculating upon another drop in cement production.

There was some truth to the speculation because some cement factories were facing machinery failure and lacked foreign currency to import spare parts in time. Scarcity of transport trucks further pushed up the price. Every year beginning May, all trucks in the country are customarily shifted to transport fertilizer and other basic commodities from Djibouti port. This is an annual schedule.

Therefore, in June 2020, the government intervened in the cement industry because the price almost doubled and projects and regional states were unable to sufficiently access cement for a long time. Government allowed five public enterprises to engage in cement transport and distribution with tagged prices. Industries are mandated to allocate 50Pct of their cement production to these public enterprises while directly selling the rest through their own channels. The intervention was meant as a short-term solution. The long-term solution includes ensuring a continuous supply of power and foreign currency to the cement sector for an efficient and continuous production and supply.

Cement industries have dedicated power lines. Why did the government change to rationing?

There was a national power problem. But the rationing stopped within six months and the power problem was solved once the summer rains filled the hydropower dams. The power issue was solved in 2019. There is no rationing now. Though most of the cement factories have dedicated lines, they are not immune to national power shortages. Some industries like Mugher share their power lines with households.

After the power issue has been solved, industries have still been unable to produce sufficiently as they are preoccupied by failed spare parts. Why did spare parts become a big issue throughout 2019 in the cement industry?

All cement plants have spare part problems. Despite daily capabilities of producing 5,000 tons, for instance, Mugher only produces around 3,000 tons per day. The rest is lost because plants are unable to run without replacing overrun or broken parts. The issue of spare parts did not occur overnight. It has accumulated over the years as sector players have been by-passing mandatory annual maintenance procedures and operating with depreciating spare parts year after year. Such adaptiveness gradually decreases their output and forces a total shutdown down the road. Some factories such as Mugher are facing a failure of the kiln while others are tackling more severe wearing down of bigger machines in their plants.

Derba is currently finding solutions but one of its machines was out of service for months as they could not import spare parts. Dangote is also facing a spare parts problem. This is because Dangote was not undertaking regular annual maintenance work since it became operational five years ago. Cement industries operate the whole year and stop during the rainy season to undertake full maintenance runs. It is recommended that factories totally shut down during the two rainy months (July and August) and undertake full-fledged repair works. This enables them operate the whole year efficiently.

Most cement industries are new and have opened within the last ten years or less. How did they wear out so quickly?

True! The big industries including Dangote, Derba, National, and Habesha are less than ten years old. A cement factory must operate sustainably for the first ten years at least based on international standards. But in the case of Ethiopia, the cement factories have been operating the machines year after year with minimum servicing, ignoring mandatory annual full-scale maintenance works. Their machineries have reached the point of maximum weariness this year. The production for 2019/20 increased because we pressured the sector to operate with maximum effort and address overdue orders and waiting lists.

Most industries are located in the Oromia region. But prices have doubled to ETB600 in this region and accessing cement is difficult. Transport is mentioned as one of the main reasons. How could transport be a reason for Oromia, if most of the industries are in this region?

Transport price increased in this region, illogically. For instance, the price variance between Dangote’s factory in Mugher and Addis Ababa was ETB25. But it climbed to ETB80 in less than two years’ time. This has a significant implication on the cement end user. Mugher is 90km from Addis Ababa but the price nevertheless increased to ETB450. The price hike increases further away from the capital. We are currently negotiating with stakeholders to bring transport rates back to previous levels.

Most industries are in Addis Ababa or in its surrounding vicinities. But Oromia region is large with up to 600 kilometers to the East and West of the capital. The problem reflects the typical nature of the informal market chain in Ethiopia. Distributors just send their trucks to plants, load cement, and take it to wherever they want and sell it for whatever price they want or even hoard it.

How many trucks are in the industry?

Close to 1,800 trucks, which are owned by cement industries. They supply to their clients and big projects such as the Grand Ethiopian Renaissance Dam (GERD). Other trucks are owned by private distributors, transport service providers, and big clients who transport for themselves. The number of trucks is not enough.

How do you evaluate the progress in stabilizing the cement price after government intervened in June and determined retail prices?

The government has the responsibility of protecting society from irrational inflation. The price stabilization measure taken by the national committee cannot be a long-term solution. Short, medium, and long-term plans are required to effectively solve the problems of power supply, inputs, spare parts, foreign currency access, and logistics. We started working towards this end. But the price needed immediate action. Public enterprises are selling in line with prices fixed by the government. But there are loopholes where large portions of production are going to the black market.

Each cement industry brings up to 30 expatriates with their salaries in foreign currency. What is CIIDI doing to produce cement professionals locally?

Cement value chain and production technology is highly complicated. It needs highly skilled professionals and operators. We have introduced a very good cement strategy in 2015. The industry needs 20Pct high-quality professionals, and 80pct technician-level professionals. A strategic study is needed to determine which one should enjoy emphasis. We decided to work on the 80Pct.

We agreed with Technical and Vocational Education and Training (TVET) colleges to launch cement technology departments. It has already begun in Mekelle, in cooperation with Messebo Cement. We worked hard to introduce cement curricula and operational standards, which Ethiopia previously did not have. We hired foreign experts and trainers. Now we are working on enabling each factory produce their own middle level operators and experts, alongside TVETs. Local professionals will replace the expatriates soon, at least at the middle level.

How many cement plants are there? Are there new plants in the pipeline?

There are ten plants producing both clinker and cement. There are three more that receive clinker form others and produce cement only. In total there are 13 factories. New investments in the cement industry were banned by an investment regulation introduced a few years back. The restriction was in place since the total installed capacity in Ethiopia reached 17 million tons per year back then and this was deemed sufficient. But in the coming years, the demand from the construction industry is forecasted to increase, especially in light of the recently launched Ten Years Perspective Plan (TYPP).

It takes a minimum of five years for an investment in the cement sector to become operational. Therefore, we have to invest today, to have a new cement factory in five years. Dangote and Derba have already asked for an expansion investment planning to extend new production lines onto existing plants. They will be given the green light first. Next, investment licenses will be given to new cement investors.

So, is investment allowed in cement industry?

The investment regulation must be revised. The amendment is already underway and the Ethiopian Investment Commission (EIC) and the Ministry of Trade and Industry (MoTI) are working on it. Ethiopia’s investment proclamation was recently amended and its regulations have already been finalized by the Council of Ministers. One of the amendments in the draft investment regulation permits investment in the cement sector. Government has approved the idea. Once the regulation is ratified, Dangote and Derba can start their expansions. New investments will also resume. Potential investors will be invited.

A large research document has been presented to the investment commissioner and MoTI officials. There are positive signs on the amendment but it is still in the pipeline.  Currently, there already is one cement factory in the pipeline, in the Amhara regional state—Abay Cement by Abay Industrial SC. The main solution for existing problems is addressing all issues immediately and enabling existing industries produce in full capacity. This will be attained in three months’ time.

How do you evaluate the impacts of the cement supply gap on the construction industry?

It has a significant impact. Especially as the government has been pressing construction projects to be finalized on schedule, cement shortage should not be an issue to linger. The governmental measure not to delay construction projects is meant to avoid any labor layoffs during the COVID-19 pandemic. The main contribution of cement factories and the construction sector is their immense employment potential besides development. But the construction sector is severely affected and can come to a standstill due to cement shortages and unjustified increases in other expenses.

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

Leave a Reply

Your email address will not be published. Required fields are marked *

Ethiopian Business Review | EBR is a first-class and high-quality monthly business magazine offering enlightenment to readers and a platform for partners.

2Q69+2MM, Jomo Kenyatta St, Addis Ababa

Tsehay Messay Building

Contact Us

+251 961 41 41 41