Anomaly in the cement industry

With the ongoing construction boom in the country, various high-rise corporate headquarters and condominiums are step by step popping up in the city. The industry and the construction boom has attracted the likes of Nigerian business tycoon, Aliko Dangote, and Ethiopian-born Saudi billionaire, Sheik Mohammed Al Amoudi. The years 2012 and 2015 brought the giants Derba Cement Factory and Dangote Cement PLC to the sector, respectively. The demand end of the sector’s chain welcomed the coming of these huge plants with high hopes, while the supply side expressed anxiety about their entry to the market. Whether the existing cement factories in Ethiopia, and the ones in the pipeline, could solve the demand-supply disarray or not is yet to be determined, writes Kaleyesus Bekele.

Fikere Derbew, 47, has been trading in cement for the past twenty years. Fikere, who runs a small store at the heart of Addis Ababa around Laghar area, cheerfully remembers the “good old days” when there was high demand for cement between 2006-2010. “I used to sell 200-300 quintals of cement daily. It was a time when we sold a quintal of cement for 500 birr,” Fikere told The Reporter.

In recent years things have changed. Following the establishment of a dozen new cement factories the price of cement has fallen. The once cash cow business is not attractive anymore for many traders like Fikre, a father of three. “Now I do not sell more than 150 quintals a day.” A quintal of cement is now sold at as low as 200 birr and the profit margin of the producers, wholesalers and retailers is slim.  

The history of the Ethiopian cement industry is long and fascinating. The first cement factory was built by Italians during the occupation of 1938 in Dire Dawa town with a yearly production capacity of 30,000 tons. Prior to that, probably the first bulk cement import was made during the construction of the Ethio-Djibouti railway between 1904 and 1917. In the 1960s the Ethiopian government built two cement plants at Massawa (Eritrea) and Addis Ababa, with a combined annual output of 150,000 tons. Two production lines with an installed capacity of 600,000 tons were built at Mugher between 1984 and 1991. All state-owned factories were managed by Mugher Cement Enterprise from the mid- 1980s.

In his acclaimed book dubbed “Made in Africa”, Arkebe Oqubay (PhD), special adviser to the prime minister, wrote that after a long, sluggish development prior to the 1990s the Ethiopian cement industry recorded impressive growth between 2000 and 2012. According to Arkebe, installed capacity in the industry rose from 800,000 tons in 1999 to 10 million tons in 2012. The average annual growth rate for cement production was more than twice when compared to the rest of Africa or the globe during this period. By the end of 2012, the number of firms had increased from a single state-owned enterprise to 16.

“The cement industry has undergone major changes throughout this period and it appears that Ethiopia is likely to become one of the top three cement producers in Africa,” Arkebe says.

A major milestone for the Ethiopian cement industry occurred during 2004-2012 when the construction industry registered an abrupt boom. Giant public infrastructure development projects, housing projects and private investments propelled the demand for cement. The government launched the construction of major hydro power dams, low cost housing projects and private real estate firms mushroomed. The local cement factories (Mugher and Messebo) were unable to satisfy the rising demand. The price of cement skyrocketed.  

“There was not enough cement supply that can accommodate the sudden construction boom,” Gemechu Waktola (PhD), managing director of i-Capital (Africa) Institute and associate professor at Addis Ababa University, says. “The capacity built before this was not adequate to accommodate the abrupt construction boom. So because of that the cement industry suddenly changed. Things in the industry changed the construction economy, policy direction, and many other things.”

Arkebe says that the government did not make timely interventions in the face of new challenges and lacked a realistic long-term strategy for the industry. He says that the government failed to prevent and contain cyclical crises in the industry. Consequently, the country faced critical cement shortage and was compelled to import cement between 2006 and 2011.

Cement is a bulk product made from limestone and volcanic ash (pumice) and importing it from long distances with foreign currency was costly to the fragile Ethiopian economy. To satisfy the cement starving economy the Ethiopian government took various measures. The government allowed the import of cement with Franco Valuta [Franco Valuta imports are goods imported without foreign exchange expenditure from the domestic banking system] and tried to impose price controls. But these measures created an opportune time for rent-seekers to use the loopholes in the government policy and make fortunes.

Bribes were rampant and investors who are given high quotas of cement for their investment projects sold the cement for exorbitant prices in the local market amassing millions of birr. Many young millionaires were created overnight.    

The Ethiopian government did not expect such a critical cement shortage and it was ill-prepared to handle the challenges. “Both the government and the market was caught by surprise when critical shortages of cement occurred in 2005 and lasted till 2010,” Arkebe says.

To address the erratic cement market the government offered attractive investment incentives to local and foreign investors who were interested in investing in the cement sector. Long-term subsidized loans, duty-free privileges and income tax exemption. The Development Bank of Ethiopia (DBE) finances 70 percent of cement industry investment projects. 

As a result, the existing cement factories undertook aggressive expansion projects and foreign firms–mostly Chinese–built new cement factories. The number of cement factories grew to 20 and annual cement production increased from 2.7 million tons to 15 million tons. Per capita cement consumption increased from 39 kg to 62 kg, which is still minimal compared to Sub-Saharan average of 165 kilograms.

Gemechu says that though the cement production capacity of the nation was generally growing, the consumption of cement was not increasing proportionally. Though the annual cement production capacity grew five-fold to 15 million tons the annual cement consumption stood at only six million tons.

In 2011 the cement industry developed excess production capacity. Arkebe says that both the market and the government again appeared ill- prepared when the industry suddenly experienced excess supply and productive capacity in 2011. 

According to Gemechu, the cement market has saturated. He says the Ethiopian government made an erroneous projection at the beginning of the Growth and Transformation Plan (GTP). “It was projected that the annual cement consumption would be 27 million tons by the end of GTP-I (2015) and the per capita consumption was supposed to be 300 kilograms. By end of the GTP-I the consumption was only 5.47 million tons while per capita consumption was 62 kilograms,” Gemechu says. “Both the government and the industry should share the responsibility for what happened,” he says.

The local cement manufacturers tried to export cement to South Sudan, Djibouti and Kenya. However, the market is limited and could not solve the market saturation problem. “Transporting cement by truck more than 300 kilometers will not make you competitive,” Gemechu says.

Haile Assegide, CEO of Derba MIDROC Cement and president of the Ethiopian Cement Producers Association, says that the demand for cement which was growing by 24-25 percent dropped to 15-16 percent. According to Haile, the current annual cement demand is 8-9 million tons.

Cement manufacturers are now complaining about the saturating market. “There are now more complaints and fears among manufacturers than the previous years. The situation is getting tougher and tougher,” Gemechu says.

In an exclusive interview with The Reporter, Haile says production has surpassed demand and factories are scrambling for the limited market. “The industry transformed from shortage to abundance. The competition is getting fierce,” he says. Cement factories are utilizing 50 percent of their production capacity.  The government has banned cement imports and suspended granting investment licenses.

The frequent power interruption has also contributed to the low capacity utilization, according to industry players. “We do not produce for six hours on the average due to power cuts,” Haile says. “But we hope this would improve as the Gilgel Gibe III has commenced generation.”  

Gemechu argues that the government’s erroneous and ambitious projection of 27 million tons of cement consumption by 2015 contributes to the market problem. Arkebe shares Gemechu’s view. “The GTP projection which targeted ten-fold growth in five years proved to be grossly unrealistic and was not founded on a careful market study by the government,” he admits.   

However, there are some government officials who try to defend the government. Samuel Alala, director-general of the Ethiopian Chemical and Construction Inputs Development Institute, says that the market saturation is a temporary problem.

“The growth of the cement industry should be viewed as part of the overall economic development of the country. The country targets to become a middle-income country by 2025. As the middle-income base expands so does the cement market,” Samuel told The Reporter.

According to Samuel, the cement market is seasonal. “The demand for cement at some point increases and reaches a peak and declines at another phase. When the government launches major infrastructure development projects the demand escalates and drops when they are finalized. Now the government is finalizing preparations to commence work on major construction projects. After a few months it will introduce these projects and the cement demand will peak up.”

However, Samuel says this is not a sustainable market position. “A sustainable cement demand will be created as the economy grows and the middle-income group expands. We hope that the whole scenario will be changed in the course of economic development.”          

Gemechu calls the Ethiopian cement industry a captive where the government is the single major cement consumer. “When something goes wrong with the government the cement industry players will jitter and pray that things will be okay.”

Industry players are advocating market stimulation. One of the recommended practices for market stimulation is replacing asphalt concrete roads with cement concrete roads. The Ethiopian government is investing heavily on the road sector development. Experts believe that if the government builds some of the roads with cement it can create a huge cement demand.

Haile told The Reporter that the cement concrete road is much better than the asphalt road.  “Asphalt is imported product while cement is locally produced. We can save a hefty amount of foreign currency if we build cement concrete roads.”

According to Haile, maintenance cost is minimal when it comes to cement concrete road. “It has a longer life than asphalt road. Maintaining an asphalt road is costly. Asphalt road easily deteriorates in the rainy seasons. But if you see the cement concrete road it gets stronger when it gets water. So rain water does not damage cement concrete road. But the initial investment on a cement concrete road is higher than on an asphalt road. But considering the low operational cost and longer life span it is still beneficial or much better than the asphalt road.”

The other major project that can be a main demand driver is rural development. “If the government realizes the rural housing development it could boost cement demand. We can produce low grade cement for the rural community. If farmers could buy cement at an affordable price and use cement to build their houses and other house hold utilities that means a lot to the cement industry because 80 percent of the Ethiopian population lives in the rural areas,” Haile says.

Haile is optimistic that the market situation will improve as the government starts implementing the projects set in the GTPII.   

Despite the dwindling price of cement the price of cement in the local market is still considered as expensive. Many in the cement industry agree that the price could reduce if manufacturers can bring down their production cost. Energy is the single biggest cost to cement factories. The factories use heavy fuel oil and coal to burn lime stone and other raw materials. Both energy sources are imported products. Energy accounts for 50-60 percent of the overall operational cost of cement factories. The global industry average is 30-40 percent. Hence, for the energy intense cement industry, energy is a strategic issue.

Samuel says that previously factories used heavy fuel oil which was costly to import from the Middle East. Now companies are switching to coal mostly imported from South Africa. “We have managed to bring down the energy cost to 40 percent but our plan is to further reduce it to 20-30 percent by using biomass. If we can do that the price of cement would go down radically,” Samuel says. 

Samuel advises local cement factories to further explore the cement markets in neighboring countries. With regard to the cumbersome transport cost Samuel says the factories would be competitive once they start using rail transport.

However, the railway lines route are determining factor. Experts say the railway lines should be integrated with the location of the cement factories.  

Experts strongly recommend the establishment of ready mix and concrete industry in Ethiopia. Prefabricated houses and concrete producers are the major cement buyers in other parts of the world. “In the developed world the concrete industry consumes the majority of the cement. We do not have that industry here. We should be able to establish the sector and concrete production has to be regulated. Standards have to be set for concrete production,” Gemechu says. 

According to Gemechu, despite all the odds, the country cement industry has an immense potential. The mega public infrastructure and housing projects are strong demand drivers.  There are significant opportunities in the cement sector. There is a national vision that we love and want to share becoming a middle income country. What does that mean in terms of construction, in terms of road construction, infrastructure development? You need to build infrastructure and you need to consume cement. However, Gemechu says the government and industry players should do their homework first to exploit these opportunities. “It requires a coordinated effort to resolve the problems and change the gloomy picture.”    

Industry players from the giant manufacturers to small retailers like Fikere pray that these dark days for the cement industry are over soon. “I hear that the government has diverted budget from the construction projects to the relief work to rescue the populace affected by the current drought. And that is why the demand for cement falls. We hope that things will get better next year,” Fikere says.