Thursday, June 20, 2024
Money TalksRaw Material Deadlock

Raw Material Deadlock

Inviting officials and having them attend the event is part of inauguration ceremonies.  The bigger the factory, the higher the officials are going to be. Accordingly, inaugural ceremonies of the biggest projects feature the head of state or government. Although this has been common due to its benefits in creating a favorable image about the works of the government, the most interesting part of such a big ceremony is the pledge Officials make, especially those at the top echelons of the ruling party.

Overlooking challenges, they tend to paint the factory or the project they launch as one that will bring a new lease of life to the public. Unfortunately, they mostly get it wrong or mislead the public. A case in point happened last week in Dire Dawa where a new edible oil plant, owned by Shemu Group, was inaugurated.

Having the capacity to produce 950,000 liters of oil a day, company executives claimed, the group spent 1.6 billion Birr to construct its new plant that can satisfy a third of the edible oil demand in Ethiopia. Contrary to their expectations, however, subsequent days of production reminded them that starting a new business endeavor is quite challenging.

“Shortage of inputs forced us to utilize only 30 percent of our production capacity. Even though we need USD 20 million in foreign currency every month, banks have only provided us with USD eight million since September 2020,” said Frezer Debela, General Manager of Shemu Management, one of the subsidiaries of the Group that administers the operations of the plant.

Regrettably, PhiBela Edible Oil Factory is also encountering a similar problem. Even though there was hope that it will produce 1.6 million liters of edible oil per day when it was inaugurated, the plant has only been able to produce 800,000 liters. “There is a critical shortage of inputs. We are waiting until we get the forex we have requested,” said Eniyew Wassie, Chief Executive Officer of PhiBela.

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Thanks to the enlisting of edible oil in the priority list by the National Bank of Ethiopia (NBE), companies like PhiBela and Shemu have at least been very hopeful that they would get foreign currency within a few months to import raw materials, even though it depends on the economic situation of the country, including export earnings.

“Raw material shortage is an every-day problem to all companies in Ethiopia,” said Demis Chanyalaw, an economist with over four decades of experience. “Partly, the problem is due to the unavailability of major inputs locally. But it is also a result of the absence of a strong supply-chain management system.”

In order to get foreign currency from banks to import raw materials, factories have to wait for more than a year. Even after getting the foreign currency, it may only be enough to buy a quarter or in rare cases, half of their raw materials needed. Due to the existence of such challenges, most factories have been forced to utilize below 50 percent of their production capacity. Even in recent years, especially since mid-2020, the dearth of foreign currency has led to a fall in productivity of factories.

Until the beginning of 2021, producers of reinforcement bars, for instance, were not able to get foreign currency for almost two years. Some of the factories stopped production as a result. A few are utilizing below 20 percent of their production capacity using the inputs they have sourced locally. Meanwhile, the price of the item has more than doubled due to a supply shortage, leading to hoarding and malpractices by traders who tend to profit from such loopholes.

The same is true for cement factories. Because of the unavailability of forex to import spare parts for their machines and chemicals, some plants have either stopped production for days, or still face production interruption. Coupled with hoarding and other malpractices, the situation has resulted in a fall in the supply of the item, leading to a surge in price, which has now reached as high as 800 Birr per quintal.

Going further, the cement conundrum did not only inflate the cost of undertaking construction projects, but has also threatened the existence of other businesses dependent on the item. Thousands of producers of bricks have been closed throughout the country as they were unable to get cement and they did not have the budget to buy the item at a higher price.

“It has been almost a month now since I closed my working area due to the unavailability of foreign currency,” said Mukerim Jemal, owner of a small enterprise involved in the production of bricks. 

Such experiences indicate that the problem has an overarching impact.

During September 2020, Federal Small & Medium Scale Manufacturing Development Agency reported that 43 percent of industries that are currently active cite shortages of raw materials as their biggest challenge, even more than access to finance, shortage of electric supply and lack of space for production.

Even though the forex crunch is usually identified as a major reason for raw material shortages faced by companies, lack of integration between producers of inputs and factories has also contributed to the problem.

A case in point is the situation that exists in the dairy market. Despite having one of the largest populations of cows in the world, Ethiopia is a country where dairy plants utilize only between 30 to 40 percent of their production capacity due to insufficient supply of milk. This is the result of a poorly developed dairy market infrastructure for collection and distribution of milk, including limited accessibility (physical) to market/collection points, according to a May 2020 study conducted by Mebrate Getabalew Et al.

In the same fashion, some leather industries have been forced to work below half of their production capacity due to lack of up to standard skin and hides. The textile sector has also been experiencing similar problems for over a decade. Despite the surge in the number of apparel factories, shortage of inputs, especially cotton, is yet to be resolved.

A policy adopted by the government four years ago, aimed at substituting cotton, did not bring the much desired outcome. Some have even left the industry after being frustrated by such challenges. For instance, there were over a dozen Turkish investors engaged in the textile sector for a decade. According to a source working at the Textile Industry Development Institute, there is just one now.

Demis, for his part, recommends the adoption of both long-term and short-term solutions to solve the raw material deadlock. “In the short term, the economic sabotage witnessed in some sectors requires administrative measures against wrongdoers, whether they are government officials or traders. Priority sectors should be identified during forex allocation and even after doing so, it is important to make sure that there are no implementation gaps,” said Demis.

“In the long term, the production system in the country needs to be reformed. No factory should be built without taking the backward and forward linkages into consideration. Capacity building works should be implemented to increase the capability of producers working on the substitution of inputs,” he urged. This seems to be well understood by the government and the factories themselves, although the fruit is yet to be seen.

The 10 year perspective plan adopted by the government also outlined the provision of a standardized, unchartered, adequate and fast product input supply as important factors for the sustainable growth of the manufacturing sector. It targets to achieve this by integrating small and medium industries with each other and higher industries. According to the plan, companies that require industrial inputs that cannot be produced locally will be prioritized during forex allocation.

Belayneh Kinde Import, Export & Associates, owner of PhiBela Edible Oil Factory, has already received land as part of its effort to produce its inputs locally. “We want to produce oilseeds here in Ethiopia and stop importing crude edible oil from abroad in the future. Our company has already received land from Benishangul Gumuz Region and has begun clearing the land. The Amhara Region is at the final stage to give us farm land to do the same,” remarked Eniyew. “The only way to solve the raw material stalemate is import substitution, which requires patience and cannot be achieved promptly.”

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