Cementing the gaps
The Government of Ethiopia is upgrading and expanding the country's infrastructure and housing. This is bound to enhance the country's demand for cement. Even now, local producers are grappling to turn out sufficient quantities of cement and there is fear that price war is looming. Ethiopia's current cement production capacity stands at 15 million tons per year. However, it was forecasted that the cement production capacity would reach 27 million tons per year by the end of country's first Growth and Transformation Plan (GTP). This was a erroneous projection, according to experts in the industry. Haile Assegide is the CEO of Derba MIDROC, one of the leading cement factories in Ethiopia. Haile served as the minister of state at the then Ministry of Infrastructure. Currently, he is heading the Ethiopian Cement Producers Association which is under formation. Kaleyesus Bekele of The Reporter spoke to Haile about the challenges facing the Ethiopian Cement Industry. Excerpts:
The Reporter: When was the Ethiopian Cement Producers Association established and what are the main objectives of the association?
Haile Assegide: The Ethiopian Cement Producers Association is under formation. We are in the registration process. 98 percent of cement producers have signed for membership. We have submitted the document to the relevant body. The association has two main objectives. The first thing is facilitating the ground work for the growth of the local cement industry. To work on building our capacity and expand the local cement market. The second thing is that we could benefit a lot by working together. For instance we can work together on alternative energy source. If one company works by itself alone it will not be fruitful. If we all collaborate and work together it will benefit us all. We could reduce our operational cost.
How many members does your association have now?
Fifteen cement producers have been registered. Except one all the cement factories have registered for membership. There are about 20 cement companies and some of the companies have two factories but we register them as one company so we have 15 members at the moment.
What are the main challenges facing the Ethiopian cement industry?
There are various challenges facing the cement industry. The first one is dearth of skilled labor. Previously there was a backward cement technology. The old cement factories used backward mode of production. The recently established factories apply modern cement technology. The problem we are facing now is that we do not have adequate number of professionals who are familiar with these modern cement technologies. So, it can be said that there is limited number of professionals. There were a couple of cement factories.
The professionals were working at either Muger or Dire Dawa cement factories. Then the Messebo Cement Factory came up with a better cement technology. The current cement technology is completely different from the old ones. Everything is backed by IT systems. There is no adequate number of trained professionals capable of operating this modern cement technology. The newly established factories poach professionals from the existing ones. A factory, which trained its professionals, will lose them to a new factory.
What should be done to mitigate the labor shortage?
Training is the most important element. Universities should offer cement technology courses. The mechanical and chemical engineers do have the knowhow on cement technology. We train the university graduates on cement technology. I suggest that the universities offer at least one course on cement technology. Particularly, we except much from the Adama Science and Technology University (ASTU). I think ASTU should incorporate cement technology in its curriculum. It could offer the course at the fourth or fifth year.
First the university itself should have the knowledge. It can hire professionals from abroad (expatriates) and train Ethiopian instructors. Then ASTU can pass the knowledge to young Ethiopian students. Each cement factory has professionals who can cooperate with the university. We should be able to be self-sufficient in a short period of time in terms of skilled labor in cement technology.
What are the problems in the cement market and capacity utilization?
The cement production capacity has been boosted. There were only two or three factories and they could not meet the demand since it has increased through time. So, in the past several years many new factories were built and have joined the market. The cement demand is not up to par with the production capacity. Currently, the installed annual production capacity is 15 million tons and the annual cement sales is eight to nine million tons. Production surpassed the demand so factories scramble for market. There is a stiff competition. The industry transformed from shortage to abundance.
There are also other challenges. There is shortage of foreign currency. The cement industry requires a large amount of spare parts. There is no heavy industry that manufactures cement factory spare parts so we are fully dependent on imports. It takes a prolonged time to secure foreign currency.
What should be done to stimulate the cement market and boost demand?
New development projects create demand. Rural development will create additional demand.
Which rural development are you referring to?
The rural housing development project has a paramount importance. 85 percent of the Ethiopia's population live in rural area. Rural development will stimulate demand. It creates a huge cement demand. If we say 80 percent of the population live in the rural area then we are talking about 72 million people. If the rural housing project is realized it will create a huge demand that the existing factories can not meet.
Our cement per capita consumption is only 62 percent. Sub-Saharan African per capita consumption is 165 kilograms and the global average is 500 kilograms. So we have a huge space for growth. Our problem is that most of our investments are in the urban areas. All the infrastructure is found in urban areas or along the main roads. If we can develop the rural infrastructure we can create a huge market.
If the rural housing projects is realized it will create a huge cement demand. We can produce low grow grade cement for rural development at an affordable price. Until now we are engaged in producing high quality cement that can be used in urban areas mostly used for structures and high rise buildings and the high quality cement is expensive for the rural community. For the rural housing projects we can produce low grade cement with lower prices which the rural community can afford to buy and that would be a big market for the cement industry. We need to replace the use of mud with cement in rural areas.
How do you evaluate the export market in neighboring countries?
There are local cement factories that sell cement to Djibouti. Derba Cement used to export cement to Djibouti. Derba exports cement to Kenya. We sell 500,000-600,000 dollars worth of cement to Kenya on a monthly basis. We transport cement by truck and the problem is that you cannot be profitable if you transport cement by truck beyond 300 kilometers. We sell to Kenya because we have excess capacity and we want to bring in foreign currency. We prefer to sell here as the local demand picks up.
Can you be competitive if you use rail transport?
Rail transport is highly beneficial to the cement industry. But it has to be integrated with the cement factories. The location of the routes is a determinant factor. The Djibouti line is mainly used for imports. The train basically transports imported goods and it heads to Djibouti unloaded and if we can use it for export as well it will be beneficial. We could be more competitive in Djibouti. We can even be competitive to export it beyond Djibouti.
Some experts advocate the use of cement to build roads instead of asphalt. The government has awarded the first cement concrete road. What is the stance of your association on this recommendation?
We held several discussions with the government on this issue. The government built the first 12 kilometers cement concrete project as a pilot project. We learnt a lot from this project. It has been a year and a half since the road has been built and there are no shortcomings noted so far. Cement concrete roads are much more beneficial than asphalt roads. The first thing is asphalt is imported product while cement is locally produced. We can save a hefty amount of foreign currency if we build cement concrete roads.
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 cement concrete road is higher than asphalt road. But considering the low operational cost and longer life span it is still beneficial or much better than the asphalt road.
The price of cement has been dwindling due to the stiff competition in the industry. But compared to other countries it is still expensive. Experts say it is the energy cost that escalates the cost of cement. What efforts are being exerted to replace carbon fuel with alternative energy sources?
The old factories used heavy fuel oil. Muger Cement, Messebo and National Cement used to burn heavy fuel oil. They now started using coal. This is one step forward in reducing cost. But now we are trying to use biomass. There is an initiative to use coffee husk as source of energy. There is also an ongoing effort to use a widespread weed found in the Afar Regional State by National Cement. If we all use biomass we can reduce cost and price. We are working on it and the government through the Chemical Corporation is providing us assistance in this regard.
Tell us about Derba Cement?
Derba Cement launched production in February 2012. It has been four years since we joined the market. Everybody knew about the recklessness of the cement market before we commence production. We played a great role in stabilizing the cement price in the local market.
Derba Cement has an installed cement production capacity of 25 million quintals. Currently, we produce and sell 20 million quintals of cement.
What is your plan for the future?
We are planning to build a second factory in Derba. The second plant will have the capacity to produce 25 million quintals of cement. When completed Derba Cement will have a total annual capacity of producing 50 million quintals of cement. The construction will take 18-24 months. The total cost of the project is estimated at 250-300 million dollars. The contractor would be the same company that built the first plant.
We are trying to secure financing from both local and international lending institutions. We are holding talks with the Development Bank of Ethiopia, International Finance Corporation (IFC), African Development Bank (AfDB), and the European Investment Bank.
So why are you venturing into a second plant while you are saying that the cement market is saturated?
The first thing is that we need to be cost leader. If we are cost leader we will also be price leader. Other than the cement plant there are many investments. We have built roads, houses and operation line. We can maximize our benefit by properly utilizing these infrastructure. We can optimize our cost by exploiting these infrastructure more efficiently there and at the same time reduce our cost. If we use them for the two factories we would benefit more.
Secondly, things will change. The market will evolve and more demand will be created in the next two to three years. It will take us two years to build the second plant and by then things will change for the better. If the second Growth and Transformation Plan is implemented properly a huge cement demand will be created. We believe that the cement market will change.