The thriving construction industry is increasing the demand for cement, but the increased prices is not a result of only normal supply and demand dynamics because traders and brokers are exploiting the excess demand for their own financial gain, writes MAHLET MESFIN, FORTUNE STAFF WRITER.
Internal Price Fixing Eschewing Cement Market
Ashenafi Bekele, 32, a father of one, went shopping for cement to construct a three-storey house for his brother, who resides in Switzerland, on a 300sqm plot, located around Ayat in Bole District, on Wednesday, February 23, 2011.
Upon entering a shop, Ashenafi inquired about the current prices and, after haggling a little, purchased 80ql of Jemmo Ordinary Portland Cement (OPC) at 400 Br per quintal, instead of the initial asking price of 415 Br. However, he was not happy with the brand.
“The district administration has written a letter to Mugher Cement Enterprise to order 250ql, but they said they have too many orders to fill and cannot help me,” he told Fortune.
Mugher cement costs 450 Br per quintal at the shop where Ashenafi made his purchase at Megenagna, a huge increase on the price at the factory’s 215 Br per quintal.
“Our lease agreement stipulates that we must commence construction within six months, making it difficult to wait for Mugher,” he said. “This situation and prices forced me to buy Jemmo.”
For the previous two weeks, a quintal had cost 370 Br, claimed Ashenafi, expressing surprise, not that prices are increasing, but at the rate at which they are doing so.
The country’s construction industry is thriving and big government projects like dams, condominium housing units, and road construction are underway, increasing the demand for cement.
The government has further plans to increase the national road network from the existing 49,000km to 136,000km, build a 2,000km railway line, and construct additional housing units to raise their number from the current 213,000 to 700,000, as part of the Five-year GTP. These projects are estimated in the plan to increase the demand for cement to 27 million tonnes per annum by 2015.
National demand is currently estimated at around 11 million tonnes. However, the combined total capacity of the 11 companies producing Ethiopia’s cement can only supply three million tonnes to the market annually, according to research conducted by the Ministry of Trade (MoT).
However, this discrepancy between the supply and the demand is not the problem for Ashenafi.
“I can buy 1,000ql from one cement shop here in Megenagna,” he told Fortune. “The product is available but the traders and brokers raise the price by only making a phone call.”
Traders across the city collude to keep their prices the same, so that a specific brand cannot be found at a cheaper price elsewhere and create price competition among traders.
“The MoT has no control over the cement distributors as most of them do not have licences,” an architect who has worked in the construction sector for 15 years told Fortune on condition of anonymity.
Individuals and government institutions who obtain cement are selling the product in large quantities and there is no mechanism with which the government can monitor whether the requested amount is used for the stated purpose, he claimed.
“The cement market is not governed by healthy rules of demand and supply, as the Prime Minister claimed,” he said. “Rather, it is dictated by illegal wholesalers, retailers, and brokers who control the market through use of their cell phones.”
This control over the market is confirmed by sources in the Ministry of Industry (MoI).
“All these irregularities in the cement market are occurring due to certain stakeholders using the excess demand for financial gain,” according to Nuredin Mohammed, director of Trade Registration and Licensing at the MoI. “The Addis Abeba City Trade and Industry Bureau gives out trade licences for wholesalers and retailers of cement. But monitoring the sources from which they obtain the cement they sell is the responsibility of the MoI, while the Ethiopian Revenues and Customs Authority (ERCA) should control whether the traders are using VAT receipts or not.”
The ministry is not lax in executing these duties, claimed sources inside the MoI.
“The ministry follows up on the cement that is allotted for major projects, like those in the manufacturing industry,” sources inside the MoI told Fortune. “There must be a mechanism to control the traders as well.”
Over the past four years, cement consumption has risen by an average of 35pc each year, well above the growth rates seen during this period for both overall GDP growth (11pc) and the construction sector (10pc). This annual growth rate is expected to remain almost the same for the next five years.
“Mugher prioritises the receivers of its cement, and the government, investors, real estate developers, and NGOs have a preference,” claimed a member of the company’s management who was not authorised to comment. “Yet, the factory satisfies only five per cent of the total demand from government developmental institutions.”
State owned Mugher Cement and private companies Messebo, owned by the Endowment Fund for the Rehabilitation of Tigray (EFFORT), and National Cement SC are the top three producers with a combined capacity of around 1.6 tonnes per year.
Hawaei Plc and Debresina Business Industries have been banned from manufacturing cement since January 21, 2011. This came after their products were found to be below standard by the former Ethiopian Quality and Standards Authority (EQSA) during a surprise inspection made on nine of the local factories. Since the inspection, another four companies have been working under stringent supervision by experts of the authority at their respective factories.
This situation is contributing to the shortage, according to sources at the Ethiopian Conformity Assessment Enterprise (ECAE), the new quality control branch of the the former EQSA.
“It is assumed that traders will increase prices if the ECAE announced that factories have been prohibited from producing,” an official at the enterprise, who is not authorised to comment, told Fortune.
While the production of certain factories has been stopped or limited, others are aiming to increase their production.
Mugher, Messebo, Derba Midroc, and Jemma cement factories are carrying out expansion projects, according to a document obtained from MoI. Upon being completed in 2012, these projects are expected to boost the production capacity by 2.9 million tonnes, according to estimations in the document.
As part of its expansion, Mugher is constructing a new factory around Tatek Military camp, located 12km west of the capital city.
“The project, which is being constructed as a total cost of 138.3 million dollars by Sinoma, a China based company, is to start trial production within two weeks and will start producing for the market soon after,” Elias Kifle, project manager of the construction, told Fortune. “The supply problem will be solved once the new expansion project comes online as it will produce a lot of cement for the market.”
Aside from the local companies, 25 companies have been registered to engage in cement production in Ethiopia, out of which 10 are foreign companies. These include Super Sunrise Industrial Plc, which has an investment capital of 9.5 billion Br; Sunrise Industrial Plc, with a capital of 8.3 billion Br and the capacity to produce three million tonnes per annum; and North Holding Plc, with a capital of five million Birr and 7.8 million tonnes annual production capacity.
Most of these are to be located in at Semen Shewa, Amhara Regional State, and Dire Dawa Town.
Yet, obtaining cement from foreign sources does not end there.
In order to meet the government’s demand for cement, the Ministry of Finance and Economic Development (MoFED) signed an agreement, in November 2010, with Maple Leaf Cement Factory, a private company based in Pakistan, to import OPC.
Since January 2011, the government has received 41,000 metric tonnes of cement out of the 1.5 million metric tonnes it had ordered from Maple Leaf, which was established in 1956 and is engaged in manufacturing and marketing cement with a total capacity of 3.6 million tonnes per annum. The cement is being allocated to large government construction projects.
However, an increased supply being allocated for government projects is unlikely to make a difference to small cement users like Ashenafi, who may remain subject to prices being set artificially high by traders.
By MAHLET MESFIN,
FORTUNE STAFF WRITER.