7 January 2013

Ethiopia: Problematic Coal Supply Deal Extended

The government and the United Kingdom coal supplier, Hayton Inc, have agreed to extend the supply contract by one year, up until December 2013.

The original deal, concluded between the Ethiopian Petroleum Enterprise (EPE) and Hayton, proposed that the EPE acquire 600,000tns, by December 2012, in monthly loads. The EPE made the deal for the benefit of Messobo, Derba MIDROC and National Cement factories.

The factories, however, would not take the coal on regular installments, as indicated in the contract. In fact, by the end of the contract period, all three had taken a total of only 250,000tns.

They informed the EPE that they only wanted to take the coal when they had need for it, leading to accusations of contract violation, by the supplier. Hayton claimed that theEnterprisewould have to pay seven million dollars as a penalty.

The factories are Messobo, Derba MIDROC and National Cement, owned respectively by the Endowment Fund for Rehabilitation of Tigray (EFFORT), Mohammed Ali-Al-Amoudi (Sheikh) and East Africa Industrial Group, as a major shareholder.

After negotiations, however, the supplier agreed to extend the maturity date, up to December 2013. The enterprise and the factories committed to buying one shipment, starting from April 2013, since they have enough stock to use until then, according to the renewed contract. One shipment is around 50,000tn of coal. After March 2013 they will begin to take two shipments, until the maturity date.

Currently, all cement factories are producing using just 50pc of their full capacity, according to an expert at the Ministry of Industry (MoI). Although the government was saying the current situation would improve, as large government projects kicked off, the expert said, it is hardly showing any progress. If things had worked out, government demand alone, which accounted for 70pc of the total, would have been enough for the factories to boost their production, according to the expert.

Price cuts by factories, down to 170 Br a quintal, for Derba, has not helped the market much.

"Since we will not be using our full capacity, it will hold our capital," Baso Assefa (Eng), general manager of National Cement claimed. "But we have no choice than to comply with the agreement as the deal is already made."

The enterprise has been supplying the coal to the factories on credit, and was in dispute with Derba MIDROC, just two months ago, for delaying the payment of 200 million Br. Derba has now settled 30 million Br out of this total.

Coal itself was intended as a cost cutting replacement for heavy furnace oil. However, Messobo is now turning to sesame husks, for which it has given an Austrian company, ATEC, a 7.6 million dollar contract, in order to set up the necessary facilities.

Whilst demand is struggling, Ethiopia is looking forward to five more factories joining the sector, by 2014/15, including Habesha Cement.

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