27 January 2013

Ethiopia: Habesha Cement At a Crossroads

Tens of thousands of shareholders in Habesha Cement will flock today to a temporary shelter erected on Ras Mekonnen St, inside the small fenced sports field, adjacent to Yidenekachew Tessema Stadium, to hear what their directors will say on the state of their company, which is yet to launch construction of its plant.

In store will be a mixture of good news, along with cause for some discontent.

The project, with the largest base of shareholders ever - at over 16,000 - has no doubt reached several milestones, from the day four of the original promoters; Eskinder Desta, Mersha Alemu, Nigeru Mulualem, and Tilahun Abay hatched the idea back in September 2008. Not only have they brought onboard two key personalities in the local cement industries; Gizaw T. Mariam and Mesfin Abi, but too, against all odds, they have succeeded in raising over 150 million Br in equity from the public, when initial public offerings (IPOs) were closed in 2010.

These shareholders were promised a return on investment of 122pc a share in two years, when the project was due to become up and running. It was a bubble period, where the price of cement per quintal hit the roof at above 500 Br, and the prospect for more had seemed simply tantalising.

The domestic construction industry was projected for an annual expansion of 25pc. Promoters of Habesha Cement stated back then that "the need for an additional cement plant cannot be overemphasised."

"It should not indeed be debatable," or so they said in a letter to the editor, Eskinder, the then the main promoter and secretary of the board, sent to this newspaper back in May 2009.

Yet, the plant that is to be erected near the town of Holeta, 35Km west of Addis Abeba, remains in its project phase, despite being twice as long after promoters had originally pledged that the factory would become operational.

It is not an isolated case, however. What is now an industry giant, Derba Cement, became operational only in February 2012, way past its original timetable of March 2011. National Cement, in Dire Dawa, 515Km east of the capital, is yet to be commissioned, despite original plans to launch in October 2012.

Directors of the company have accomplished so much, in convincing local and federal authorities to acquire land, both for the factory and the quarry - 50Kms away from the plant - and have awarded a near 80 million dollars engineering, procurement and construction (EPC) contract to the Chinese Northern Heavy Machinery Industries, Shenyang Co Ltd.

None of these achievements was, however, as big a breakthrough, perhaps, as their success in convincing federal authorities to obtain loans of 1.5 billion Br (86 million dollars at the exchange rate of the time) from the state owned Development Bank of Ethiopia (DBE). Directors signed a one year agreement with the Bank, in September 2011, in which it committed to raising the 30pc of equity that the company should have raised on its own.

Again, despite widespread scepticism of those watching the otherwise chaotic domestic equity market, promoters pulled the rug out in the final days before the deal was to expire.

Two months before the DBE's loan deal was set to expire, South African companies came to the rescue of Habesha. Pretoria Portland Cement (PPC) Company Ltd, and Industrial Development Corporation (IDC) jointly acquired 47pc equity in the company, in July 2012, injecting an additional 21 million dollars. Not only has this restored confidence in the Habesha community and government authorities, but also it came at a time of desperate demand for foreign exchange.

"I've been impressed with the professionalism of the Habesha management and their advisors," Paul Stuiver, former chief executive officer of PPC, told his own shareholders at the time of signing. "They have significant experience in the cement industry and we have already built great relationships."

Indeed, two of the individuals involved in the project from its inception are Gizaw and Mesfin, both engineers by trade and with excellent reputations, achieved whilst running the oldest, state owned Mughar Cement Factory. On the board of directors there are also other reputable names; Eyesuswork Zafu, a known leader of the business community, and Tamiru Wondimagegn, a prominent lawyer.

These are the people who will return Habesha's original investment of 130 million dollars and produce 1.4 million tonnes of cement when it commences operations, hopefully in 2014.

The road to this goal is bumpy, though. The first stumbling block came a few months ago, when the state owned DBE showed reluctance in fulfilling its commitment, according to those familiar to the deal. Owing it to a liquidity crunch, the DBE declined to disburse the loans according to schedule. A high level meeting between Habesha's board of directors and senior government officials was held a few months ago, in the office of Sufian Ahmed, minister of Finance & Economic Development (MoFED), where the DBE managers reconsidered their commitment to less than half the amount they had originally agreed to lend, sources in the DBE told Fortune.

To the relief of the Habesha Cement board of directors and managers, their institutional investors from South Africa, who came to Addis last week, have pledged to close the investment gap created by DBE's unexpected decision, promoters of Habesha, who requested anonymity due to the sensitivity of the deal, told Fortune.

"I'm moved to tell our shareholders on Sunday that our South African shareholders have committed to bring additional investment that would even exceed the amount that the DBE said it would lend us," one of the promoters told Fortune.

Indeed, one of the issues on the agenda, which shareholders are required to address today, is the change in number of directors on the board - from 12 to nine - in an attempt to reflect the current reality in the growing presence of the South Africans, according to sources in the company.

The South Africa PPC is the leading supplier of cement in southern Africa, with eight cement manufacturing facilities and three milling depots in South Africa, Botswana and Zimbabwe. With a total capacity of eight million tonnes of cement annually, its managers have pledged to their shareholders to enhance revenues, up to 50pc in five years, and thus defend their investment in Ethiopia. They foresee, for Habesha, a future development plan, including an option to double its annual production capacity up to 2.8 million tonnes.

It will be a significant addition to the domestic cement manufacturing capacity, which has reached up to 9.4 million tonnes, from 1.5 million tonnes back in the mid 2000s. Such was the case, with the cement industry ironically besieged by a limited supply, that the country was compelled to import over a million tonnes from India, Pakistan and Egypt in the first two years after 2008.

Although both Mughar and Messebo have doubled their production capacities since then, to over a million tonnes per year, the game changer is, indeed, Derba Cement, with a full daily production capacity of 8,000tn.

Very soon, National Cement SC, in Dire Dawa, will launch production, with a daily combined output of 4,500tn. It is an upgrade of the nation's first cement plant, built by the Italians prior to Second World War, with its 1.8 billion Br investment largely being financed by the DBE. Its chairman, Bezuayehu Tadelle, has already fired the kiln (a furnace that burns the clinker and makes up a key component of a cement plant) two months ago, and pledges to inaugurate the plant in April 2013.

Its entrance to the domestic market is projected to enhance the nation's productive capacity, taking it up to nearly 12.5 million tonnes a year.

Haile Assegidie, chief executive officer of Derba Cement, is already in the mood for an onslaught. Under pressure to service local and foreign debts of 400 million dollars, the company hardly sells all its manufactures, according to sources in the company. Having alarming low daily average sales of 30pc, Haile is pushing local prices down - cutting the wholesale price per quintal to 160 Br. He also launched extremely competitive marketing devises, such as sales in credit to projects with signed contracts and delivery, by truck, to the project gates, anywhere within a 600Km radius of the capital.

Derba watchers foresee that Haile is in fact determined to bring wholesale prices down below the historic threshold of 150 Br a quintal. Yet, this price is much higher than the internal average price of six dollars (114 Br). Nonetheless, Derba has put the smaller producers, which profited from the shortfall since 2008, out of business, with some already having shut down.

Such is a grim marketing prospect for Habesha, which has conducted its feasibility studies on a base price of 177 Br a quintal. Its managers, ironically, still remain upbeat about the future. They see the current plight in the market as a temporary glitch, and are optimistic that the market will inevitably rebound. They argue that there is still room for Ethiopia to reach the sub-Saharan manufacturing annual average of 15 million tonnes.

"We aren't scared," Mesfin told Fortune. "There will be a lot more demand from the market, requiring more factories to come to the scene."

But where will the demand come from to support those currently ailing, due to plummeted demand; not to mention the newcomers also?

The Board of Directors have a much tougher job in trying to convince their shareholders, during today's meeting, regarding future prospects, let alone the guarantee of a 122pc annual return on investment, which they had been pledged at the beginning.

Elleni Araya contributed to this story.

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