15 June 2019

Ethiopia: Rolling Blackout Pinches Cement Industry

opinion

The power rationing program that started in April is thwarting the productivity of the cement industry.

The local cement manufacturing industry, which has been facing a myriad of challenges, has been hard hit by the power shedding program the state power monopoly, Ethiopian Electric and the Ministry of Water and Energy recently introduced.

As part of the power shedding program, the cement manufacturers are allowed to operate only 15 days in a month. The manufactures are lamenting that their production capacity is slashed by 50 percent. Though their fixed costs have surged, the government has advised them not to make price adjustments. Even though the cement manufactures did not make price adjustment the price of cement has gone up in the local market. The price of a quintal of cement which was 260 birr before the introduction of the power shedding program has jumped by a whopping 60 percent to 410 birr. Last week a quintal of cement was sold at 350 birr-360 birr and this has increased to 410 birr this week.

Danilo Trugillo, Country Manager of Dangote Cement Ethiopia PLC, told The Reporter that his plant is working only 15 days. "We work for 15 days and stop for 15 days. The direct impact is we have cut our production by 50 percent," Trugillo said.

Trugillo explains that as cement production is a continuous process when plant resumes production it cannot reach the high performance immediately. "When you stop you have to stop it gradually. The impact on our company is 60 percent meaning we are utilizing only 40 percent of the plant production capacity," Trugillo said. "This is really a big challenge for me," he added.

According to him, the Dangote Cement plant was producing 200,000 tons of cement every month but this has dropped to 103,000 tons in the aftermath of the power crisis. "We have a huge fixed cost. We have to pay back loan from our mother company in Nigeria. In addition, here, we have 2,000 workers. It really hurts us," he lamented.

Truggilo's biggest worry is the fate of the employees. Looking at some of his staff members who gathered to celebrate Dangote Industries International Safety week on Thursday he said: "If the plant does not run for 15 days especially the daily laborers will not have anything to do. I do not want to tell them to go. So I tell them to clean the area. I do not want to lay off but if the power rationing continues for long we may be forced to do so."

Dangoet Cement at the moment is selling a quintal of cement for 235 birr at the factory located 80 km west of Addis in Adaberga wereda near Mugher town. "We did not make price adjustment though our cost of production has gone up. We fully respect the government's call not to increase the price."

The Ministry of Trade has told all the cement manufacturers not to surge the price of cement in spite of the increasing production cost. Transport cost has increased. The price of fuel has also increased. The price of imported coal that the cement factories abundantly use has also escalated.

In the wake of the power rationing, the price of retail price of cement has been galloping. "I do not want to blame the retailers because they are not getting enough cement. In addition they have fixed costs like ware house rent, labor and the transport cost has increased significantly."

Transporters spend up to seven days at the cement factories waiting for adequate cement cargo. And they include this cost on the transport price. Shortage of trucks has exuberated the problem. The government has instructed transporters to transport bulk fertilizer products from Djibouti as the rainy season has started. Previously transporters used to charge 20 birr per quintal to transport a quintal of cement from Mugher town to Addis Ababa. This has escalated to 100 birr per quintal.

"I do not blame the retailers because they are paying high transport cost," Trugillo said. "The retailers will put on the price and the end users will suffer," he added.

The CEO of Habesha Cement SC Mesfine Abi (Eng.) told The Reporter that the power shedding program is costing the cement industry dearly. Mesfine said the production of Habesha Cement has dropped below fifty percent. "There is a huge waste of resources when we start up and stop running our plant. Continuous production has cost benefit. We spend 24 hours warming up the plant. There is wastage of coal and electric power," Mesfine said.

According to him the biggest challenge Habesha Cement facing now is machine break down. He said due to the power cuts our machines are failing frequently and we are facing unforeseen maintenance cost."

Mesfine furiously protested the decision made by the Ministry of Trade and Industry. "Even though our fixed cost has doubled the Ministry instructed us not to make price adjustment. The cement industry in general is heading to bankruptcy. When we reach at the situation where we no longer can produce they may realize that their decision was wrong," Mesfine said.

According to him, Habesha Cement, which has an installed production capacity of 90,000 tons of cement per month, used to produce 80,000 tons on a monthly basis. Following the introduction of power rationing the output has nosedived to 30,000 tons per month. "It is not only Habesha Cement but the industry at large is in big trouble but the Ministry of Trade and Industry has failed to understand the grave situation we are facing."

Hebesha Cement is selling a quintal of cement for 234 birr for customers who buy up to 400 quintals and 220 birr for those who buy more than 400 birr.

President of the Ethiopian Cement Producers Association and CEO of Derba Cement Haile Assegidie told The Reporter that the situation is worrisome. Haile poised that the power rationing is not affecting the cement industry only but it is harming the economy in general.

Haile confirmed that the cement factories did not make any price adjustment even if their production has plumbed by 50 percent. "Labor is a small cost but the trunk cost (capital cost) of cement factories is huge. Weather we produce or not the fixed costs are there," he said.

According to Haile, the giant cement factories trunk cost is more than 10 billion birr. "Even when the factories are not producing they should service their loans, pay salaries and cover other indirect costs. Due to the prevailing situation the cement factories would incur loses so they would be forced to make price increment," he said.

Haile pointed out that the government is losing money that it was collecting from the cement factories. "It you look at the big cement factories, they pay 5-7 million birr VAT daily. Since our production has dropped by 50 percent the government is losing half of the daily VAT it collects from us," he said.

The impact of the power shedding would go much deeper than this. Due to the surge in the price of cement the construction sector would seriously be affected. The sector is already suffering from shortage of foreign currency and increasing price of steel. Shortage of cement is like adding salt to the wound. "Unlike cement factories contractors have temporary workers when there is shortage of cement they would lay off a large number of them and this would have a serious repercussion," Haile said.

According to Haile, a reduction in power supply would affect the GDP. "When you reduce one megawatts of electric supply you would lose 10 million birr from the GDP. Now EEP reduced 470MW of electric power that means the economy is losing close five billion birr," he said.

Even if the current power rationing comes to an end soon there is a fear among cement manufactures that there will be power shortage in the coming two years. "There is no guarantee that there will not be power shedding next year because there is a forecast that indicates that enough rain may not be harvested during the current rainy season."

Derba Cement has a daily production capacity of 8,000 tons of cement. Prior to the rolling blackout it was producing and supplying 6,000-7,000 tons of cement daily. However, this has dwindled to 3,000-4,000 tons in the wake of the power rationing program.

Haile recommends that the government should sit down and think of a way out. "The ongoing hydro and geothermal power projects should be expatiated and they must start production at least partially. Otherwise there will be a grave consequence on the overall economy."

Gemechu Waketolla (PhD), Managing Director of I-Capital Africa, a private consulting firm that closely monitors the cement industry blames the cement manufacturers. "They are reactive. They do not work together proactively to deliberate on the industry challenge and formulate a strategy. Pointing a figure at the government is a not a practical solution. They all have to come together and work with the government on strategic issues that can address the industry challenges."

With regards to the abrupt cement price surge in the retail market Gemechu said it is an opportunistic act by distributors and retailers. "The factories did not make price adjustment but the retailers have made a large amount of price increment. There is no logical reason why they should make a 100 percent profit," he added.

What frustrated the cement manufacturers most is that EEP did not consult with them before making the announcement of the power rationing. "If they did," Trugillo said "We may have forwarded a better alternative solution."

The Minister of Water and Energy Sileshi Bekele (PhD) yesterday told a press conference that rain water has started flowing into the water dams. However, he said since the water levels have not reached to the required level the power shedding will continue until July 7, 2019.

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