Ethiopia: investing for a better future

Ethiopia's cement capacity is in the ascent. The sector has raised its cement capacity to approximately 17Mta, but domestic cement demand was just under 9Mt in 2017. In the meantime local cement producers have turned to exporting, and last year the Ethiopian Cement Association announced the country had become a net exporter, supported by the reopening of the border with Eritrea and developed trade routes to Djibouti and Somaliland and Somalia.

The country needs more large construction projects to help raise domestic cement demand. While construction of large infrastructure projects like the US$4.2bn Grand Ethiopian Renaissance Dam (GERD) will boost the local economy and bolster cement consumption, such projects have been met by strong resistance. Egypt and Sudan are fearful that the dam will cut-off their water supply from the Blue Nile. While China has been building and funding many elecricity infrastructure projects, a lack of foreign lending has seen these large construction projects hit by delays.

It is in this country context that, this week, Abay Cement has launched the construction of a new 2.25Mta cement plant in Dejen, Amhara state, north of Addis Ababa. FLSmidth has won the EPC contract for the new greenfield plant, which will have a kiln line producing 5000tpd of cement when it is commissioned in 2022.

Domestic economic and construction growth
In many respects, Ethiopia is currently east Africa's economic success story with GDP expected to race along at 8.5 per cent in 2019, according to the IMF. This developing country already has the leading transfer hub for long-haul air travel to sub-Saharan Africa and Addis Ababa Airport is in the process of tripling its passenger capacity.

Meanwhile, UAE-based Eagle Hills Properties LLC has invested US$2bn in building an integrated community development project in the capital, which will include 4000 apartment units, three-star hotels and recreation centres, and will take seven years to complete. In July 2018 Ethiopia's Federal Housing Corporation also announced plans for 16,173 new homes in the capital at a cost of US$1.2bn. According to the Addis Ababa City Administration, more than 755,535 people have registered for low-housing schemes. As a result, cement demand is forecast to keep rising.

Mokate Ramafoko, PPC's head of Africa operations, explained to Bloomberg in 2018 that Ethiopia is one of the African countries that are leading the way in transforming the region. "There's an emergence of African leaders that are really starting to change the continent. New presidents of countries including South Africa, Ghana and Zimbabwe are all in the process of approving new infrastructure projects that benefit the cement makers, while the Ethiopian capital of Addis Ababa is a construction site."

Operational challenges
While, at first glance, Ethiopia appears to be an enticing market to enter, the sector also has some unique challenges. For example, there is a lack of skilled labour, which increases costs with foreign workers' wages often needing to be paid in foreign currency. In addition, the shortage of foreign currency affects the imports of spare parts, reports Haile Assegide, president of the Ethiopian Cement Producers' Association.

Further challenges exist in terms of energy supply. For the cement sector to operate more efficiently, the number of electrical transmission lines and substations needs to be increased. In addition, local producers have also had to contend with fluctuations in heavy fuel oil prices. Mugher Cement changed to imported coal in 2017 and has since been looking to substitute this with locally-mined coal. Messebo Cement substitutes biomass to supplement its coal use.

Balancing development with unrest
The growth in economic and infrastructural investment similarly has to be balanced against the country's potential for civil unrest and volatility, which has seen outburst of discontent against foreign ownership in the cement sector. The Abay Cement plant will be the second new entrant since Dangote Cement’s 2.5Mta Mugher cement plant opened in 2015. Dangote Cement's presence raised tensions and gunmen killed the company's country manager in May last year. Furthermore, lower cement volumes were recorded in the country in 2018 for the Nigerian manufacturer.

Another new market entrant is PPC-owned Habesha Cement with its 1.4Mta plant, which also suffered from protestors in 2017 following its inauguration. This resulted in the facility's temporary closure. PPC has invested considerably in its new Ethiopian factory, but the company will need to see returns from Habesha Cement now. Like Mugher Cement, Pioneer Cement and Ture Dire Dawa Cement, Habesha Cement is situated near Addis Ababa where 75 per cent of cement is consumed, but the distance to the borders for exports are at their furthest from here. The market is also characterised by many small players that operate capacities of below 0.5Mta.

Further foreign ownership is represented by Chinese investments in the sector, which reportedly have been less affected by unrest. The Chinese have factories set up by Jiangsu Qiyuan Group, Guangdong Chaunhui Technology Development Group Co Ltd, CH Clinker Manufacturing, Pioneer Cement, Capital Cement and Zhong Shun Cement. The Oriental Industrial Park, established in 2007 is a Chinese hub of free trade companies, including Zhingshun Cement Manufacturing plant and the Oriental Cement Leasing Company that provides services for the construction of the Eastern Cement (Jiangsu Qiyuan Group), which opened in 2010.

If the Ethiopian cement industry can successfully overcome operational challenges and improve foreign currency reserves for infrastructure development while allaying the civil unrest that surrounds foreign investments in the sector, it could hold the key to much more prosperous times.