A couple of years back we commented on the palpable ‘irrational exuberance’ that was sweeping across Ethiopia’s formal private sector. FIRE (finance, insurance, real estate) led the way, followed by ambitious industrial projects. Cement was one of those. Two years later, the cement market has swiftly moved from excessive shortage of supply to excessive surplus of supply, thereby forcing prices to plummet haunting the unprepared, both within government and the private sector. Our novice promoters devoid of prudence, compliment of implied government protection, forgot to differentiate between the more realistic needs of the country and the rosy projections of their well-paid consultants. As a result, distress started to set in and government banned the issuance of new licenses for prospective cement plants! Naturally this sector is not the first and won’t be the last to experience obvious mal investment; untimely overinvestment in this case.
Like many opportunistic investors elsewhere, ill experienced startups managed to flood the countryside with mini cement plants in the past four years. Some have already started production, while others are in the implementation phase. All in all, there are 22 cement projects in the pipeline. Cumulative production of these plants is expected to reach about 8 million tons in a couple of years, comfortably passing Nigeria. The current production of 5.3 million tons has already left Kenya in the dust, cement dust that is. Kenya produces about 3.5 million tons per annum. As it stands, the price of cement has already dipped below 250 birr per quintal (10% of a ton) in Addis. For bulk buyers, some of the Chinese minis are offering less than 160 birr per quintal (factory gate price, which was Mugher’s (government owned) selling price eight years ago!)
China is facing the same kind of problem, not only in its cement sector, but also in steel, aluminum and glass. The Chinese government has also stopped issuing licenses as well as availing easy finance for these four industrial commodities. The annual excess capacity in these four industries is more than sufficient to satisfy the need of sub-Sahara Africa. China produces around 2000 million tons of cement per year. India, the second in the world is at 300 million. By comparison, the USA produces only about 60 million tons per annum. Naturally the US or even China is already over built and need to cut down their productions. See Chen’s article next column.
When promoters of favored projects are unduly protected from market rigor, (by governments) wasteful excesses are bound to happen. In the long run this approach sets a dangerous rent seeking behavior in the world of business. At the same time, we also admit the very concept of ‘free market’, as taught and conveyed by global establishments (World Bank/ IMF, universities, etc) is seriously flawed. These entities mishmash planning with suffocating regimentation. As globally observed, unfettered ‘free market’ can also be chaotic and wasteful. Developmentalists must strike the balance between the above two tendencies on their own; planning and ‘free market.’ They should also realize ultimately ‘cry babies’ and ‘connected investors’ don’t make a dynamic ‘entrepreneurial class.’ For that to happen, particularly in the case of Africa, the state must solidly institute transparent good governance.
At the end of the day, cement is a pulverized and roasted limestone/clay. In short, it is just dust, a very dry dust. Consequently, this weighty commodity of low value cannot be transported for long distances on a continuous basis. At times expedience might necessitate its transportation even by plane; if for example, the purpose is to swiftly construct a gold mine that can yield a ton of gold a day. Therefore, the natural fate of cement is to stay, in as much as possible, where it is produced. To those readers who don’t mind the jargon, it is called location-specific industry, just like the beverage one. As the price of energy escalates, (cement production also consumes serious energy) cost of transport will assume a significant proportion of total cost, forcing the market radius of the product to decrease commensurately. This aspect of the industry will be gradually felt as we go down on the energy scarcity path.
Even with all the precautions in the world, a prudent promoter must also be wary of non-visible intangibles such as those that arise from all sorts of schemes that go under the rubric ‘globalization.’ About a decade ago, Kenya’s cement market was opened to foreign competition. Immediately thereafter, Kenya’s major producer, which is no novice (an affiliate of the French giant, Lafarge) encountered a shocker of a sort. The huge cement plant that was strategically located in the port city of Mombasa, to serve both local and neighboring markets, couldn’t compete with imported cement that has already travelled the sea (cost of production + sea freight!) If it weren’t for the surtax the government levied on imported cement the local industry would have gone the way of the Dodo! A promoter in Ethiopia, may be taking his cue from the above, earnestly proposed to set up one of the biggest cement plant in Africa somewhere in the northwest part of Ethiopia. The ambition was to flood the African market with products from this plant! Anyone who has enough sense to understand even a third of our regular editorials can see through this ludicrous proposition, but not our government bureaucrats, unfortunately! Officials from the regional government were running up and down to have this project financed. Pathetic!
We believe Ethiopia’s target of 27 million tons/year in the current five year plan (GTP) looks a tad too ambitious, as the understating British would probably put it. Vulgars like us just say; surely, we cannot be breathing cement all over the place! Even if we start concretizing (with cement) all our roads, like the US did after WWII, the whole project would still be dependent on an ever increasing cost of energy (production, including externalizing cost as well as cost of usage – energy per vehicle). Those days are long gone when cement (also steel) was still dirt cheap.
Growth is a protracted adventure that defies easy linear extrapolation. It can be achieved only through hard work, creativity, tenacity and frugality, on the part of economic agents and intelligent planning accompanied with equitable good governance, on the part of the administrative state. Many a promoter, industrial or otherwise, always comments that we are ever the pessimists. Such comments (by those who don’t want to be confused with facts) usually trigger hearty laughs in our prestigious research centers (Kebele pub house) because deep inside we know: “Pessimism is optimism with experience.” Good Day!