Steel Confusion

Steel

Confusion

By Muluken Yewondwossen

Small scale nail manufacturers have filed a letter with Prime Minister Hailemariam Desalegn and six ministry offices asking them to intervene on their behalf, because they say some individuals are using their name to lobby the government to lift the duty imposed on wire rod imports.

In their letter addressed to the PM together with to Ahmed Abetew, Minister of Industry, Abdulaziz Ahmed, Minister of Finance and Economic Cooperation, Yakob Yala, Minister of Trade, Merkebu Zeleke, Director General of Trade Competition and Consumer Protection Authority, Workineh Desalegn, Ethiopian Metal Industries Development Institute (EMIDI), and Ethiopian Association of Basic Metals and Engineering Industries (EABMEI), they describe that they were part of the so called 48 nail producers meeting held on Wednesday September 14 in Ghion Hotel, Unity Bar.

The letter explained that on the said date, only seven individuals attended the meeting which was called by Yohannes Abadi, owner of Sunny Nail Factory and Yohannes Abadi  Import Trading enterprises, and Benyam Berehe, owner of Country Trading Airport Duty Free.

Other participants included, Zenebe Firew, owner of  Zenebe Firew real estate company,   China Nail Factory representative, Melaku Moges and Alemayehu Tilahun, two small scale nail manufacturers. According to the letter sent by the last two individuals to the relevant government officials the seventh attendant at the meeting was an unnamed lawyer of the two individuals.

The letter signed by Melaku Moges and Alemayehu Tilahun cautioned the government that there were in fact no 48 nail manufacturers at the meeting nor was there any agreement reached.

In their letter, the two nail manufacturers stated that the two individuals who called the meeting informed them that the motive of the September 14 meeting was to consent to the letter that will be submitted to the PM and other government officials in the name of 48 nail manufacturers in the country.

The current confusion in the steel sector dates back to months ago when some individuals appealed to the government to lift the tariff imposed on imported wire rods, according to Capital sources.

The tariff in question was introduced in 2014 through a circular issued by the Ministry of Finance and Economic Cooperation and indicating that 20 percent tariff and 10 percent surtax will be levied on wire rod imports. Before that, the tariff was only 5 percent.

At the Ghion meeting, the meeting coordinators asked the nail manufacturers to sign the letter to the PM, which they refused.

The two small scale nail manufacturers explained in their letter to the PM and the six government officials that, should the tax be lifted, it will affect local wire rod producers from whom they buy their input for their nail production. Local producers engage with the small scale metal industry through a government sponsored initiative.

“The motive of the tax levied since 2014 is to protect local wire rod manufacturers and encourage other steel manufacturers to get involved in the sector,” the letter stated.

The government introduced this tax levy based on four studies undertaken by a committee that included all stakeholders including the Ethiopian Metal Industries Development Institute, the Ministry of Finance and Economic Cooperation, and the Ministry of Industry. As indicated in their letter, before endorsing the importers’ complaint letter the two nail manufacturers were invited to sign, they raised eight key questions to the individuals who called the meeting.

“We asked the two steel importers to disclose the 48 nail manufacturers that were also mentioned in a previous letter sent to the PM and publicized by different media outlets,” they state.

Sources said that on several occasions the importers have lobbied the government to lift the tariff.

They further asked what would happen to small scale manufacturers that use locally produced inputs if the tax is lifted, making domestic production difficult to sustain and leading to a halt by the local wire rod manufacturers?

“We have also asked them what kind of guarantee the importers would give to the small scale manufacturers who do not have the capacity to import wire rod,” the letter mentioned.

They further expressed their concern that there is no guarantee that the importers would not give priority to supply the wire rod for other purposes, once they get the tax benefits instead of selling it to the local manufacturers at a reasonable rate.

Wire rod, which is usually 6mm steel, is the binding material for many construction projects. Hence, the small scale manufacturers’ concern is that the importers will sell the wire rod directly to the construction sector rather than supply it to small scale manufacturers producing nails and such products.

They also asked the meeting organizers if lifting tariffs would not affect upcoming local wire rod manufacturers.

Currently, C & E Brothers, the biggest steel manufacturer in the country and Eastern, a Chinese company that set up its wire rod factory in the Chinese Eastern Industry Zone, are the two companies that are in their final stages of investment to launch wire rod production as an input for not only nail factories but the construction sector as well.

“It will also force Steely RMI, the only wire rod manufacturer currently, to cut its production due to input scarcity that will occur in the market, and which will have a direct impact on the nail manufacturers,” they argue.

Sources said that Steely RMI has been under pressure by invisible actors to halt production. Asked by Capital, company officials have admitted that they have been pressured to cut their wire rod production.

According to experts, other companies are expected to join the sector in the near future in addition to C & E Brothers and Eastern.

C & E and Eastern are coming with a capacity of 250,000 metric tons and 200,000 metric tons of wire rod production respectively, which is significantly higher than Steely which produces 120,000 metric ton per annum.

The two nail manufacturers who appealed to the PM have also expressed their worry that if small scale manufacturers are forced to import their inputs, it will greatly affect their working capital. “We are producing throughout the year using the inputs from the local manufacturers and without the need of a significant stock,” they argued.

“But if we are forced to import the raw material, it would consume our working capital and force us to allocate all of our capital just for that input and we would not be able to work for several months in the year,” they said expressing their anxiety in their letter to the PM.

Melaku and Alemayehu implored the government to encourage importers, who have the skills and capital, to invest in the sector rather than lifting the tariff.

“Even though large companies are getting involved in the steel sector with billions of birr, I am arguing for the benefit of my company and others like me,” Alemayehu Tilahun, owner of Alemayehu Tilahun Metal Product Manufacturing, told Capital. “We wrote the letter because the intention of the companies that called the meeting initially affects the interest of our small scale business,” he said.

“In the wider view, their interest will never benefit the country; in fact it will harm the sector investors who have already invested a huge amount,” he added.

Solomon Mulugeta, General Manager of EABMEI, confirmed that the association has received a letter from the nail manufacturers.

“Previously we were informed that the so called 48 nail producers had filed a complaint to the government officials with regards to the wire rod supply,” he said.

“Since the wire rod production began in Ethiopia, the government has endorsed a tariff to discourage imports and promote local production. The claim by some importers started when the government imposed the levy, ” he explained.

“It is obvious that some importers will be affected by the tariff but the latest claim by importers is baseless and we also explained the issue to the government,” Solomon told Capital.

He said that the Association’s comment is that the country is developing and the government is supporting the manufacturing industry with the goal of feeding the emerging economy. “The metal industry under the government policy is also growing significantly, and interested investors should grab the opportunity to be involved in it,” he added.

The steel manufacturers have been investing aggressively with the support of state banks. According to experts, since domestic steel manufacturers increased their production, they have become more competent in the local market including government procurement, which is the major buyer.

“This situation has changed the previously dominant position of importers and international suppliers,” experts said.

Importers on their part had claimed that locally produced wire rod is more expensive and has inferior quality than imported ones. “Their claim is not accurate,” the Association head responded.

And as far as the 48 nail manufacturers are concerned, “in fact according to our knowledge the number of nail manufacturers has not reached 48,” Solomon said.

“The stated number may include steel importers as well,” Fite Bekele, Corporate Communication head of EMIDI said on his part.

Dereje Kassa, Marketing Director of EMIDI, told Capital that the Institute knows about 20 nail manufacturers in the country. He added that there is no legitimate association of nail manufacturers that he knows of.

Meanwhile, EMIDI’s Marketing Director told Capital that the institute met with the nail manufacturers who appealed to the PM and other government bodies on Wednesday September 21. “They told us that the tariff is advantageous for them because they don’t need to import raw material, which requires huge capital,” Dereje said.

“They argued that if the government lifts the tariff, the first affected would be the small scale nail producers,” the marketing head of EMIDI said.

According to these companies, the current situation is favorable for them as they can buy their inputs with limited resources.

In their letter they also explained that they would not have adequate working capital if they are forced to import their input product.

The country’s current wire rod demand is about 60,000 metric tons per annum.

Steely RMI, which has a capacity of producing 120,000 metric tons per annum, commenced its wire rod production in March 2014 to fill the market demand that was dominated by imports. Experts commented that the current wire rod production that includes C & E and Eastern will lead the government to actually ban imports. In fact the surplus production would eventually lead these companies to assess the neighboring countries’ market for export.

The EMIDI Corporate Communication head agrees with the expert’s comment. “To speak the truth, some manufacturing industries like car assemblers and huge governmental projects shall continue importing metal items, while the construction sector will stop importing steel,” Fite further added.

Rejecting the monopoly accusation by importers, Fite argued that the government does not give monopoly to a single company. “The government does not prohibit importers or other companies from producing in the country. For instance two new companies are expected to commence wire rod production with huge capacity,” he said.

The Association head on his part noted that within a year, the production capacity will triple as the two new steel manufacturers would have begun their production.

According to officials at C & E Brothers, the company has finalized the process of commencing production of wire rod noting that the tariff protection was crucial in encouraging them to get involved in wire rod production.

The company official said that the investment and production of wire rod is very expensive and if there was not government support, their company would never have gotten involved.

He further argued that the current tariff is not enough in terms of protecting the local producers from import, and suggested that the government should adopt an anti dumping policy that has been implemented in other countries, including in the developed world, to protect it from cheap imports.

Although C & E the largest steel producer in the country has finalized setting up the wire rod manufacturing machineries, they have retreated from commencing operation sources told Capital.

C & E’s officials,  admitted that the company had suspended the commencement of wire rod production.

“We have observed the hassle with the sole wire rod producer, Steely RMI, since it commenced operation in the past couple of years. Due to that our company, was not encouraged to expedite the launching of wire rod production,” they explained.

“We are also experiencing various hidden pressures since we installed the wire rod machines,” Capital’s sources at the company said.

Now C & E has decided to commence wire rod production within a few weeks regardless of the consequences. “We hope the government will support producers as opposed to traders.”

According to Solomon, the metal association has submitted a letter about three weeks ago to the relevant government bodies showing the reality of the steel sector and the baseless complaint of importers.

It is recalled that the international suppliers, their agents and importers in Ethiopia had filed a letter to the Prime Minister and other officials last month claiming that the local manufacturers are abusing government support.

According to the government procurement law, 15 percent price preferential is allocated for local steel industries if they add 35 percent value locally. “The local steel producers are asking an extraordinary price on the bids compared with the price available on the international market,” had claimed the importers.

On their letter they note that the international steel market is 2.1 birr per kg while local manufacturers have escalated their price up to 300 percent.

Surprisingly, on the bid for the purchase of 22,000 metric tons of different size of steel that opened September 9, two international suppliers, Acemar International Ltd and Metal Market, submitted the rate of 22.25 birr and 22.15 birr per kilogram respectively, which goes against their own claim filed to the PM in August.

The offered price by the two importers was significantly higher than the three local steel manufacturers who participated in the bid.

According to experts, in the past couple of years local manufacturers have been dominating the local bid floated by the government, who is the largest steel consumer in the country.

Local manufacturers are expanding and the competition has become tough for international actors, according to experts.

Pundits that Capital interviewed from the private sector, EABMEI, EMIDI and small scale manufacturers agree that the current confusion is directly related with the growing capacity of the local steel production, which affects the interest of importers.

They stressed that the government has to assess what is occurring behind the issue and added that they feel that the steel sector should be getting closer attention from the government than other manufacturing industries.

Capital tried to reach Yohannes Abadi, for comment. He told Capital he did not attend the meeting at Ghion Hotel on September 14. However, the letter written to the PM that Capital obtained mentioned his name as one of the convener of the meeting.

Capital’s effort to talk with Benyam Berehe was unfruitful.