Comparative Value Chain and Economic Analysis of the ...siteresources.worldbank.org/DEC/Resources/VolumeIICh6.pdf · 224 VI. Comparative Value Chain and Economic Analysis of the Metal

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VI. Comparative Value Chain and Economic

Analysis of the Metal Sector (Crown Cork) in

Ethiopia, Zambia, China and Vietnam

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VI.1. Crown Cork (Bottle Caps) Products Analysis: Objectives

The purpose of the crown cork products analysis is to assess the current competitiveness

of the subsector and the main opportunities for maintaining and increasing

competitiveness in the future. To do this, a typical product (steel bottle caps) was

analyzed in the following manner:

Examine important issues and trends in the world metals and metal products

market;

Review the structures of the Ethiopian, Zambian, Chinese and Vietnamese metal

goods markets;

Assess the key features, strengths and weaknesses of the existing supply chains

for metal products in Ethiopia, Zambia, China and Vietnam;

Assess the overall economic efficiency of domestic crown cork production in

relation to world prices (as reflected by production prices in China and Vietnam)

using alternative cost projection scenarios to establish current and medium term

competitiveness;

Taking the economic efficiency result as a starting point, analyze the metal

products (crown cork) value chain to identify key strengths, weaknesses and

opportunities or needs for investment, expansion or contraction to maintain and

increase crown cork productivity and competitiveness at the business strategy and

business process levels; and

Provide possible policy options and recommendations to help stimulate growth

and improve competitiveness in the sector.

VI.2. Product Selection Method

Following a review of the first product screening in which 40 products were selected for

consideration for the value chain analysis and feasibility study, the World Bank (WB)

and Global Development Solutions (GDS)/HQ teams immediately agreed on seven out of

the ten products needed for the analysis. The seven products selected by the teams were

as follows:

1. Apparel:

a. Polo shirt; and

b. Underwear

2. Agribusiness:

a. Milk; and

b. Wheat milling

3. Leather:

a. High-end sheepskin loafers

4. Wood:

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a. Windows/French windows and frames

5. Metal:

a. Padlocks.

To finalize the selection of the remaining products from the wood, metal and leather

sectors, based on the Africa Competitiveness: Phase 1.1 - Preliminary Product Screening

in Ethiopia report (July 2010), the WB and GDS/HQ teams chose six products as

potential candidates to be included in the list of the final ten products to be the target

products for the value chain analysis and feasibility study. The six products included the

following:

1. Wood products:

a. Wooden doors; and

b. Wooden chairs (not upholstered).

2. Leather products:

a. Leather golf gloves; and

b. Sports footwear of leather.

3. Metal products:

a. Metal doors, window-frame (security window frame); and

b. Aluminum doors and windows.

In order to screen the final six products, a product screening survey was developed which

revolved around six factors:

1. Whether these products are currently produced by companies with less than

50 employees;

2. If companies identified in #1 above can be set up with less than US$100,000

in investment capital;

3. The minimum level of skills and know-how required to produce the products;

4. Whether the products produced by the companies in #1 are being exported;

5. Whether products produced by companies in #1 are consolidated by brokers

or other intermediaries for exports; and

6. Whether companies identified in #1 can readily access raw material inputs in

the market to produce the products.

These questions were posed to the wood, metal and leather sector associations in both

China and Vietnam. Following interviews with sector associations, additional interviews

were conducted at the firm level to identify specifically the level of investments and

minimum level of technical skills required for an entrepreneur or existing SMEs to set up

a production operation. These questions were posed to existing operators in China and

Vietnam to identify whether:

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Barriers to market entry, particularly from a financial and skills

requirement, were sufficiently low to allow entrepreneurs and SMEs in

Ethiopia to easily establish operations; and

These products are currently being produced by SMEs in China and

Vietnam, and are effectively being sold in local and export markets.

The product screening survey identified the following products as viable candidates to be

targeted for the value chain and feasibility analysis.

1. Wood product:

a. Wooden chairs (soft wood); and

b. Wooden door (semi-solid).

Although French windows and their frames made of wood had originally been

preselected for analysis, a decision was made to opt to analyze both wooden

chairs and wooden doors. This decision stemmed from the fact that French

windows require glass thus introducing an outside factor that could influence

the manufacturing of the final product. Wooden doors (without glass) and

wooden chairs (without upholstery) are more representative of wood

processing exclusively.

2. Leather products: Leather golf gloves or sports glove of comparable structure

and weight.

3. Metal products: Both the pre-selected products (security window frame; and

aluminum doors and windows) were screened out of the selection due to

various factors including high initial investment requirements. As a result,

further analyses of products identified during the preliminary product

screening were conducted. Interviews with metal sector associations and

enterprises currently operating in China and Vietnam, as well as interviews

with existing operators in the fabricated metal products sector in Ethiopia

identified crown corks (bottle caps) as a viable candidate to be targeted for

value chain analysis. Crown corks currently are produced in four of the five

countries (not in Tanzania), but Ethiopia continues to import substantial

volumes of this product, including imports from China. As a result, crown

corks have been chosen as the final fabricated metal product to be the focus of

a value chain analysis in the target countries.

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VI.2.1. Respective Government Definitions of Small, Medium and

Large Enterprises in Ethiopia, Tanzania, Zambia, China and

Vietnam

Ethiopia: For Ethiopia, the classification of enterprises into small, medium and large

scale depends on a number of variables such as level of employment, turnover, capital

investment, production capacity, level of technology and subsector. Accordingly, the

following scales are referred to the classification of enterprises in the Ethiopian context

(Table 117).

Table 117: Company Size Classification Structure for Ethiopia

Small Scale Medium Scale Large Scale

Textile and Apparel 5-9 10 – 49 above 50

According to the Central

Statistics Agency (CSA)

Leather 2-10 21 – 50 above 51

Diary 2-10 21 – 50 above 51

Wheat 2-10 21 – 50 above 51

Wood Processing 2-10 21 – 50 above 51

Metal 2-10 21 – 50 above 51

According to Federal

Medium and Small

Enterprise Development

Agency (FeMSEDA)

Sub-sector Remark

Number of Employees

Source: Ethiopia CSA and FeMSEDA

Tanzania: For Tanzania, the classification of enterprises into small, medium and large

scale depends on a number of variables such as level of employment and capital

investment in machinery. The classification cuts across sectors and subsectors of the

economy. Accordingly, the following scales refer to the classification of enterprises in

the Tanzanian context (Table 118). Note that the small enterprise type is most

appropriate for all sectors studied in this analysis.

Table 118: Company Size Classification Structure for Tanzania

Category Employees

Capital Investment in Machinery

(TZS million) Remarks

Micro enterprise 1 - 4 Up to 5 Majority in the informal sector

Small enterprise 5 - 49 5 - 200 Most in the informal sector

Medium enterprise 50 - 99 200 - 800 Most in the formal sector

Large enterprise 100+ 800+ All in the formal sector Source: Tanzania Chamber of Commerce, Industry and Agriculture (TCCIA)

Zambia: Zambia classifies enterprises as micro, small, medium and large based on

several factors including number of employees, annual revenue and capital investment.

The capital investment category is further delineated by whether the firm is engaged in

manufacturing or if it is a trading/services firm. For microenterprises, the minimum

revenue and investment requirements are kept intentionally low in order to encourage

registration, although few microenterprises actually register.

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Table 119: Company Size Classification Structure for Zambia

Classification Employees

Annual Revenue

(ZMK million)

Capital Investment for Manufacturing

Firms (ZMK million)

Capital Investment for Trading/ Services

Firms (ZMK million)

Micro < 10 < 20 < 10 < 10

Small 10 - 50 150 - 250 80 – 200 150

Medium 51-100 300 - 800 200 – 500 151 - 300

Large > 100 > 800 > 500 > 300

Source: Zambia Development Agency

China: The China government is challenged in defining sizes of firms. Temporary

definitions have been used for the past several years, and the government promised to

revise the standard in 2010. The definition from the National Bureau of Statistics of

China is complex. The definition was published in 2002 jointly by the Ministry of

Finance, National Bureau of Statistics of China, State Economic and Trade Commission

(no longer exists), and China Planning Commission, which has since split and exists as

the State Development and Planning Commission (SDPC) and the National Development

and Reform Commission (NDRC). A simplified presentation of the company size

classification is shown in Table 120. Note that the Industrial type is most appropriate for

all sectors studied in this analysis.

Table 120: Company Size Classification Structure for China

Type Index Unit Small Medium Large

Employee person Less than 300 300-2000 More than 2000

Revenue million RMB Less than 30 30-300 More than 300

Asset million RMB Less than 40 40-400 More than 400














Lodging and

Catering services

Industrial

Construction

Wholesale

Retail

Transportation

Post services

Source: National Bureau of Statistics of China

Vietnam: A small firm has less than 50 laborers, while a medium-size firm has 51-200

laborers. Within the small and medium-size classifications, there are some detailed

categories depending on the purpose of research and management. For instance, a firm

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with less than 10 laborers is called a super small-size firm. Such a regulation is in line

with Social Insurance Law.104

VI.2.2. Product Technical Specifications

Following the identification of products to be targeted for the value chain and feasibility

analysis, a detailed technical profile of each product with an accompanying diagram or

photograph was complied and sent to the field teams to help ensure that product data

collection in the field focused on products with similar - if not identical - technical

specifications.

Table 121 below provides the product technical specifications for all ten products for

which product data are being collected.

Table 121: Product Technical Specifications

Material

Product WeightUnit of

measureUnit of measure

1 Golf gloves 85 - 141 grams Men's medium Sheepskin

Loafer 780 grams Heel Width Insole

Size US = 8 EU = 7 2.5 10 30

3 Padlock* 760 grams 7 7 NA* cm Brass

Thickness Diameter Height

0.24 31.9 6.6

Width Depth Height

45 45 75

Width Depth Height

80 4 210

Protein Lactose Ash Vitamins Fat content

3.5% 4.7% 0.8% B1, B2, C and D Full

Type (German) Type (French) Ash Protein Moisture

550 55 <0.65%approx.

11%<14.5%

9 Polo shirt 250 - 270 grams 100% cotton

10 Underwear 80 - 100 grams80% cotton/

20% spandex

* Overall height is 14 cm with a 2 cm shackle diameter

** The weight of the cover (plastic sole made from PVC) in the internal surface of the cap is 290 mg

Source: Global Development Solutions, LLC

Pine

Wheat or rice

Dimension

All purpose flour

cm

Refer to diagram

Weight

cm

mm

cm

tin free steel

(tfs)

Sheepskin

Pine

mg

kg

kg

liters

Refer to picture

Crown cork

(metal bottle

cap)**

Wooden chair

Wooden door

Milk

Milling

290

6.5

12

0.5

2

4

5

6

7

8

104

Information garnered from

http://laws.dongnai.gov.vn/1991_to_2000/2000/200004/200004280005_en/lawdocum


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VI.3. Global Metal Products Market

The production of iron and steel ore and products based on these metals are the most

important items in the global metal products trade. As per the classification of the

International Trade Statistics of the International Trade Center, the most significant

products in this market segment are shown in Table 122 below.

Table 122: Iron and Steel Products and Articles of Iron or Steel

Iron and Steel Products Articles of Iron or Steel

1. Pig iron and spiegeleisen in pigs

2. Ferro-alloys

3. Ferrous products obtained by direct reduction

of iron ore (min. pure iron of 99.9 percent)

4. Ferrous waste and scrap; remelting scrap

ingots or iron or steel

5. Granules and powders of pig iron, spiegeleisen,

iron or steel

6. Iron and non-alloy steel in ingots or other

primary forms

7. Semi-finished products of iron/non-alloy steel

8. Flat-rolled products of iron/non-alloy steel

9. Bars and rods

10. Angles, shapes and sections of iron or non-

alloy steel

11. Wire of iron or non-alloy steel

12. Stainless steel in ingots/other primary forms

13. Flat-rolled products of stainless steel

14. Bars and rods, hot rolled in irregular wound

coils of stainless steel

15. Bars and rods of stainless steel, angles and

shapes

16. Wire of stainless steel

17. Alloy steel in ingots/other primary form

18. Flat-rolled products of other alloy

19. Bars and rods other alloy steel hollow drill bars

20. Wire of other alloy steel

1. Sheet piling, etc., of iron/steel

2. Rail, crossing pieces iron/steel

3. Tubes, pipes and hollow profiles of cast iron

4. Structures (roads, angles, plates)

5. Iron and steel reservoirs, tanks, vats (cap>300 l)

6. Iron or steel tanks, casks, drums, cans and boxes

7. Containers for compressed or liquefied gas

8. Iron or steel stranded wire, ropes, cables, etc.,

not electrically insulated

9. Iron and steel wire barbed twisted hoop, etc.

10. Cloth grill, netting and fencing of iron and steel

wire

11. Chain and parts thereof of iron or steel

12. Anchors, grapnels and parts thereof

13. Nails, staples and sim art, iron or steel

14. Iron or steel screws, bolts, nuts, coach-screws

15. Iron and steel sewing, knitting needles and sim

arts for hand use

16. Spring and leaves for springs

17. Iron or steel stoves, ranges, barbecues and semi

non-electrical apparatuses

18. Iron and steel radiators, air heaters and hot air

distributers

19. Iron or steel tables and household articles

20. Sanitary ware and parts thereof

21. Cast articles of iron or steel

22. Articles of iron or steel

Source: International Trade Center

Market Trends: Global iron and steel exports attained the highest export value of

US$529 billion in 2008. Germany was the largest exporter, accounting for 7.6 percent of

the global export in 2008. Global exports experienced a sharp decline (by 47.6 percent)

in 2009 against 2008 due to the economic crisis and registered a substantially lower

export value of US$273 billion. Following Germany, major iron and steel exporters are

Japan, Republic of Korea, USA, Russian Federation, Belgium, China, France,

Netherlands and Ukraine.

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With regard to import of iron and steel products, the global import value registered in

2008 was the highest, amounting to US$546 billion of which Germany accounted for 7.4

percent, followed by the Republic of Korea (6.5 percent). The leading importers in 2009

were China, Germany, Republic of Korea, Italy, USA, France, Turkey, Belgium,

Netherlands and India.

The aggregated export and import by LDCs in iron and steel accounted for only 0.12

percent and 1.13 percent of the global figures, respectively.

With respect to items made of iron or steel, the global export value in 2008 was US$307

billion, which suffered a 26.5 percent decline the following year to US$226 billion.

China was the leading exporter of items made of iron or steel and accounted for 15.8

percent of global exports in 2008 and 15 percent in 2009. The export values of the major

15 exporting countries are depicted in Table 123 below.

Table 123: Leading Exporters of Items Made of Iron or Steel (US$000)

Exporters Exported value in

2005

Exported value in

2006

Exported value in

2007

Exported value in

2008

Exported value in

2009

World * 172,011,312.00 208,788,640.00 256,712,912.00 306,900,512.00 225,664,352.00

'China 19,032,492.00 26,784,042.00 36,739,592.00 48,419,120.00 33,781,144.00

'Germany 21,490,444.00 26,056,732.00 31,238,204.00 35,632,184.00 28,304,016.00

'Italy 14,381,019.00 17,619,888.00 22,490,508.00 25,388,438.00 17,642,628.00

'United States of America 11,284,488.00 13,490,562.00 14,872,820.00 17,720,372.00 13,797,469.00

'Japan 9,411,485.00 11,033,798.00 12,097,593.00 13,727,355.00 10,524,204.00

'France 8,236,698.00 9,349,253.00 11,882,738.00 13,165,533.00 9,519,684.00

'Republic of Korea 4,425,868.00 5,875,965.00 7,017,940.00 9,062,526.00 8,022,113.00

'Netherlands 3,930,404.00 4,722,160.00 6,197,963.00 7,023,034.00 6,480,614.00

'United Kingdom 5,302,817.00 5,933,115.00 7,254,103.00 7,274,785.00 5,709,821.00

'Belgium 4,339,551.00 5,092,192.00 6,258,115.00 7,260,830.00 5,391,108.00

'Spain 4,406,745.00 4,856,903.00 6,444,109.00 7,759,928.00 5,311,791.00

'Czech Republic 4,056,744.00 4,635,045.00 5,982,851.00 7,365,110.00 4,882,103.00

'Austria 3,916,570.00 4,718,309.00 5,913,590.00 6,918,761.00 4,682,389.00

'Turkey 2,731,357.00 3,336,371.00 4,129,749.00 5,742,371.00 4,550,970.00 *The world aggregation represents the sum of reporting and non-reporting countries

Source: ITC calculations based on COMTRADE statistics

The global import value in items made of iron or steel in 2008 was US$312 billion,

which declined by 24.6 percent to US$235 billion in 2009. The USA is the major

importer, accounting for 12.9 percent and 10.9 percent in 2008 and 2009, respectively.

The import value of the top 15 countries is indicated in Table 124 below.

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Table 124: Leading Importers of Items Made of Iron or Steel (US$000)

Importers Imported value in

2005

Imported value in

2006

Imported value in

2007

Imported value in

2008

Imported value in

2009

World * 173,021,264.00 208,454,080.00 258,539,712.00 311,837,184.00 235,236,160.00

'United States of America 25,835,268.00 30,343,136.00 33,716,364.00 40,156,844.00 25,569,372.00

'Germany 12,785,598.00 15,235,104.00 18,505,148.00 21,926,012.00 17,981,908.00

'France 8,487,300.00 9,566,788.00 11,922,653.00 13,414,303.00 9,706,551.00

'China 5,696,076.00 6,944,612.00 8,045,630.00 10,547,823.00 8,920,663.00

'Canada 7,031,175.00 8,211,322.00 8,568,208.00 10,179,806.00 7,328,304.00

'Netherlands 3,904,567.00 4,875,406.00 6,116,298.00 7,347,327.00 6,830,941.00

'United Kingdom 6,882,889.00 7,670,878.00 9,891,995.00 9,780,884.00 6,588,334.00

'Republic of Korea 2,553,221.00 3,290,423.00 4,873,724.00 6,324,883.00 6,109,855.00

'Belgium 4,332,092.00 5,056,104.00 6,508,090.00 7,839,085.00 5,347,520.00

'Mexico 5,506,211.00 6,255,126.00 6,643,320.00 6,851,629.00 5,282,210.00

'Japan 4,260,322.00 5,030,303.00 5,691,382.00 6,232,073.00 5,260,056.00

'Italy 4,629,148.00 5,627,897.00 7,483,601.00 8,222,864.00 5,148,014.00

'Algeria 1,015,152.00 2,014,170.00 2,431,646.00 3,545,844.00 4,979,777.00

'United Arab Emirates 1,760,231.00 2,708,042.00 3,732,655.00 5,639,089.00 4,667,359.00

'Kazakhstan 1,565,881.00 1,867,885.00 2,197,255.00 4,387,504.00 4,569,698.00 *The world aggregation represents the sum of reporting and non-reporting countries


The aggregated export value from LDCs amounted to US$197 million in 2008, which

declined to US$158 million in 2009. LDC exports accounted for only 0.06 percent and

0.07 percent of the global export value, respectively. The leading LDCs exporting items

made of iron or steel are depicted in Table 125 below.

While Sub-Saharan Africa accounted for 87 percent of LDC exports in 2008, Sub-

Saharan Africa exports declined drastically to only 60 percent of LDC exports in 2009.

Table 125: Leading Exporters of Items Made of Iron or Steel from LDCs (US$000)

Exporters Exported value in

2005

Exported value in

2006

Exported value in

2007

Exported value in

2008

Exported value in

2009

'World 172,011,312.00 208,788,640.00 256,712,912.00 306,900,512.00 225,664,352.00

Least Developed Countries (LDCs)

Aggregation 84,640.00 67,376.00 110,732.00 197,053.00 158,285.00

Sub-Saharan Africa Aggregation** 75,813.00 51,824.00 93,064.00 171,231.00 95,534.00

Angola 3,123.00 1,934.00 2,795.00 6,000.00 34,025.00

Nepal 27,600.00

Yemen 2,592.00 11,670.00 6,570.00 8,753.00 23,250.00

Senegal 4,990.00 7,708.00 11,399.00 13,206.00 11,047.00

United Republic of Tanzania 5,482.00 3,038.00 7,509.00 10,970.00 10,711.00

Cambodia 9,097.00 8,700.00

Zambia 1,922.00 4,790.00 11,359.00 10,097.00 8,695.00

Mozambique 15,757.00 5,400.00 5,638.00 15,945.00 8,066.00

Bangladesh 10,896.00 5,134.00 13,757.00 4,734.00 3,871.00

Burkina Faso 2,518.00 3,359.00

Madagascar 4,138.00 4,082.00 3,628.00 3,483.00 3,275.00

Uganda 8,897.00 11,235.00 28,635.00 43,131.00 2,222.00

Sierra Leone 2,512.00 2,034.00 1,638.00 6,574.00 1,904.00

Rwanda 229.00 137.00 1,396.00 186.00 1,304.00

Malawi 237.00 785.00 607.00 491.00 1,273.00 *The world aggregation represents the sum of reporting and non-reporting countries

**Only LDCs per ITC statistic


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The aggregate import value by LDCs amounted to US$5.3 billion in 2008, which

increased to US$5.9 billion in 2009. LDC imports of items made of iron or steel

accounted for 1.7 percent of the global import values in 2008 and 2.5 percent in 2009.

The import values of the major 15 LDCs are depicted in Table 126 below.

Sub-Saharan Africa represented 73 percent of LDC imports in 2009 and increased 11

percent from 2008.

Table 126: Leading Importers of Items Made of Iron or Steel from LDCs (US$000)

Importers Imported value in

2005

Imported value in

2006

Imported value in

2007

Imported value in

2008

Imported value in

2009

World * 173,021,264.00 208,454,080.00 258,539,712.00 311,837,184.00 235,236,160.00

Least Developed Countries (LDCs)

Aggregation 2,512,013.00 3,015,390.00 3,442,748.00 5,295,897.00 5,936,499.00

Sub-Sahara Africa Aggregation** 1,410,452.00 1,792,506.00 2,334,423.00 3,917,075.00 4,345,480.00

Angola 553,163.00 819,770.00 917,917.00 1,676,829.00 1,628,066.00

Madagascar 33,199.00 35,242.00 80,143.00 304,004.00 616,032.00

Sudan 477,768.00 400,160.00 116,125.00 410,993.00

Ethiopia 129,143.00 128,843.00 176,857.00 235,268.00 350,672.00

Myanmar 98,079.00 137,263.00 315,401.00 201,779.00 320,671.00

Yemen 199,398.00 357,897.00 405,256.00 415,863.00 268,704.00

Liberia 19,936.00 31,448.00 38,019.00 188,579.00 234,527.00


Equatorial Guinea 64,440.00 112,946.00 70,201.00 94,822.00 161,772.00

Bangladesh 133,936.00 141,061.00 131,839.00 146,342.00 157,434.00

Democratic Republic of the Congo 63,652.00 55,267.00 123,086.00 214,373.00 121,949.00

Zambia 75,867.00 99,429.00 211,598.00 184,999.00 117,046.00

Benin 8,602.00 8,272.00 113,617.00 115,491.00 114,028.00

Niger 16,393.00 22,172.00 17,618.00 30,054.00 105,924.00

Senegal 45,930.00 70,196.00 92,565.00 107,951.00 105,791.00 *The world aggregation represents the sum of reporting and non-reporting countries

**Only LDCs per ITC statistic


Industry and Consumer Trends: According to the World Steel 2008 Sustainable

Report, the construction industry continues to be the highest consumer of steel,

accounting for almost 47 percent of steel use, followed by mechanical machinery and

metal products, which account for 14 percent each. The automotive industry accounts for

nearly 13 percent of global steel use. Transport, electrical equipment and appliances

consumed 5 percent, 5 percent and 2 percent, respectively. China is the highest consumer

of steel. Its consumption in 2009 was nearly 55 million tons, and this figure is expected

to continue to grow.

The capacity utilization rate in the world steel industry declined sharply, from 88.4

percent in March 2008 down to 57 percent in December 2008. Since then, the capacity

utilization rate improved gradually and registered 62 percent utilization by February 2009.

Government stimulus measures in the USA and Western Europe as well in emerging and

developing countries that spend heavily on infrastructure development are expected to

impact the global steel industry positively.

235

Supply and Demand: According to the World Steel Association (WSA), crude steel

production logged steady growth from 1950 to 1973 (growth rate of 5.8 percent) and

entered a stagnant period from 1974 to 2001 with an average growth rate of only 0.7

percent per annum. World steel production increased from 200 million tons in 1950 to

650 million tons in 1973 and gradually grew to about 800 million tons by 2001. World

crude steel production worldwide has experienced a boom since 2001, registering an

average growth rate of 8.4 percent and attained a total production of 1.33 billion tons in

2008.

Demand for steel is driven broadly by the level of socioeconomic development and the

living standards in a country. In this context, per capita consumption of steel is highest in

industrialized countries and is low in developing countries. A few examples are provided

in Table 127 below.

Table 127: Per Capita Consumption of Steel in Select Countries

Country Per Capita

Consumption in kg

Japan 574.6

USA 372.8

China 132.2

Kenya 65.0

Ethiopia 9.0

Source: Metal Industry Development Institute, Addis Ababa

VI.4. Comparative Sector Profile: Processed Metal Sector

Key Indicators: Employing nearly 3.6 million workers, and with over US$225 billion in

total production in 2009, China is the largest producer of processed metal in the world.

Of the over 24,000 companies operating in China‘s processed metal sector, half are

medium-size companies.

Vietnam, on the other hand, consumes 10.6 million metric tons annually, but over 40

percent of Vietnam‘s steel is imported. Only a fraction of the size of the Chinese market,

the metals sector in Vietnam employs slightly over 130,000 workers. Similar to China,

over 59 percent of the 3,762 firms operating in the sector in Vietnam are medium-size

firms.

In Ethiopia, fabricated metal products accounted for 4.6 percent of the country‘s

industrial production in 2009/10 and employed slightly more than 21,000 workers.

Unlike China and Vietnam, small-scale firms represent 98 percent of the 4,400 firms in

Ethiopia. In all three countries, male workers dominate the sector (73 percent to 91

percent).

236

Zambia is well known as one of the world‘s leading producers of copper. There is,

however, little value addition in terms of processed copper and, further, there is little steel

processing in the country. Reportedly only 43 companies are active in metal processing

in Zambia, with the majority (46.5 percent) being medium size (Table 128).

Table 128: Snapshot of Processed Metal Sectors in China, Vietnam and Ethiopia (2009)

Key Comparative Indicators China Vietnam Ethiopia Zambia

Total Import (US$1,000) 8,920,663 1,548,413 350,672 4,084

Total Export (US$1,000) 33,781,144 706,226 960 9,938

Companies Operating in the Sector 24,547 3,762 4,456 43

Small 20.0% 38.7% 97.0% 32.6%

Medium 50.0% 59.3% 1.6% 46.5%

Large 30.0% 2.0% 0.7% 20.9%

Est. No. of workers in the sector 3,561,638 130,436 21,054 2,360

Male 73.0% 74.0% 91.0% 85.0%

Female 27.0% 26.0% 9.0% 15.0% Source: Global Development Solutions, LLC; COMTRADE

Policy and Regulatory Environment: There is a wide array of tariffs in China covering

processed metal products, but of primary concern for this analysis are tariffs related to

iron sheets and products where the preferential rate for iron sheets is 7 percent and the

tariff rate (regular) for iron products is as high as 90 percent (preferential rate: 20

percent). In Vietnam, tariff rates (preferential) for base metals and metal parts relevant

for this analysis is approximately 27 percent. With this noted, the Common Effective

Preferential Tariff (CEPT) covers other products at an average rate of 2.3 percent.

In China, other taxes and levies relevant to the sector include a 25 percent income tax and

VAT of 17 percent (which is higher than in Vietnam where VAT is 10 percent, but VAT

reimbursements are generally immediate in China). In Vietnam, in addition to the VAT,

enterprises in the processed metal sector face a relatively high income tax (28 percent)

and export tax ranging up to 45 percent. Zambia income tax is high at 35 percent and

VAT is 16 percent. Regardless of raw material or finished goods, duties in Zambia are

25 percent. As Table 129 below indicates, enterprises in Ethiopia face a wide range of

taxes, starting with a VAT (15 percent) – for which refunds are either slow or non-

existent – and income tax ranging up to 35 percent.

237

Table 129: Comparative Policy and Regulatory Environment for the Processed Metal Sector

Iron sheets

(regular) 20%

Padlock, of base metal

(preferential) 27%

Import duties

(COMESA) 18% - 30% Iron ore 25%

Iron sheets

(preferential) 7%

Clasps and frames with

claps, incorporating locks

of base metal (preferential) 27% Customs duty 10% - 30% Iron sheets 25%

Iron product

(regular) 90%

Parts of padlocks and

Locks, of base metal

(Preferential) 27% Iron wire 25%

Iron product

(preferential) 20%

CEPT (over 40,773 fast and

normal track tariff rates)

Average

rate 2.3% Brass alloys 25%

Finished brass products 25%

Finished padlocks 25%

Finished crown cork 25%

VAT 17% VAT 10% VAT 15% VAT 16%

Income tax 25% Income tax 28% Income tax 0 - 35%, 30% Income tax 35%

Other tax 7% Other tax 0% Provident fund tax 10%

Business tax

55 ~ 155

US$ Salary tax 0 - 35%

Export tax 0% - 45% Excise tax 10% - 100%

License fee 1% - 2% Surtax 10%

Turnover tax 2%, 10%

Dividend tax 10%

Royalty tax 5%

Capital gains tax 30%:15%

Withholding tax 3%

Iron sheets 9%

Tax reduction for rural

enterprises

1/7th

reduction of

income tax

rate for 1st

five years

Iron product

5%, 9%,

13%

1 Tariffs

2Taxes and

Levies

3 Subsidies

China (import tariff) Vietnam Ethiopia Zambia

None None


Enterprises in the processed metal sector in China enjoy a subsidy of 9 percent for iron

sheets and subsidies ranging from 5 percent to 13 percent for iron products. In Zambia,

there are no specific subsidies for the sector but there is a general tax subsidy of 1 1/7th

reduction in income tax for the first five years of operation for rural enterprises. Neither

Vietnam nor Ethiopia enjoys such subsidies, although enterprises in Vietnam enjoy a

preferential rate for electricity and water.

VI.5. Sector Profile for the Processed Metal Sector in Ethiopia, China, and

Vietnam

VI.5.1. Sector Profile: Fabricated Metal Products - Ethiopia

The Ethiopian fabricated metal products sector accounted for 4.6 percent of the country‘s

industrial production in 2009/10. Key products for the year were iron sheets (1,768,355

tons), nails (17,036 tons), iron bars (16,258 tons), wires (2,847 tons), crown cork (1,563

tons), motor vehicle springs (712.2 tons), doors and window frames (42,938 m2) and

ovens/stoves (<100 tons).105

Total imports for the sector amounted to US$240.7 million

(269,101 tons) in 2009; this represented a 46 percent decrease in value and 43 percent

105

The Federal Democratic Republic of Ethiopia Central Statistical Agency, Report on Large and Medium

Scale Manufacturing and Electricity Industry Survey, December 2009, Addis Ababa.

238

less demand from 2008. Leading import partners are China, India, Turkey, Ukraine and

Kazakhstan. There are no fabricated metal exports registered from Ethiopia.

Current capacity of the 14 basic metal companies exceeds 1 million tons. A breakdown

of production by the 14 companies is shown in Table 130 below.

Table 130: Production by 14 Basic Metal Companies in Ethiopia

Item Billet

Reinforced

Bars

Hollow

Section

Corrugated

Sheet Wire Nails

Number of Producers 5 6 4 6 3 4 Source: JICA, Basic Metal and Engineering Industries Firm-Level Study

Eighty-five percent of Ethiopia‘s basic metal and engineering industry product (BMEI)

demand is met by imports. The Ministry of Finance and Economic Development‘s Plan

for Accelerated and Sustained Development to End Poverty II (PASDEP II) will likely

focus on the industry for import substitution. Targets include:

Gross production value in 2014/15 to be five times that of 2010/11;

Steel demand to grow 28 percent per annum until 2014/15: per capita steel

consumption grew from 12.1 kg in EFY 2002 to 34.72 kg in EFY 2007 (3 million

tons total); and

Within five years, demand for BMEI products by major industrial sectors is

expected to be met through local production.

The sector has attracted approximately US$30 million in foreign investment mainly from

India and Pakistan, which each established a steel factory in Ethiopia.

The sector supports 4,456 companies, of which 83.1 percent are informal. Total

employment is estimated to be 21,054 people, with 91 percent being male and 9 percent

female (Table 131).

Table 131: Employment Statistics for Ethiopia Fabricated Metals Sector

Company Size

Estimated Number

of Companies

% of Companies

by Size

Number of

Employees

Average Employees

per Company

Small 4,355 97.7% 15,301 4

Medium 70 1.6% 3,142 45

Large 31 0.7% 2,611 84

Subtotal 4,456 100.0% 21,054

Informal 3,701 83.1%

Formal 754 16.9%

State-owned enterprise 4 0.1% Source: Central Statistical Agency

239

The fabricated metals sector in Ethiopia has the following advantages:

A promising site exists in West Ethiopia, with 22 million tons of ore with high

content of pentoxide vanadium (V2O5) and titanium oxide (TiO2), which increases

value;

Long experience in manufacturing basic metal products;

Availability of manpower commensurate with prevailing technology with the

exception of a few disciplines;

The existence of engineering factories with substantial hardware;

Good experience in structure, tanks, truck body and trailer manufacturing; and

Presence of institutional infrastructure for quality, standardization and services

(QSAE).

Disadvantages are:

High investment requirement for most industries in the metal sector;

Steel industry depends heavily on raw material import; and

Shortage of supply of spare parts.

VI.5.1.1 Supply Chain and Institutional Support Structure: Metal - Ethiopia

Figure 42: Ethiopian Metal Sector Market and Institutional Support Structure Ethiopian Metal Sector Market and Institutional Support Structure

Market structure Institutional Support structure

Old/ Post consumer

metal scraps

- Ministry of Finance

Metal Scrap

Collectors/Dealers

Basic Metal Processing Mfs

Imported

metal ore

Metal Engineering Industry

FDI

LE SMEs

Local Market

- Ministry of Trade and Industry (MOTI)

- Ministry of Finance (MoF)

- Quality & Standard Authority of Ethiopia

(QSAE)

- Ministry of Justice (MOJ)

- Ministry of Capacity Building (MCB)

- Ethiopian Society of Mechanical

Engineers (ESME)

Notes: FDI – Foreign Direct Investment Enterprises; LE – Large enterprises; SMEs – Small and Medium enterprises

Second Hand

metal Products

Imported

fabricated

metal products

Imported

basic metal

products

Local Enterprises

Scrap Collectors: Most of scrap

collectors and dealers are informal

individuals and groups

Basic Metal Processing Mfs:

FDI: 2

Large: 10

Engineering Industry

Small: 4,355

Medium: 70

Large: 19

New/

Industrial

metal scrap

Scrap generators: The main venues of

scrap sourcing are insurance industries

(stocking and selling vehicles and

machines when condemned as total

loss) and service industries like

(Anbessa City Bus, Ethiopian Road

Authority).

Local Industries

LE


240

VI.5.2. Sector Profile: Fabricated Metal Products - Zambia

Zambia‘s economy has always been dependent on its metal mining industry, dominated

by copper mining, which accounts for about 10 percent of Zambia‘s Gross Domestic

Product (down from 40 percent in 1965) and 90 percent of export revenues. Zambia‘s

industrial sector has long lacked growth, and so has the contribution of the metal and

engineering sector to the national output. The decline in the output levels in Zambia is

also reflected in the reduction of contribution of the industrial sector to GDP from 18.5

percent in 1980 to 10.9 percent in 2008. The situation in the manufacturing sector

decline has been exacerbated by the liquidation of most companies in the mid-1990s,

which resulted in deindustrialization.106

The Zambian metal products subsector has continually only accounted for less than 1

percent of the GDP and only about 1.6 percent of manufacturing output.107

The country‘s

recorded trade deficit of US$108,351,244 in 2009 is on all processed metals.108

Zambia

both imports and exports metal products. According to the Zambia Development Agency,

the major exported items include copper rods, copper wire, power cables, nuts and bolts,

mill balls, aluminum wire, carbon brushes and switch gears.109

The major export

destinations are South Africa, Switzerland, Hong Kong, India, Tanzania, Congo and

Zimbabwe. Padlocks are not produced in Zambia, but the country re-exports a small

number of the imported padlocks (less than 0.5 percent) primarily to Democratic

Republic of Congo. Table 132 shows the export data for all processed metal products for

the period 2007 to 2009.

Table 132: Zambia Metal Sector Exports110

Category 2007 2008 2009

All Processed Metal Products

Volume - Units (kg) 12,854,333 1,369,768 1,726,197

Value (US$) 7,621,779 3,445,798 9,937,652

Crown Cork

Volume - Units (kg) 167,699 17 74,403

Value (US$) 482,833 1,803 175,227

Padlocks

Volume - Units (kg) 352 481 327

Value (US$) 8,734 8,955 7,941 Source: Central Statistical Office/UN COMTRADE

106

Central Statistical Office, Zambia 107

Central Statistical Office, Zambia; Ministry of Commerce Trade and Industry 108

COMSTATS 109

Zambia Development Agency 110

Although this data were reported by both the Central Statistical Office, Zambia and by UN

COMTRADE, nobody was able to provide explanation regarding the variability in values from year to

year.

241

The major sources of imports are China, South Africa, Zimbabwe, Tanzania and Hong

Kong. Table 133 shows the import data for the sector for the period 2007 to 2009.

Table 133: Zambia Metal Sector Imports

Category 2007 2008 2009

All Processed Metal Products

Volume - Units (kg) 1,966,305 2,535,351 1,638,757

Value (US$) 5,017,067 5,906,421 4,084,130

Crown Cork

Volume - Units (kg) 366 7,023 10,010

Value (US$) 440 24,342 40,511

Padlocks

Volume - Units (kg) 98,506 211,740 97,832

Value (US$) 151,927 525,571 303,114 Source: Central Statistical Office/UN COMTRADE

The sector has 43 registered companies and employs approximately 2,360 people. The

male:female ratio is estimated by industry specialists to be 85 percent:15 percent but no

official data is available.

Table 134: Employment Statistics for Zambia Fabricated Metals Sector

Est. no. of firms in the sector (2)

All Processed Metal

Products (Exludes

Ore) Padlocks Crown Cork

Ave no. of

employees

/firm

Small 14 - 0 25

Medium 20 - 0 60

Large 9 - 1 90

Subtotal 43 0 1 2,360

Informal NA 0 0

Formal NA 0 1

State-owned enterprise NA 0 0

Est. no. of workers employed by the sector

% Male 85

% Female 15 Source: Global Development Solutions, LLC; Zambia metals industry experts

Main Issues

Zambia has had a longstanding desire to capture additional economic returns through

value addition to its raw materials before exports. However, for the fabrication of metal

products, the viability of producing and selling these products on a significant scale is

constrained by a number of factors, both on the supply-side and the demand-side.

242

On the supply side, there is little competitive advantage from sourcing metal (copper)

inputs locally, since the price of copper is set by international commodity exchanges and

varies little throughout the world. For example, the only cost advantage that can be

maximized by a Zambian fabricator of copper is in the cost of shipping the cathode for a

fabricator in China. However, that savings is likely to be offset entirely by the Zambian

fabricator having to ship the same weight of (fabricated) copper to China where it will be

used to manufacture the final product. On the demand side, local and regional demand

for semi-manufactures is small due to a lack of an industrial and consumer goods

manufacturing base of any significant size. Additionally, Zambian competitiveness in

this industry on the international market outside Africa is likely to be hampered by

logistical difficulties in servicing these markets reliably.111

Being a landlocked country,

these logistical difficulties include long waiting times at border posts, poor transport

infrastructure and difficulties in accessing seaports. Additional difficulties arise due to

long distance to the major would-be importers.

111

Jobs and Prosperity: Building Zambia‘s Competitiveness (JPC)

243

VI.5.2.1 Supply Chain and Institutional Support Structure: Metal - Zambia

Figure 43: Zambian Metal Sector Market and Institutional Support Structure

Sources of scrap metal are disused mines and equipment. Other sources include waste from processing & engineering

industry.

- Ministry of Mining - Ministry of Commerce

and Industry - Chamber of Mines - Scrap Metal dealers

Association of Zambia - Zambia Development

Agency

- Ministry of Commerce and Industry

- Zambia Development Agency

- Manufacturers Association of Zambia

- Engineering Institution of Zambia

- Zambia Chamber of Commerce and Industry

- Export Board of Zambia - Development Bank of

Zambia

Institutional Support

Structure

Market

Structure Mineral Ore

Mining & Processing

Scrap Metal Dealers and Collectors

Local Enterprises

Basic Metal Processing

LE SME

Local Enterprises

Metal Engineering Industry

LE SME

Export Market

Local Market

Imported Fabricated

Metal Products

Major exports include copper rods, copper

wire, power cables, nuts & bolts, mill balls, aluminum wire, carbon brushes and

switchgear

Overall firm size for the industry: Small: 14 Medium: 20 Large 9

Imported Basic Metal

Products

Imported Metal/All

oys

Notes: i) FDI – Foreign Direct Investment; IS – Informal Sector

ii) Dash line (- - -) indicates a weak linkage, lack of organization, and area where

technical support is required to help strengthen linkages along the supply chain

Dotted arrow indicates scrap

metal from local companies that is recycled back into the supply chain

VI.5.3. Sector Profile: Fabricated Metal Products - China

China is the largest producer and exporter of metals and articles of metal in the world. In

the first six months of 2010, China produced 46 percent of the world‘s crude steel (570

million tons).112

Its output of nonferrous metals is equally strong. According to the

China Nonferrous Metals Industry Association, the output of ten types of nonferrous

metals from China exceeded 26 million tons in 2009 (up 3.99 percent year-on-year).

Refined copper output reached 4.11 million tons, primary aluminum 12.85 million tons,

lead 3.71 million tons, zinc 4.36 million tons, nickel 164,800 tons, tin 134,500 tons,

antimony 165,800 tons, magnesium 500,800 tons, and sponge titanium 61,500 tons.

In terms of exports, after a sharp increase in 2008, metals and articles of metal exports in

2009 decreased to US$115 billion. Almost 7 percent of base metal exports are in the

form of miscellaneous articles. Chinese exports of padlocks, locks, clasps with locks and

keys hover at around US$2 billion per year, making up approximately one-third of the

112

Japan Iron and Steel Federation

244

world trade in this category.113

Chinese exports of stoppers, caps and lids, including

crown corks, increased by 30 percent from 2007 to 2009; at US$130 million per year,

Chinese exports in this category constitute a little less than 40 percent of the world trade

in the category.114

Table 135: Exports of Base Metals and Their Products (Locks and Corks), China, 2007-2009

Total Exports (Value, US$ million) 2007 2008 2009

Base metals and articles of base metal, of which: 77,103$ 144,015$ 115,697$

Miscellaneous articles of base metal, of which: 8,226$ 8,782$ 7,416$

Padlocks, locks, clasps with locks, keys 1,966$ 2,124$ 1,872$

Stoppers, caps and lids, including crown corks 98$ 122$ 130$

Main countries/regions of destination Central Asia, Malaysia, Australia, Japan Source: UN Comtrade

There were nearly 25,000 firms in the metals and metal products industry in China in

2009. The sector employs 3.5 million people.115

Most firms (over 70 percent) are small

or medium-size firms with 100 to 150 employees per firm on average.

One of the world‘s richest countries in terms of resources, China is abundant in metals.

In addition, China has a good technological base and strong economic growth, suggesting

that the country is likely to remain the dominant player in the metals and metal products

113

UN Comtrade 114

UN Comtrade 115

China Statistical Yearbook Network

Tariff on Steel

Ethiopia‘s import tariffs on steel vary according to type of steel.

Tariff Rates for Imported Steel, 2010

Article Tariff rate on CIF value

wire < Ø 6 mm 20%

wire > Ø 6 mm 10%

Sheet metal 5% Source: Ethiopian Customs Agency

With regard to self-sufficiency in steel production, currently there is no basic metal industry that can

extract iron/steel from ore. So far existing engineering companies depend on imported articles of steel.

Recently, a large metals enterprise, Metal and Engineering Corporation (MaEC), has been established

and it is expected to build its capacity and capability to manufacture machinery and equipment for the

entire manufacturing sector. MaEC shall only import components that it cannot manufacture locally. It

may find it plausible to go into basic metal production in the long-run as demand for steel will increase

sharply in light of the rapid development taking place in the country.

245

industry in the near future. Some of the key challenges that are likely to be faced by the

industry relate to:

Ore access – notwithstanding their abundance, metal ores are located in

prohibitively rugged regions of the Chinese northwest. Recent exploration and

site development/modernization deals signed by Chinese metals companies with

multinational firms are illustrations of initiatives aimed at improving ore access in

China.

Energy costs – last year, metal producers in China were stripped of their access to

preferential power rates as utility companies began to address the demand and

supply imbalances with price as well as service interruption interventions. These

measures are expected to increase the price of metal raw materials along the

supply chain.

VI.5.3.1 Supply Chain and Institution Support Structure: Metal - China

Figure 44: Metal Products Market and Institutional Support Structure, China Metal Products Market and Institutional Support Structure, China

Market structure Institutional Support structure

i) FDI – Foreign Direct Investment Enterprises; LE – Large Enterprises; SME – Small and Medium Enterprises ii) Dashed line (- - -) indicates a week

linkage, lack of organization, and areas where technical support is required to help strengthen linkages along the supply chain

Mineral Ores/Mining

Metal Processing

Primary Processed

Metals/Alloys Hardware (Locks,

Corks, etc) FDI LE SME

Local Market Export Market

- Ministry of Land And Resources

- China Iron and Steel Association

o China Metallurgical Construction Association

o China Metallurgical Mining Enterprises Association o China Special Steel Enterprises Association

o China Refractory Materials Industry Association

o China Coking Industry Association

o China Ferroalloy Industry Association o China Structural Steel Association

o China Carbon Industry Association

o Chinese Form-Work Association

o China Scrap Steel Application Association o Metallurgical Planning & Research Institute

o Metallurgical Information & Standardization Research Institute

o Metallurgical Economic Development Research Center

o Metallurgical Information Research Center Metallurgical Human Resources Development Center

o Metallurgical Education Resources Development Center

o Metallurgical Science and Technology Development Center

o Metallurgical Legal Affairs Center o Metallurgical Industry Finance Service Center

o Metallurgical Construction and Quota Center

o Metallurgical Project Quality Supervision Center

o Chinese Society for Metals o Chinese Society for Rare Earth

o Chinese Society for Metallurgical Education

o Metallurgical Council of China Council for the Promotion of International

Trade

- China National Hardware Association

o Tool Hardware Branch Kitchen Apparatus and Stainless Steel

o Building Hardware Branch Lock Branch

o Daily-use Hardware Branch Zipper Branch o Cooking Utensils Branch Shower-bath Products Branch

o Hoods Branch Gas Appliance Branch

FDI LE


VI.5.4. Sector Profile: Metal – Vietnam

According to the Southeast Asian Iron and Steel Institute (SEAISI), the apparent steel

consumption of total steel products in Vietnam reached approximately 10.6 million

246

metric tons in 2009, just behind Thailand (10.7 million metric tons), and Taiwan (11.7

million metric tons). Over 40 percent of the steel consumed in the country is imported.

(According to the Vietnam Steel Association, the country imported more than 200,000

tons of finished steel products during the first half of 2010.) In addition, Vietnam

imports 94 percent of its metalworking equipment and mechanical products, with only 6

percent of demand met by local manufacturers. Similarly, as industrial production in

Vietnam grows at a pace of 19 percent per year, imports of modern technology continue

to increase at an annual rate of 30 percent.

On the production of raw material, the first cold rolling mill began operating in Vietnam

in 2005, and its rolling capacity is as little as 400,000 tons. As of 2007, there were more

than ten 100 percent privately owned or foreign-invested firms operating in the long

product rolling business. Vietnam continues to be a major importer of low and medium

grade steel products from Japan and also imports even lower grade from Russia, Ukraine

and China, which suggests that the high-grade steel market continues to be limited.

Demand for high-grade hot coil and cold rolled sheets to manufacture mechanical

products such as motorcycles continues to be high, but demand for other high-grade

products such as heavy plates used for large scale industrial production such as

shipbuilding and galvanized steel for automotive production continues to be low.

Despite a period of decline in steel prices earlier in 2010, steel consumption continued to

be slow and producers were suffering from high interest rates. Recently, the declining

price trend reversed and in response to an increase in the price of steel ingots, the

domestic steel price increased in July by VND600,000 – VND700,000 per ton to VND14

– 14.5 million (US$736 - US$762).

Thanks to an increase in price of steel ingots, following a period of decline, the domestic

steel price increased in July by VND600,000 to VND700,000 per ton to VND14 – 14.5

million (US$736 to US$762). Despite the decline in prices, steel consumption continues

to be slow and producers are suffering from high interest rates.

The fabricated metal products sector currently employs approximately 130,436 workers

across 3,762 enterprises (Table 136).

Table 136: Enterprises in the Fabricated Metal Products Sector in Vietnam (2010)

Size Categories No. of Enterprises percent of Total Size of Employees

Small 1,457 38.7 percent < 10

Medium 2,229 59.3 percent 10 – 200

Large 76 2.0 percent >300

Total 3,762 100 percent


247

Male workers dominate the labor force in the fabricated metal products sector and

represent approximately 74 percent of the workforce.

According to the Ministry of Industry and Trade, as many as 65 steel projects (7 FDI

projects and 58 domestic and joint venture projects) are currently in the pipeline with an

aggregate yearly design capacity of more than 100,000 tons spread across 30 provinces in

the country. In this context, the Ministry has asked cities and provinces to stop granting

new investment licenses to steel projects and revise existing contracts as supply continues

to outstrip demand in the country.

Last year, the industry met 54 percent of the country‘s total demand for steel ingot, and

40 percent of cold steel and 100 percent of building steel demand, but by 2015, it is

estimated that Vietnam will require 15 million tons of steel.

VI.5.4.1 Supply Chain and Institutional Support Structure: Metal - Vietnam

Figure 45: Vietnam’s Iron Ore-to-Steel Market and Institutional Support Structure Vietnam’s Iron ore -to- Steel Market and Institutional Support Structure

Iron ore, scrap steel

Imported

steel scrap

Casting Mfs.

Imported

billet & slabs

Rolling Mills

No. of exploited iron mines: 38

Reserves: 956.415 mil. tons

Long Flat

Export market Domestic market

- Ministry of Industry and Trade (MOIT)

- Vietnam National Coal and Mineral

Industries Group

- Department of Geology and Minerals

of Vietnam

- Ministry of Industry and Trade (MOIT)

- Vietnam Steel Association (VSA)

- Ministry of Planning and

Investment (MPI)

- Local governments

- National Research Institute of

Mechanical Engineering (Narime)

Billets: 11 (MS)

Slabs: 0

Long: 60 (LS: 3; MS: 20; SS: 37) /

Capacity: 6.5mil. tons

Flat: 4 (L/MS) / Capacity: 1,1mil.

tons

Imported flats

(80%)

Notes: i) LS: Large scale; MS: Medium scale; small scale

ii) Dash line (- - -) indicates a week linkage, lack of organization, and areas where technical support is required

to help strengthen linkages along the supply chain


248

VI.6. Economic Efficiency and Competitiveness in Metal Processing – Crown

Corks

VI.6.1. Ethiopia: Crown Cork

The aim of this section is to establish the basic economics of a representative metal

products activity, crown corks (bottle tops), and its competitiveness vis-à-vis imports.

The comparison with imports is justified because Ethiopia is a net importer of crown

corks, as it is with most metal products. The analysis provides a complement to the VCA

by establishing whether the domestic industry is, can become, or can remain competitive.

The VCA itself looks in more detail at the strategic and business process opportunities for

cost reduction, upgrading, expansion and investment at each production stage over the

next five years.

Only one firm produces crown corks in Ethiopia, and although the VCA survey shows it

is operating at close to full capacity, its cost of production is high, its wastage rates are

high, its labor productivity is low and it is operating with very old equipment. In the case

of crown corks, the survey reveals Vietnam to be a higher productivity, lower cost

production location than China (although the surveyed firms in Vietnam do not appear to

be exporting yet). Ethiopia is importing crown corks, and the price data collected for the

survey indicate a wide range of prices: CIF Djibouti of US$0.0043 to US$0.0110 per

piece.

The average unit economic cost of the Ethiopian producer (calculated by omitting import

tariffs and VAT and estimating an annual capital charge) is approximately $0.0058/piece,

and of this 73 percent is composed of directly imported inputs largely of steel (Table 137).

Production appears profitable, however, since the average selling price of approximately

$0.008/piece is high in comparison with domestic prices in China and Vietnam.

Table 137: Ethiopia Crown Cork: Average Unit Economic Cost

Average

Cost/Piece

Revenue 5729938.0 0.0080

Costs

Imported Inputs 3056040.0 0.0042

Domestic Inputs 0 0

Packaging 129388.8 0.0002

Labor 103316.4 0.0001

Electricity 69065.8 9.59E-05

Water/Fuel 266341.6 0.0004

Laboratory Testing 49642.0 6.89E-05

249

Professional Services 25016.4 3.47E-05

R and M 126935.5 0.0002

Admin 271655.8 0.0004

Capital Cost 97818.7 0.00014

Total Cost 4195221.0 0.0058

Average Unit Cost 0.0058


The level of Ethiopian production efficiency will depend on what CIF price is used as a

comparison against domestic productions costs. Given the high wastage rates and old

equipment, product quality is likely to be low, which implies that the lower end of the

range of CIF prices is the most appropriate price comparison. Note, however, that this

low CIF price of US$0.0043 is very close to the bottom end of the range of domestic

prices reported for Vietnam. At this CIF price, domestic production in Ethiopia is highly

economically inefficient. Total costs of foreign exchange (allowing for indirect foreign

exchange effects) are greater than the saving of foreign exchange derived if output is

valued at US$0.0043/piece. The net foreign exchange effect is thus negative, creating a

negative DRC indicating significant economic inefficiency (see Table 138 below). This

implies that imported materials are in total being converted into products of lower value

than the cost of the materials themselves (due to the high wastage and inefficient

equipment).

However, the result is very sensitive to the assumed CIF price, and the switching value

price at which the DRC ratio becomes 1.0 is approximately $0.00583 (or approximately

35 percent above the bottom of the current range of CIF prices). In other words, if a CIF

price 35 percent higher is assumed, the production of crown corks becomes competitive.

Table 138: Ethiopia Crown Cork: Economic Efficiency 2010

CIF Price 0.0043

Costs

Imported Inputs 3056040.0

Domestic Inputs

Packaging 129388.8

Labor 103316.4

Electricity Local 34532.9

Electricity: Foreign 34532.9

Fuel: Local 159805.0

Fuel: Import 106536.6

Laboratory Testing 49642.0

Professional Services 25016.4

R and M 126935.5

Admin 271655.8

250

Capital Cost: Local 36339.6

Capital Cost: Import 61479.0

Total 4195221.0

Foreign Exchange

Savings 3096000.0

Direct Use 3056040.0

Indirect Use 202548.6

Net -162588.0

Domestic Resources 936632.3

DRC -5.76


As with the previous products discussed, two ways in which the economic efficiency of

crown corks could improve are a) better productivity, and b) a realignment of real

exchange rates. Accordingly, as with other products, the assumption is to increase

(double) labor productivity, and then examine how far the Dong or RMB would need to

appreciate in order to render Ethiopian production competitive (i.e., the switching value

of the currencies).

The projections for 2015 with an exchange rate appreciation scenario are complicated

because Vietnam, not China, is the marginal product supply source, but none of the

imports required for local production come from Vietnam. Thus in the calculations for

2015, any projected real appreciation of the Dong has no impact on import costs of

Ethiopian production. Labor is a very small element in total cost (2.5 percent), and even

if labor productivity (pieces per person day) doubles in Ethiopia by 2015, which would

bring it to the average level reported for China in the VCA survey but still below the

level for Vietnam, it would have only a very marginal impact on overall efficiency.

Table 139 gives the DRC result for 2015 assuming a) a doubling of labor productivity,

and b) the real appreciation of the Dong required to make Ethiopian domestic production

competitive assuming an import price of $0.0043/piece remains constant in real terms. It

also shows the new switching value CIF price with higher labor productivity and a

constant real value of the Dong.

Table 139: Summary DRC Results for 2015 Different Scenarios Summary

Assumptions

Doubling labor

productivity, constant real

Dong

Switching value for real

appreciation of Dong

with a doubling of labor

productivity

Switching value for real

CIF price with a doubling

of labor productivity and

constant real Dong

DRC Ratio DRC = -5.44 34 percent appreciation

DRC=1.0

$0.00575/piece

DRC = 1.0

251

Level of

Competitiveness

HIGHLY

INEFFICIENT

MARGINALLY

EFFICIENT

MARGINALLY

EFFICIENT


Production will remain highly inefficient in 2015 with a doubling of labor productivity

alone. By 2015, on these assumptions a 34 percent real appreciation of the Dong would

also be required to make domestic production competitive with imports from Vietnam. A

real adjustment of this size is very unlikely to occur. At a constant real value of the Dong,

and with the assumed doubling of labor productivity, the effective import price would

need to rise to $0.00575/piece, about 33 percent higher than that currently prevailing.

Based on the above results, current production of crown corks in Ethiopia is

economically uncompetitive, with little prospect for medium term competitiveness

through higher real levels of prices from competing economies like Vietnam and China.

Complete re-equipment to increase productivity through lower material wastage and

lower production costs looks to be the main possibility of producing domestically without

the need for protection.

VI.6.2. Zambia: Crown Cork

The aim of this section is to establish the basic economics of a metal product and its

competitiveness in Zambia. We analyze metal crown corks, which are in significant local

demand as an input into the beverage industry. The VCA looks in detail at the strategic

and business process opportunities for cost reduction, upgrading, expansion and

investment at each production stage, while as in the other cases, the DRC analysis

complements the VCA by establishing whether the industry can be competitive, the

ground that it has to cover to become competitive or, alternatively, how well it can

maintain competitiveness.

The DRC cost adjustment methodology is based on a separate methodological annex –

‗The Methodology for Efficiency and Competitiveness Analysis.‘

In Zambia, crown corks are produced locally and run a positive trade balance, denoting a

product that is exportable at the margin, and where the reference price for the DRC

analysis would therefore be the FOB price. An existing production unit in Zambia has

been taken for this analysis. Average unit economic cost is calculated using firm-level

financial data from the VCA survey adjusted to economic values as follows:

Import tariffs are removed from the value of imported inputs;

VAT is removed from the value of domestic items;

252

An annual capital charge is estimated based on the application of a capital

recovery factor for 12 percent over 10 years to the replacement value of assets;

Overhead costs are allocated to crown cork on the basis of their share in total firm

revenue; and

To allow for indirect foreign exchange content, it is assumed that 80 percent of

fuel and electricity cost is for foreign exchange.116

Table 140: DRC Analysis: Crown Corks – Zambia (US$)

Output (pcs p.a.)

477,440,000

Revenue p.a.

$3,247,800.0

Cost Financial Economic Per kg

Imported

PVC compound (liner) 350000.00 301724.14 0.00063

Tin-free steel 1575997.00 1358618.10 0.00285

Printing inks/varnish/lacquers 126000.00 96183.21 0.00020

Domestic

Printing inks/varnish/lacquers 171509.90 147853.36 0.00031

Cartons 74136.65 74136.65 0.00016

Poly bags/Wrap 6326.33 6326.33 0.00001

Salary/wage for primary output 126810.97 126810.97 0.00027

Electricity 84251.97 84251.97 0.00018

Fuel 25163.77 25163.77 0.00005

Testing equipment 68.85 68.85 0.00000

Safety equipment 1.06 0.00 0.00000

Lab supplies 68.85 68.85 0.00000

Prof services 19254.66 19254.66 0.00004

R and M 42594.00 42594.00 0.00009

Admin 377952.59 377952.59 0.00079

Capital charge 135540.31 135540.31 0.00028

Total cost 2796547.73

Average unit cost 0.00586


As shown in Table 140, the average unit cost per piece is US$0.00586, which is very

similar to the average unit cost found for Ethiopia of US$0.00583. The domestic selling

price for this firm is reported as US$0.0077, which is a little below the selling price in

Ethiopia. Unlike the Ethiopian firm surveyed, the Zambian firm reports the export of

around 25 percent of its output to the Congo at an FOB price of US$0.0068. No

116

This is an assumption but given the relatively small share of fuel in total cost the results are not sensitive

to it.

253

competing imports are reported into Zambia.117

In the Ethiopian case, Vietnam was a

more competitive exporter than China, but import prices varied widely with quality and

scale of purchase.

Zambia is selling to the Congo at a price that is higher than the bottom of the CIF range

reported for Ethiopia. However, these exports indicate an ability to compete in the

regional market, probably due to transport and marketing advantages relative to China

and Vietnam. Using the FOB price as a measure of value for the product gives a DRC of

0.68, indicating it is competitive, as it can be produced at a cost well below the regional

market export price (Table 141).

Table 141: DRC Estimate: Crown Corks - Zambia (US$)

FOB price 0.0068

Import content

Fuel 0.80

Electricity 0.80

Foreign exchange output 3246592.00

Imported inputs 1756525.45

Indirect imports 87532.59

Net foreign exchange 1402533.96

Domestic resources 952489.70

DRC 0.68


Medium term Outlook - 2015

Crown cork production currently is competitive in the regional market (e.g., Congo).

Productivity is relatively high under good management, with very low wastage and

absenteeism rates. Production is, however, highly import-intensive with imported steel

nearly 50 percent of total cost, so that any significant adverse relative price shift for steel

on the world market could undermine future competitiveness. If there were a RMB/ZMK

exchange rate realignment by 2015 that saw an appreciation of the Chinese currency, this

would strengthen Zambia‘s competitive position in the medium term, although there

almost certainly would need to be re-equipment of the Zambian plant to ensure adequate

productivity levels are maintained. There is, however, no presumption that unit labor

costs (and the RER) will shift in Zambia relative to China in the medium term.

117

Indian supplies have been quoted as low as US$5.25 per 1000 caps, but no imports have been made.

This is probably because of long standing agreements between the crown cork company and the bottlers,

and partly because demand for corks is highly price inelastic (since they are such a small component of

total cost).

254

VI.7. Value Chain Analysis: Crown Cork (Bottle Caps) 118

The cost of producing crown cork (bottle caps) in Ethiopia is estimated to be about

US$6.60 per 1,000 pieces. In contrast, the same quality caps cost approximately

US$5.66 per 1,000 pieces in Zambia, US$5.28 per 1,000 pieces in China and US$5.01 in

Vietnam. In Ethiopia, crown corks were produced using imported tin-free steel at a

delivered price of US$1,414/ton. In Vietnam, locally available tin-free steel is used at a

price of approximately US$1,360/ton. In China, however, where tin-free steel is readily

available, the delivered price of tin-free steel at the factory gate is approximately

US$1,106/ton. The delivered price in Zambia is highest among the four countries at

US$1,610/ton, largely due to transport logistics.

Key Characteristics: Raw materials account for more than 85 percent of the overall

value chain for the production of bottle caps. The primary raw material (tin-free steel)

accounts for a large portion of the value chain in Ethiopia, Zambia and Vietnam (65

percent, 58 percent and 72 percent, respectively), while in China, however, given the low

price of locally available tin-free steel, it only accounts for 42 percent of the overall value

chain.

The distribution of resources across the value chain is somewhat similar for all countries.

Excluding the primary raw material, the seal making and sealing stage of the production

accounts for 14 percent to 30 percent of the value chain, of which more than 78 percent is

comprised of consumables such as PVC compound and bonding chemicals.

For enterprises in Ethiopia and China, coating and printing is the third largest segment of

the value chain and accounts for 9 percent to 17 percent of the overall value chain. Here

again, consumables account for more than 78 percent of the inputs for this segment of the

value chain. In Vietnam, however, cutting and shaping was the third largest segment of

the value chain, accounting for approximately 5.4 percent of the overall value chain. In

Zambia, coating and painting is the second highest cost contributor to the value chain

(16.8 percent). This is attributed to the high cost of consumables but also the fact that the

technology in Zambia requires LPG (liquid petroleum gas) to run the printing operation

(which adds nearly 19 percent to the coating and painting cost component). The reliance

upon LPG can cause a problem with operations. The LPG is sourced from South Africa

and if it is not available for any reason, as was the case for a week in January 2011, the

printing operations cannot be executed and the line has to shut down.

118

Value chain diagrams in this section reflect actual data from export oriented best practice firms.

255

Figure 46: Crown Cork Value Chain Diagram, Ethiopia

Crown Cork Addis Ababa Ethiopia Unit production cost 6.60 $ (per 1,000) Price of Imported Tin-Free Steel $/ton 1,414 $ Skilled:Unskilled Worker Ratio 1:1.02

Raw material Coating & Painting

Cutting and Shaping

Seal Making & Sealing Packing Admin

65.0% 8.6% 0.8% 17.1% 3.3% 5.2%

Tin-free steel 100.0% Raw material 78.2% Raw material 78.2% Labor 4.0% Labor 1.5% Electricity 4.3% Fuel/oil/ water 17.4%

R & M 11.6% R & M 1.6% Raw material 5.61 $ 85.1% Labor 0.11 $ 1.6%

Packing material 0.21 $ 3.1% Global Development Solutions, LLC

256

Figure 47: Crown Cork Value Chain Diagram, Zambia

Crown Cork Ndola Zambia Unit production cost 5.66 (per 1,000) 0.005661 $ Price of Imported Tin-Free Steel $/ton 1,610 Skilled:Unskilled Worker Ratio 2.8:1


Cutting and Shaping


58.3% 16.8% 2.6% 14.4% 3.4% 4.5%

Tin-free steel 100.0% Raw material 65.5% Raw material 89.9%

Fuel/oil/LPG 18.8% Labor 8.5% Labor 8.1% R&M 0.9%

R&M 4.0%

Raw material 4.66 $ 82.3% Labor 0.27 $ 4.7% Packing material 0.17 $ 3.0% Global Development Solutions, LLC

257

Figure 48: Crown Cork Value Chain Diagram, China

Figure 49: Crown Cork Value Chain Diagram, Vietnam

Crown Cork HCMC Viet Nam Unit production cost 5.01 $ (per 1,000) Price of Domestic Tin-Free Steel $/ton 1,360 $ Skilled:Unskilled Worker Ratio 1:0.2


Cutting and Shaping


72.4% 3.8% 5.4% 14.8% 2.3% 1.2%

Tin-free steel 100.0% Labor 24.9% Raw material 95.6% Electricity 12.6% Labor 1.1%

Raw material 3.82 $ 86.2% R & M 2.9% Electricity 2.1% Labor 0.22 $ 5.0% Consumables 57.4% R & M 0.8%


Crown Cork Guangdong China Unit production cost 5.28 $ (per 1,000 pieces) Price of Local Tin-Free Steel $/ton 1,106 $ Skilled:Unskilled Worker Ratio 1:9


Cutting and Shaping

Seal Making & Sealing

Packing Admin

42.0% 17.1% 3.4% 30.9% 4.2% 2.5%

Tin-free steel 100.0% Raw material 83.9% Raw material 93.2% Labor 15.4% Labor 6.4% Electricity 0.2% Electricity 0.1%

R & M 0.4% R & M 0.2% Raw material 4.50 $ 85.1% Labor 0.69 $ 13.1%


258

VI.7.1. Benchmarking Key Variables

The difference in the cost of tin-free steel between Ethiopia and China is approximately

28 percent. However, the average unit cost differential between Ethiopia and China is

more than 36 percent, despite the fact that labor costs for skilled workers in Ethiopia are

less than 58 percent of those in China. These figures suggest that there are substantial

inefficiencies in the only enterprise currently producing bottle caps in Ethiopia. When

compared with Zambia, the cost of tin-free steel is 14 percent higher in Zambia than in

Ethiopia yet in Zambia the unit cost of crown cork production is 18 percent lower than in

Ethiopia.

Capacity utilization at the only production facility for bottle caps in Ethiopia is 99 percent,

and demand for bottle caps in the domestic market continues to outstrip supply as local

breweries prepare to double production. Given quality issues and lack of supply, major

bottlers such as Pepsi and Coca Cola continue to import caps with most coming from

India (44.5 percent) and the EU (42 percent) with some as well from China (4.5 percent).

The situation in Zambia is quite the opposite of that in Ethiopia. Factory utilization for

the lone plant in Zambia is only 52 percent and yet the plant meets more than 75 percent

of the local market demand. While the Ethiopian producer cannot meet demand, the

Zambian producer would benefit greatly from export markets.

Table 142: Benchmarking Key Variables for Crown Cork Production China Vietnam Ethiopia Zambia

1.0 Factory

1.1 Capacity utilization 95% - 100% 70% - 100% 99% 52%

1.2 Installed capacity (x1,000 piece/day) 427 - 2,500 800 - 8,000 5,000 2,667

1.3 Labor absenteeism rate (%) 1% - 2% 0% - 5% 7% 3%

1.4 Average salary/wage/month

1.5 Skilled $265 - $369 $168 - $233 $181 $510

1.6 Unskilled $192 - $265 $117 - $142 $89 $342

1.7 Days of operation/month 26 - 28 26 - 30 30 22

1.8 Average age of major equipment 4.5 - 5.3 1.3 - 1.8 28 11.3

2.0 Exported Output (finished primary product)

2.1 Direct Export without consolidator/broker 0% 0% 0% 26%

2.2 Indirect Export Through Local Consolidator 20% - 60% 0% 0% 0%

2.3 Indirect Export Through Overseas Consolidator 0% 0% 0% 0%

3.0 Domestically Sold Output (finished primary product)

3.1 Direct Sales to Wholesalers/Retailers w/out consolidator 0% 100% 100% 74%

3.2 Direct Sales Through Own Outlets/Shops/Showrooms 40% - 100% 0% 0% 0%

3.3 Indirect Sales Through Local Consolidator/Trader 0% 0% 0% 0%

4.0 Unit production cost ($/1,000 pieces) $4.81 - $5.32 $4.43 - $5.01 $6.91 $5.67

5.0 Avg Selling Price ($/1,000 pieces)

5.1 Factory gate $5.75 - $6.64 $5.13 - $5.80 8.64$ $6.79

5.2 Wholesale $5.90 - $7.08 -$

5.3 FOB price $6.19 - $7.08 -$


Demand exceeds supply;only one plant in ET

High labor absenteeism

Competitive labor wages bu t narrow

gap compared to VN

Old equipment

High unit productioncost reflects use of

inefficient equipment

Low capacity utilization

As the benchmarking data above indicates, the factory in Ethiopia suffers from high

absenteeism (7 percent) when compared to factories in Zambia, China and Vietnam.

259

Perhaps more notable is the fact that, while labor costs in Ethiopia are competitive, the

labor cost differential between China and Vietnam, particularly for skilled workers, is

substantially less than the gap found in other less technical sectors such as the apparel

sector where the cost of skilled labor in Ethiopia was less than one-third that of China.

This suggests that while labor cost is competitive in Ethiopia, in sectors requiring

technical and engineering skills, low labor costs alone may be insufficient to sustain

competitiveness over the medium- and long-term. The labor cost differential between

Ethiopia and Zambia further illustrates the point considering that the Zambian labor costs

are more than double that of Ethiopia yet unit production cost in Zambia remains lower

than in Ethiopia.

An example of the need for technically skilled labor can be found in the high unit cost of

crown corks produced in Ethiopia, which in part can be attributed to the age of the

equipment (averaging 28 years old) where manual and semi-manual operations continue

to be a part of the production line. The consequence of continuing to use old manual and

semi-manual equipment is reflected in the wastage rate, where 32 percent of the tin-free

steel ends up as scrap.119

In Zambia, China and Vietnam, where newer, automated

equipment is used, the scrap rate is well below 5 percent (refer to Table 143 below).

Table 143: Benchmarking Key Variables for Crown Cork Production (cont.) China Vietnam Ethiopia Zambia

6.0 Avg Spoilage & Reject rate: List different types (3)

6.1 Rejected by firm 2% 0% - 5% 3% 1.5%

6.2 Rejected by clients 3% 0% - 1% 0% 0%

7.0 Waste and Losses

7.1 Metal scrap 5% 1% - 2% 32% 2.5%

7.2 Plastic scrap 5% 1%

8.0 Electricity

8.1 On grid (Cost/kWh) $0.12 - $0.15 $0.05 0.05$ $0.03

8.2 Off grid (Cost/kWh) - self generated 0.19$

8.3 % of time off grid/month 8% 10%

9.0 Water (m³) $0.54 - $0.59 $0.24 - $0.25 0.33$

10.0 Fuel & Oil (liter) $0.92 - $2.95 $0.83 - $0.94 0.64$ $1.45

11.0 Productivity & Efficiency

11.1 Labor productivity (factory level): pieces/person/day (x1,000) 12.9 - 25.1 24.7 - 26.7 10.4 201.9

11.2 Electricity usage: On-grid (kWh/million pieces) 37- 80 1,115 - 1,633 1,050 2,079

11.3 Electricity usage ($/million pieces) $4.60 - $11.76 $56.99 - $83.46 57.55$ $61.76

11.4 Water usage (m³/million pieces) 1.7 - 5.1 9.3 - 11 6.40

11.5 Water usage ($/million pieces) <$0.01 $2.25 - $2.78 2.14$

11.6 Fuel & oil usage (liters/million pieces) 0.5 - 2.8 41 - 42 344.3 0.1

11.7 Fuel & oil usage ($/million pieces) $0.47 - $2.56 $34.78 - $38.69 219.81$ $14.50

11.8 Transport ($/km-ton) $0.08 - $0.18 $0.11 - $0.23 $0.48


Unsustainable wasteage rate

Low labor productivity

High fuel usage reflects old

equipment and poor quality electricity

Automated processes gives high efficiency

High fuel and oil usage (344 liters per million pieces) is also symptomatic of the age and

inefficiency of the equipment. The fuel consumption rate for a factory in Ethiopia is

119

If the factory in Ethiopia is able to reduce the scrap rate to 5 percent, which is the average rate in China,

holding all other production costs constant, the unit production cost per 1,000 pieces would come down to

approximately US$5.20, which would place the factory in Ethiopia well within a competitive range with

China, but still would not be competitive with a similar facility in Vietnam.

260

more than 300 times that of a factory in China.120

Inevitably, all of these factors add up

to the low labor productivity rate in Ethiopia, where factory workers produce less than

one-half that of their counterparts in China and Vietnam and nearly a factor of twenty

less than in Zambia where the processes are fully automated.

As the benchmarking data suggests, even when all high-cost imported input materials are

excluded from the production costs, due to the use of outdated equipment, fabricating

crown corks is highly uncompetitive in Ethiopia. Specifically, fabrication costs

(excluding the cost of all input material) in Ethiopia are 30 percent higher than in China

and nearly 68 percent higher than in Vietnam (Table 144).

Table 144: Benchmarking Fabrication Costs for Crown Cork

Average Fabrication Costs for Crown Cork (Bottle Caps)*

China Vietnam Ethiopia Zambia

Avg Processing Costs (US$/ton) $0.60 $0.47 $0.78 $0.60

* US$/1,000 pieces


Despite its inefficiency and high market price, the Ethiopian manufacturer is able to

command a high market price and stay in business.

Currently, there are no policy or regulatory barriers prohibiting or limiting market entry

in this subsector, but the close supplier relationship between bottlers/breweries and crown

cork manufacturers makes it very difficult for new market entrants to penetrate the supply

chain. As the beverage sector prepares to double its production capacity, the Ethiopian

crown cork manufacturer is exploring options to expand production capacity, but in the

absence of plant modernization, it is not anticipated that Ethiopia can remain competitive

in this product segment.

VI.8. Conclusions: Policy Issues and the Possibilities and Actions for Achieving

Competitiveness in the Manufacture of Crown Corks

Current Competitiveness

Ethiopian production currently is characterized by high import-intensity (low domestic

value added), obsolete equipment and high wastage rates of materials. These factors

make local production highly inefficient and only sustainable through forms of protection

(which is not recommended). Even with the projected advantage of lower costs through

120

In Ethiopia, the fuel is used to run backup generators (note that off grid time per month in Ethiopia for

this plant is above 8 percent).

261

reduced RER of the Birr relative to the Yuan and the Dong, with current technology and

practices there is no potential for competitiveness.

Future Competitiveness

The only possibility for production becoming competitive is with re-equipment and

modernization accompanied by appropriate skills upgrading. New equipment is likely to

be accompanied by lower fuel costs and lower repairs and maintenance. The very low

Ethiopian wage levels do not have much bearing on the issue because labor costs are a

very small proportion of the total costs of production.

However, while re-equipment would probably improve competitiveness, it may be that

the combination of economies of scale and low transport costs of crown corks in/from

Asian countries would still prevent crown corks being a priority opportunity for local or

foreign Asian investors in Ethiopia compared to exporting from Asian countries.

Currently, the only viable policy recommendation is to ensure that both financial and

non-financial incentives (e.g., duty free imports, accelerated depreciation, concessionary

loan and trade finance, subsidized training for skills upgrading, etc.) are in place to

reward investments in capital equipment as a part of a broader program to rehabilitate and

upgrade the equipment and technology in the metal products sector, not only for the

purpose of improving price competitiveness, but also to reduce both material and energy

waste.

262

Comparative Value Chain and Economic Analysis

of the Agribusiness Sector (Wheat Milling) in

Ethiopia, Tanzania, Zambia, China and Vietnam

263

VI.9. Wheat Milling Analysis: Objectives

The purpose of the wheat milling analysis is to assess the current competitiveness of the

subsector. To do this, a typical product (production of wheat flour) is analyzed in the

following manner:

Examine important issues and trends in the world agribusiness and food market;

Review the structures of the Ethiopian, Tanzanian, Zambian, Chinese and

Vietnamese milling markets;

Assess the key features, strengths and weaknesses of the existing supply chains

for milling in Ethiopia, Tanzania, Zambia, China and Vietnam;

Assess the overall economic efficiency of domestic wheat flour production in

relation to world prices (as reflected by production prices in China) using

alternative cost projection scenarios to establish current and medium term

competitiveness;

Taking the economic efficiency result as a starting point, analyze the wheat

milling value chain to identify key strengths, weaknesses and opportunities or

needs for investment, expansion or contraction to maintain and increase

productivity and competitiveness of the milling sector at the business strategy and

business process levels; and

Provide possible policy options and recommendations to help stimulate growth

and improve competitiveness in the sector.

VI.10. Product Selection Method

Following a review of the first product screening in which 40 products were selected for

consideration for the value chain analysis and feasibility study, the World Bank (WB)

and Global Development Solutions (GDS)/HQ teams immediately agreed on seven out of

the ten products needed for the analysis. The seven products selected by the teams were

as follows:

1. Apparel:

a. Polo shirt; and

b. Underwear

2. Agribusiness:

a. Milk; and

b. Wheat milling

3. Leather:

a. High-end sheepskin loafers

4. Wood:

264

a. Windows/French windows and frames

5. Metal:

a. Padlocks.

To finalize the selection of the remaining products from the wood, metal and leather

sectors, based on the Africa Competitiveness: Phase 1.1 - Preliminary Product Screening

in Ethiopia report (July 2010), the WB and GDS/HQ teams chose six products as

potential candidates to be included in the list of the final ten products to be the target

products for the value chain analysis and feasibility study. The six products included the

following:

1. Wood products:

a. Wooden doors; and

b. Wooden chairs (not upholstered).

2. Leather products:

a. Leather golf gloves; and

b. Sports footwear of leather.

3. Metal products:

a. Metal doors, window-frame (security window frame); and

b. Aluminum doors and windows.

In order to screen the final six products, a product screening survey was developed which

revolved around six factors:

1. Whether these products are currently produced by companies with less than

50 employees;

2. If companies identified in #1 above can be set up with less than US$100,000

in investment capital;

3. The minimum level of skills and know-how required to produce the products;

4. Whether the products produced by the companies in #1 are being exported;

5. Whether products produced by companies in #1 are consolidated by brokers

or other intermediaries for exports; and

6. Whether companies identified in #1 can readily access raw material inputs in

the market to produce the products.

These questions were posed to the wood, metal and leather sector associations in both

China and Vietnam. Following interviews with sector associations, additional interviews

were conducted at the firm level to identify specifically the level of investments and

minimum level of technical skills required for an entrepreneur or existing SMEs to set up

a production operation. These questions were posed to existing operators in China and

Vietnam to identify whether:

265

Barriers to market entry, particularly from a financial and skills

requirement, were sufficiently low to allow entrepreneurs and SMEs in

Ethiopia to easily establish operations; and

These products are currently being produced by SMEs in China and

Vietnam, and are effectively being sold in local and export markets.

The product screening survey identified the following products as viable candidates to be

targeted for the value chain and feasibility analysis.

1. Wood product:

a. Wooden chairs (soft wood); and

b. Wooden door (semi-solid).

Although French windows and their frames made of wood had originally been

preselected for analysis, a decision was made to opt to analyze both wooden

chairs and wooden doors. This decision stemmed from the fact that French

windows require glass thus introducing an outside factor that could influence

the manufacturing of the final product. Wooden doors (without glass) and

wooden chairs (without upholstery) are more representative of wood

processing exclusively.

2. Leather products: Leather golf gloves or sports glove of comparable structure

and weight.

3. Metal products: Both the pre-selected products (security window frame; and

aluminum doors and windows) were screened out of the selection due to

various factors including high initial investment requirements. As a result,

further analyses of products identified during the preliminary product

screening were conducted. Interviews with metal sector associations and

enterprises currently operating in China and Vietnam, as well as interviews

with existing operators in the fabricated metal products sector in Ethiopia

identified crown corks (bottle caps) as a viable candidate to be targeted for

value chain analysis. Crown corks currently are produced in four of the five

countries, but Ethiopia continues to import substantial volumes of this product,

including imports from China. As a result, crown corks have been chosen as

the final fabricated metal product to be the focus of a value chain analysis in

the target countries.

266

VI.10.1. Respective Government Definitions of Small, Medium and

Large Enterprises in Ethiopia, Tanzania, Zambia, China and

Vietnam

Ethiopia: For Ethiopia, the classification of enterprises into small, medium and large

scale depends on a number of variables such as level of employment, turnover, capital

investment, production capacity, level of technology and subsector. Accordingly, the

following scales are referred to the classification of enterprises in the Ethiopian context

(Table 145).

Table 145: Company Size Classification Structure for Ethiopia

Small Scale Medium Scale Large Scale

Textile and Apparel 5-9 10 – 49 above 50

According to the Central

Statistics Agency (CSA)

Leather 2-10 21 – 50 above 51

Diary 2-10 21 – 50 above 51

Wheat 2-10 21 – 50 above 51

Wood Processing 2-10 21 – 50 above 51

Metal 2-10 21 – 50 above 51

According to Federal

Medium and Small

Enterprise Development

Agency (FeMSEDA)

Sub-sector Remark

Number of Employees

Source: Ethiopia CSA and FeMSEDA

Tanzania: For Tanzania, the classification of enterprises into small, medium and large

scale depends on a number of variables such as level of employment and capital

investment in machinery. The classification cuts across sectors and subsectors of the

economy. Accordingly, the following scales refer to the classification of enterprises in

the Tanzanian context (Table 146). Note that the small enterprise type is most

appropriate for all sectors studied in this analysis.

Table 146: Company Size Classification Structure for Tanzania

Category Employees

Capital Investment in Machinery

(TZS million) Remarks

Micro enterprise 1 - 4 Up to 5 Majority in the informal sector

Small enterprise 5 - 49 5 - 200 Most in the informal sector

Medium enterprise 50 - 99 200 - 800 Most in the formal sector

Large enterprise 100+ 800+ All in the formal sector Source: Tanzania Chamber of Commerce, Industry and Agriculture (TCCIA)

Zambia: Zambia classifies enterprises as micro, small, medium and large based on

several factors including number of employees, annual revenue and capital investment.

The capital investment category is further delineated by whether the firm is engaged in

manufacturing or if it is a trading/services firm. For microenterprises, the minimum

revenue and investment requirements are kept intentionally low in order to encourage

registration, although few microenterprises actually register.

267

Table 147: Company Size Classification Structure for Zambia

Classification Employees

Annual Revenue

(ZMK million)

Capital Investment for Manufacturing

Firms (ZMK million)

Capital Investment for Trading/ Services

Firms (ZMK million)

Micro < 10 < 20 < 10 < 10

Small 10 - 50 150 - 250 80 – 200 150

Medium 51-100 300 - 800 200 – 500 151 - 300

Large > 100 > 800 > 500 > 300

Source: Zambia Development Agency

China: The China government is challenged in defining sizes of firms. Temporary

definitions have been used for the past several years, and the government promised to

revise the standard in 2010. The definition from the National Bureau of Statistics of

China is complex. The definition was published in 2002 jointly by the Ministry of

Finance, National Bureau of Statistics of China, State Economic and Trade Commission

(no longer exists), and China Planning Commission, which has since split and exists as

the State Development and Planning Commission (SDPC) and the National Development

and Reform Commission (NDRC). A simplified presentation of the company size

classification is shown in Table 148. Note that the Industrial type is most appropriate for

all sectors studied in this analysis.

Table 148: Company Size Classification Structure for China

Type Index Unit Small Medium Large

















Lodging and

Catering services

Industrial

Construction

Wholesale

Retail

Transportation

Post services

Source: National Bureau of Statistics of China

Vietnam: A small firm has less than 50 laborers, while a medium-size firm has 51-200

laborers. Within the small and medium-size classifications, there are some detailed

categories depending on the purpose of research and management. For instance, a firm

268

with less than 10 laborers is called a super small-size firm. Such a regulation is in line

with Social Insurance Law.121

VI.10.2. Product Technical Specifications

Following the identification of products to be targeted for the value chain and feasibility

analysis, a detailed technical profile of each product with an accompanying diagram or

photograph was complied and sent to the field teams to help ensure that product data

collection in the field focused on products with similar - if not identical - technical

specifications. Table 149 below provides the product technical specifications for all ten

products for which product data are being collected.

Table 149: Product Technical Specifications

Material

Product WeightUnit of

measureUnit of measure

1 Golf gloves 85 - 141 grams Men's medium Sheepskin

Loafer 780 grams Heel Width Insole

Size US = 8 EU = 7 2.5 10 30

3 Padlock* 760 grams 7 7 NA* cm Brass

Thickness Diameter Height

0.24 31.9 6.6

Width Depth Height

45 45 75

Width Depth Height

80 4 210

Protein Lactose Ash Vitamins Fat content

3.5% 4.7% 0.8% B1, B2, C and D Full

Type (German) Type (French) Ash Protein Moisture

550 55 <0.65%approx.

11%<14.5%

9 Polo shirt 250 - 270 grams 100% cotton

10 Underwear 80 - 100 grams80% cotton/

20% spandex

* Overall height is 14 cm with a 2 cm shackle diameter

** The weight of the cover (plastic sole made from PVC) in the internal surface of the cap is 290 mg


Pine

Wheat or rice

Dimension

All purpose flour

cm

Refer to diagram

Weight

cm

mm

cm

tin free steel

(tfs)

Sheepskin

Pine

mg

kg

kg

liters

Refer to picture

Crown cork

(metal bottle

cap)**

Wooden chair

Wooden door

Milk

Milling

290

6.5

12

0.5

2

4

5

6

7

8

VI.11. Global Agribusiness Market

Agribusiness is a very wide sector with numerous subsectors and many products within

each subsector. Dairy products and wheat flour are selected for consideration as the

focus of the African Competitiveness (AC) project.

121

Information garnered from



269

Market Trend (wheat flour): 2008 saw the highest global export in wheat flour, tallying

a total of US$5.2 billion. Exports, however, experienced a sharp decline of 27 percent

and registered a total value of US$3.8billion in 2009. Kazakhstan exported US$849

million worth of wheat flour in 2008 but showed a significant 32 percent decline and

exported wheat flour worth US$574 million in 2009. Turkey became the top exporter in

2009 by exporting wheat flour valued at US$581 million. Argentina, France, Belgium

and Germany are also among the top exporters of wheat flour (See Table 150 below).

Table 150: Leading Exporters of Wheat or Meslin Flour Products (US$000)

Exporters

Exported value in

2005

Exported value

in 2006

Exported value

in 2007

Exported value

in 2008

Exported value

in 2009

World* 2,286,726.00 2,258,634.00 3,476,889.00 5,216,523.00 3,780,594.00

Turkey 426,152.00 272,850.00 424,486.00 617,572.00 581,471.00

Kazakhstan 142,307.00 172,344.00 339,122.00 849,228.00 574,450.00

Argentina 1,473.00 35,006.00 250,082.00 435,452.00 294,838.00

France 157,845.00 177,986.00 242,549.00 359,897.00 259,418.00

Belgium 195,241.00 190,433.00 276,316.00 386,580.00 249,577.00

Germany 145,462.00 160,319.00 200,411.00 295,991.00 222,727.00

United States of America 49,677.00 51,293.00 125,942.00 137,254.00 132,282.00

Russian Federation 42,847.00 43,615.00 92,444.00 197,579.00 121,495.00

United Kingdom 46,401.00 42,404.00 70,581.00 102,131.00 99,047.00

Canada 80,946.00 88,051.00 96,009.00 133,239.00 98,886.00

China 85,667.00 97,033.00 210,520.00 77,368.00 96,003.00

Japan 72,924.00 67,849.00 65,740.00 80,317.00 58,209.00

United Arab Emirates 60,098.00 47,341.00 38,115.00 121,337.00 54,031.00

Netherlands 61,095.00 74,055.00 52,311.00 82,255.00 52,189.00

Australia 64,726.00 64,105.00 74,573.00 108,768.00 44,867.00

*The world aggregation represents the sum of reporting and non reporting countries

Source: Compiled by Global Development Solutions, LLC based on COMTRADE statistics

Global import of wheat flour declined from US$4.9 billion in 2008 to US$3.8 billion in

2009. The top importers of wheat flour are Iraq, Uzbekistan, Indonesia, Brazil, Angola

and the Netherlands. In 2009, Afghanistan became the leading importer of wheat flour

by importing product worth US$360 million (see Table 151).

270

Table 151: Leading Importers of Wheat or Meslin Flour Products (US$000)

Importers

Imported value

in 2005

Imported value

in 2006

Imported value

in 2007

Imported value

in 2008

Imported value

in 2009

World* 2,281,332.00 2,320,998.00 3,420,186.00 4,889,996.00 3,829,739.00

Afghanistan 162,443.00 359,929.00

Iraq 257,854.00 124,676.00 174,131.00 319,660.00 283,251.00

Uzbekistan 66,430.00 71,608.00 160,629.00 314,703.00 223,453.00

Indonesia 128,009.00 143,110.00 180,317.00 271,263.00 223,184.00

Brazil 6,000.00 31,041.00 175,866.00 291,833.00 194,363.00

Angola 76,046.00 91,547.00 122,624.00 169,243.00 128,778.00

Netherlands 93,020.00 86,544.00 127,389.00 223,068.00 117,860.00

Bolivia 26,092.00 33,187.00 67,719.00 115,836.00 103,776.00

United States of America 71,687.00 83,010.00 88,611.00 133,059.00 99,947.00

Tajikistan 48,690.00 52,140.00 101,117.00 153,838.00 99,213.00

Ireland 38,540.00 39,029.00 53,912.00 68,653.00 97,341.00

Hong Kong (SARC) 62,851.00 64,701.00 73,460.00 95,046.00 93,411.00

Spain 11,242.00 51,438.00 103,571.00 112,525.00 92,297.00

France 57,563.00 54,844.00 79,547.00 113,802.00 87,373.00

Belgium 42,846.00 49,325.00 67,827.00 99,240.00 84,455.00 *The world aggregation represents the sum of reporting and non reporting countries


The aggregate contribution of LDCs in export of wheat flour in 2009 was only 1 percent

(US$63 million) of the global export value of US$3.8 billion. Although small in value,

the major exporting countries of wheat flour are Zambia, Mozambique and Tanzania (see

Table 152 below).

Table 152: Leading Exporters of Wheat or Meslin Flour of LDCs (US$000)

Exporters

Exported value

in 2005

Exported value

in 2006

Exported value

in 2007

Exported value

in 2008

Exported value

in 2009

World* 2,286,726.00 2,258,634.00 3,476,889.00 5,216,523.00 3,780,594.00

Least Developed Countries

(LDCs) Aggregation 43,890.00 38,195.00 76,775.00 79,839.00 62,915.00

Zambia 6,990.00 11,530.00 15,062.00 24,782.00 20,073.00

Mozambique 2,201.00 692.00 695.00 1,750.00 17,209.00


Senegal 2,047.00 5,430.00 4,222.00 6,077.00 3,319.00

Nepal - - - - 2,057.00

Yemen 4,673.00 3,920.00 998.00 4,685.00 1,421.00

Benin 4,568.00 2,403.00 1,439.00 865.00 1,157.00

Togo 7,881.00 3,896.00 132.00 691.00

Uganda 457.00 1,907.00 3,526.00 1,667.00 495.00

Bhutan 1,060.00 - 446.00

Mali - 31.00 795.00 - 159.00

Burundi - - 10.00 - 104.00

Gambia - - - - 73.00

Guinea-Bissau - - - - 37.00

Myanmar - - - 82.00 25.00 *The world aggregation represents the sum of reporting and non reporting countries


271

For imports, the LDCs took 22 percent of the global value of US$3.8 billion in 2009.

Afghanistan stands out as a major importer taking 41 percent (US$870 million) of the

total imports by LDCs. Angola is the second largest importer of wheat flour and

accounts for 14 percent of the aggregate LDC import. Although not very significant, the

Democratic Republic of Congo, Somalia, Ethiopia, Guinea and the Sudan are also among

the leading LDC importers of wheat flour (Table 153).

Table 153: Leading Importers of Wheat or Meslin Flour of LDCs (US$000)

Importers

Imported value

in 2005

Imported value

in 2006

Imported value

in 2007

Imported value

in 2008

Imported value

in 2009

World* 2,281,332.00 2,320,998.00 3,420,186.00 4,889,996.00 3,829,739.00

Least Developed Countries

(LDCs) Aggregation 325,068.00 355,418.00 425,576.00 686,665.00 870,211.00

Afghanistan 162,443.00 359,929.00

Angola 76,046.00 91,547.00 122,624.00 169,243.00 128,778.00

Democratic Republic of the

Congo 25,060.00 29,468.00 54,640.00 69,742.00 41,837.00

Somalia 26,598.00 33,230.00 29,185.00 50,099.00 37,167.00

Ethiopia 36.00 456.00 417.00 3,450.00 28,660.00

Guinea 12,431.00 17,233.00 20,216.00 24,619.00 28,460.00

Sudan 10,416.00 5,266.00 4,997.00 28,380.00

Chad 7,978.00 9,006.00 17,805.00 22,992.00 22,497.00

Haiti 12,192.00 17,693.00 16,478.00 21,736.00 21,759.00

Madagascar 13,756.00 13,412.00 12,206.00 2,815.00 21,085.00

United Republic of Tanzania 838.00 1,027.00 337.00 631.00 17,221.00

Djibouti 5,023.00 6,798.00 10,597.00 19,974.00 12,105.00

Burkina Faso 13,896.00 12,017.00

Mali 4,866.00 23,097.00 18,055.00 11,972.00 11,325.00

Maldives 5,646.00 5,672.00 7,769.00 12,936.00 11,019.00 *The world aggregation represents the sum of reporting and non reporting countries


Industry and Consumer Trend: According to FAO, per capita caloric intake globally

generally has been increasing since the mid-1960s, although not equally across regions.

The supply of calories remained almost stagnant in Sub-Saharan Africa. In contrast, the

per capita supply of energy has shown a significant increase in Eastern Asia by almost

1,000 kcal per capita per day, mainly in China, and almost 700 kcal per person per day in

East/North Africa. The global average per capita kilocalorie intake per day stands at

2,940. Specifically, it is 3,440 kcal per capita per day in industrialized countries and

2,850 kcal per capita per day in developing countries. The average kilocalorie per capita

per day supply of energy for Sub-Saharan Africa is 2,360.

Dairy Products - Industry and Consumer Trend: According to FAO and

Euromonitor,122

consumer food prices remained high in 2009 and the number of dairy

product consumers is expected to increase by 50 percent over the next seven years.

Overall, the global demand for dairy products is rising by about 2 percent every year.

122 Special Report, Consumer Food Prices Remained High in 2009, FAO and Euromonitor, 2009

272

This increase is driven by population growth in general and the growing per capita

consumption in Asia, particularly in China. Increasing dairy product intake is in line with

the healthy lifestyle trend of the present modern generation.

Wheat flour - Industry and Consumer Trend: According to FAO‘s projection,123

world

wheat production in 2010 will be 646 million tons; down 5 percent from 2009 but still the

third highest on record. World wheat utilization has been raised by 6 million tons,

mainly driven by the expected higher wheat-based feed use in the Russian Federation,

which traditionally uses barley, but its production is expected to drop by 50 percent in

2010. As a result of the combination of a decrease in world wheat production along with

an increase in demand, it is forecasted that wheat stocks by the end of 2011 would be

only 181 million tons, down by 9 percent from its average eight-year level. The stock-to-

use ratio for wheat in 2010/11 is projected to reach 27 percent, down 3 percentage points

from the previous season, but still 5 percent higher than the 30-year low in 2007/08. The

forecast for world wheat trade (including wheat flour) also has been lowered in 2010,

mostly on higher international priceswhich may curb imports of wheat, especially for

animal feeding.

Dairy Products - Supply and Demand: Global milk output in 2009 was 699 million

tons, registering a growth rate of only 1.6 percent against the previous year. Demand

growth from 2008 to 2009, however, was 2 percent resulting, therefore, in a 0.4 percent

gap in demand growth verses production growth. The slow growth pace is attributed to

an increased price for animal feed and poor pasture conditions in South America. The

overall increase in price of animal feed is related to poor harvest of cereal in the major

exporter countries. The global financial crisis has also eroded purchasing power of

consumers as evidenced by a sharp decline of cheese imports – US$1.1billion in 2008

versus US$891million in 2009 – into the Russian Federation, the largest importer of

cheese in the world.

Wheat flour - Supply and Demand: According to FAO, the world cereal production in

2010 fell to 2,238 million tons (including rice in milled terms) from 2,280 million tons in

2009. However, even at this lower level, world cereal output in 2010 would be the third

highest on record and above the five-year average. Among the major cereals, wheat

accounts for most of the reduced production as a result of adverse weather in the leading

producer countries.

At present, it is forecasted that world cereal utilization would slightly exceed production

in 2010/11. This will result in a 2 percent contraction in world ending stocks from their

123

FAO/GIEWS Global Watch Global Cereal Supply and Demand Update, Sep 2010

273

eight-year high opening levels and this, in turn, could lead to a small decline in world

cereal stocks-to-use ratio to 23 percent which is well above the 19.5 percent low level

witnessed in the 2007/08 food crisis period.

VI.12. Comparative Sector Profile: Agribusiness/Food Sectors

Key Indicators: With over US$990 billion in total production, China has become a

major player in the global agribusiness/food sector. For Vietnam, the agribusiness/food

sector is the largest productive sector of the economy and contributes to over 20 percent

of total output (US$22 billion).

In all five countries, the agribusiness/food sector has relatively few large companies. In

China, more than 75 percent of the firms are SMEs; this figure is 94 percent in Vietnam,

92 percent in Ethiopia, 79 percent in Tanzania and 99 percent in Zambia. In China, the

sector employs nearly 10 million workers, of which more than 73 percent are men,

whereas in Vietnam it is estimated that 451,000 are employed of which 45 percent are

men. In Ethiopia, of the 46,000 agribusiness/food sector workers, 76 percent are male.

In Tanzania, the sector employs 44,000 workers, 73 percent of whom are male. In

Zambia, 330,000 work in agribusiness; of these 83 percent are male (Table 154).

Table 154: A Snapshot of the Agribusiness/Food Sectors in China, Vietnam, Ethiopia, Tanzania and

Zambia

Key Comparative Indicators China Vietnam Ethiopia Tanzania* Zambia

Total Imports (Value - US$1,000)* 6,596$ 25,360$ 28,660$ 17,221$ 12$

Total Exports (Value - US$1,000)* 96,003$ 15,848$ 5$ 15,585$ 20,000$

Companies Operating in the Agribusiness/Food Sector 12,903 5,979 1,926 203 33

Small 35% 45.4% 80% 64% -

Medium 40% 48.7% 12% 15% -

Large 25% 5.9% 8% 21% 100%

Estimated Number of Workers* 9,956,316 451,360 46,183 43,792 20,160

Male 73% 45% 76% 73% 83%

Female 27% 55% 24% 27% 17%

* Trade data refers to wheat flour only

** Year 2008 figures in the case of Tanzania. Does not include micro and small firms with less than 10 employees.

Global Developmenrt Solutions, LLC from interviews and national statistics. Trade data from Comtrade.

Policy and Regulatory Environment: For all countries, the agribusiness/food sectors

have a wide array of tariffs (too many to list here). In the case of China, there are over

722 tariffs in the agribusiness/food sector with an average rate of 15 percent. In the case

of Vietnam, there are over 40,773 tariff lines in the Fast and Normal tracks of the

Common Effective Preferential Tariff (CEPT) scheme, which on average has come down

to as low as 2.3 percent. Ethiopia is covered under COMESA with an import duty that

ranges from 18 percent to 30 percent.

Concerning taxes and levies, China has a relatively high tax rate ranging from 10 percent

for fish to 20 percent for maize with a VAT of 17 percent, whereas in Vietnam, the VAT

274

rate is on average 10 percent. Although there are a range of taxes and levies imposed on

the agribusiness/food sector in China, there are also tax refunds that range from 8 percent

for rice to 15 percent for maize, with an average tax refund of 16 percent. Producers in

the other countries do not enjoy a subsidy or tax-refund.

Tanzania does not maintain any direct subsidies or tax preferences for the agribusiness

sector or related agricultural production. As a result, the policy and regulatory impact on

agribusinesses is primarily through external trade tariffs. Like all member countries of

the East African Community (ECA), Tanzania is bound by the Common External Tariffs

(CET). For agriculture and agribusiness goods, member countries commonly apply

exemptions (so called ‗stays‘) on CET.124

For wheat, much to the chagrin of wheat

millers in all ECA countries, most ECA countries maintain a duty of 10 percent on wheat

grains.125

Like in Kenya and other ECA countries, local wheat production is limited and

meets only a small fraction of local demand,126

yet a tariff protective of local producers is

maintained. According to local wheat millers in Tanzania, this tariff generally is a

reflection of regional governments‘ policy goals of propping up domestic wheat prices so

as to protect/stimulate local production. Such a policy generally is considered among

agribusinesses/millers to have no impact on production and leads to final consumer price

increases, because local producers in the region, including in Tanzania, receive

international prices for their wheat anyway, yet their production levels are poor due to

factors other than price that make wheat production in the region uncompetitive. It is

during periods of spikes in international prices (as was the case in 2010 after Russia

imposed a ban on grain exports) that millers have most difficulties with passing on the

duty costs to final consumers of wheat flour – as a substitute food, wheat flour

consumption is highly sensitive to prices increases according to local specialists.

Other tariffs on some major food products are illustrated in Table 155 below.

124

Countries regularly seek exemptions from CET depending on grain and other foods situations in the

local and international markets. Kenya for example has an exemption on maize imports at 0 percent (ECA

duties on maize from COMESA countries is 25 percent and from all other countries is 50 percent). 125

The official ECA tariff for wheat was 35 percent in 2010: Tanzania levied an effective duty rate of 10

percent, Kenya levied an effective duty of 25 percent and consequently reduced it to 10 percent, Rwanda

proposed to ECA to reduce all wheat duties to 0 percent. 126

10 percent-15 percent of local demand of 600,000 tons/year in Tanzania and 30 percent-35 percent

percent of local demand of 900,000 tons/year in Kenya.

275

Table 155: Comparative Policy and Regulatory Environment for the Agribusiness/Food Sector

Preferential

tariff

Average rate

15%Import duties

(COMESA) 18% - 30%

ECA External

Tariffs (non-

COMESA origin):

CEPT (over

40,773 fast

and normal

truck rates)

Average rate

2.3%

Customs duty 10% - 30% Wheat 10%

Wheat/

wheat

flour 0

Maize 50% All dairy 7%

Wheat/meslin flour 60%

Cereal flours other

than wheat/meslin 25%

Milk 60%

Cream/yoghurt

sweetened 25%

Most other

processed foods 25%

VAT 17% VAT 10%

Rice 10% Income tax 28% Income tax 30% VAT 18% VAT 16%

Legume

vegetable13% Other tax 0%

Provident fund Tax 10% Income tax 30%

Income

tax 0%

Maize 20% Business

tax55 ~ 155US$

Salary Tax 0 - 35%

Presumptive

Turnover Tax 1.1%-3.3%

Fish 10% Export tax n.a.Excise tax 10 - 100%

License fee 1% 2%Export Tax 0%

Export levy (tax) -

cashew nuts 15%

Turn over tax (TOT) 2%, 10%

Dividend tax 10%

Royalty tax 5%

Capital gains tax 0%

Tax refund 16% None None None None

Rice 8%

Legume

vegetable11%

Maize 15%

Fish 7%

Wine, soft

drinks,

tobacco,

petroleum

China Vietnam

Over 722

different tariffs

in

agribusiness/

food sectors

Average

rate 15%

3 Subsidies

1 Tariffs

Ethiopia Tanzania Zambia

2

Taxes

and

Levies

Excise duties


VI.13. Sector Profile for the Agribusiness/Food Sectors in Ethiopia, Tanzania,

Zambia, China, and Vietnam

VI.13.1. Sector Profile: Agribusiness/Food Sectors in Ethiopia

Ethiopia has an agrarian economy and the agriculture sector accounts for 43 percent of its

GDP, 83 percent of its exports and 85 percent of total employment (2008/2009 statistics).

The sector overall has been growing at an average rate of 8.5 percent per annum during

the past four years.127

Major staple crops include coffee, cereals, pulses and oilseeds.

The principal cereals – the main element in the local diet – are teff, wheat, barley, maize,

sorghum and millet. Oilseeds are an important element in the diet stemming from the

fact that the Ethiopian Orthodox Church forbids consumption of animal fats on

Wednesdays and Fridays and other times throughout the year. Niger, flax and sesame

seeds are the most significant oilseeds.

127

NEWBUSINESSETHIOPIA.COM; ―Ethiopia GDP Per Capita Hikes To 217 USD, Says Government‖,

04June2010

276

Agribusiness exports for Ethiopia in 2008/09 totaled approximately US$625 million.

Data from 2007 show green coffee to be Ethiopia‘s leading agribusiness export in terms

of both volume (158,234 tons) and value (US$416,783). Coffee is actually the leading

export overall and the primary foreign exchange earner for the country. Aside from

animal meats and skins, green coffee has the highest unit value (US$2,634/ton) of all

other leading Ethiopian agriculture exports (Table 156).

Table 156: Ethiopia Leading Agriculture (Food) Exports, 2007

Product

Quantity

(Tons)

Value

(1,000 US$)

Unit Value

US$/Ton)

Green coffee 158,234 416,783 2,634

Sesame seed 139,653 132,764 951

Beans, dry 71,194 39,192 550

Chick peas 43,891 25,177 574

Oilseeds (nes) 23,377 19,837 849

Sugar, raw 25,285 16,532 654

Broad & horse beans, dry 41,016 14,783 360 Source: FAOSTAT

Despite the agricultural potential of Ethiopia, the WFP estimates that more than 5 million

people will depend on emergency food aid in 2010. Droughts are common in the country

(six major droughts in the past two decades) and rainfall has been erratic over the past

two years. Complicating the situation are the high food and fuel prices that hit the

country in 2008 along with the persisting global financial crisis. Supplying 65.5 percent

of the total, the US is by far the biggest import partner for fruits and vegetables going to

Ethiopia. Next are Somalia (9.4 percent), Italy, Djibouti and Sudan. Prepared vegetables,

fruits and nuts are imported from France (19.4 percent), UAE (19.2 percent) and Saudi

Arabia (18.3 percent) with five-year cumulative totals of US$4.65 million, US$4.6

million and US$4.38 million respectively. Cereals imported for 2009 totaled more than

US$368 million (US 30.3 percent, Italy 28.1 percent, Romania 14.4 percent, Bulgaria

11.8 percent). Milled grains import for 2009 total was US$54.1 million (US 28.5 percent,

Italy 23 percent, Belgium 20 percent, France 10.4 percent, Ukraine 6.3 percent).

Sector employment is estimated to be 46,183 of which 76 percent are male and 24

percent are female. The majority of companies (63.2 percent) are operating informally

(Table 157).

277

Table 157: Employment Statistics for Ethiopia Food Processing Sector

Company Size

Estimated Number

of Companies

% of Companies

by Size

Number of

Employees

Average Employees

per Company

Small 1,541 80.0% 4,623 3

Medium 234 12.1% 12,870 55

Large 151 7.8% 28,690 190

Subtotal 1,926 100.0% 46,183

Informal 1,218 63.2%

Formal 774 40.2%

State-owned enterprise 34 1.8% Source: Central Statistical Agency

VI.13.2. Sector Profile: Agribusiness/Food Sector in Tanzania

Agriculture (including crop production, livestock and natural resources) is one of the

leading sectors of Tanzania‘s economy. About 30 percent of the country‘s GDP is from

agriculture, which is the main source of income for the country‘s rural population (80

percent). Due to its wide climatic range and good endowment with arable land and agro-

ecological conditions, a large variety of crops can be grown in Tanzania Maize and rice

are principal food crops as well as commercial crops, while cassava and banana are

important subsistence crops. Traditional export crops include coffee, cashew nuts, cotton,

tea and sisal. Other widely grown crops include beans, sorghum, millet, sweet potatoes

and a wide variety of fruits, vegetables, oilseeds and flowers.

In terms of agribusiness, the food processing industry128

earned approximately US$1.4

billion in gross revenues in 2009, contributing about half of the country‘s net

manufacturing value added of U$1.2 billion. Beverages, processing of fishery products,

manufacture of grain mill products and manufacture of animal/vegetable fats and oils

were the largest contributors to the food processing industry revenues.129

According to the 2008 industrial survey, an estimated 203 food processing companies

operate in the country and employ about 44,000 people. The bulk of companies (80

percent) are SMEs but the bulk of the employment (90 percent) is created by the large

firms (see Table 158). In terms of the skill levels of operatives in the labor force, an

estimated 66 percent of all operative/line workers in the industry are skilled and 34

percent are unskilled. Also, 73 percent are male and 27 percent are female.

Tanzania has 61 producers of grain milling, starches and similar products employing little

over 2,200 people. Over 50 percent of the labor force in the grain milling subsector is

128

Includes beverages. 129

The Economic Survey 2009, Ministry of Finance and Economic Affairs, Tanzania.

278

employed by the seven (out of nine) wheat milling companies that are currently operating

in Tanzania. Capacity utilization in the food processing industry as a whole is estimated

at 44 percent130

and in the wheat milling subsector it currently stands at 62 percent.131

Table 158: Employment Statistics for Tanzania Food Processing Sector

Company Size

Estimated

Number of

Companies

% of Companies

by Size

Number of

Employees

Average

Employees per

Company

Small 129 64% 2,319 18

Medium 31 15% 2,164 70

Large 43 21% 39,309 914

Subtotal 203 100% 43,792

% of Total % of Total

Manufacturing of grain mill products 61 30% 2,205 5%

Manufacturing of wheat mill products* 7 3% 1,350 3%

State-owned enterprise 11 5%

Ministry of Industry Trade and Marketing, Annual Survey of Industrial Production and Performance, 2008

* Tanzania Grain Millers Association

Note: Does not include micro/small firms employing less than 10 employees

Interviews, Global Development Solutions, LLC

VI.13.3. Sector Profile: Agribusiness/Food Sector in Zambia

Two of the challenges facing the Zambian Government are diversification of the

economy and ensuring that the growth process includes the poor. In its Fifth National

Development Plan (2006-2011), the government recognized agriculture as a niche sector

that can contribute to inclusive and sustained accelerated economic growth in Zambia.

In Zambia, agricultural production is dominated by small-scale producers who account

for more than 70 percent of the farming population. They play a critical role in the

supply of staple foodstuffs, mainly maize. Despite this role, at least 25 percent of small-

scale farmers are food insecure each year. Most of the crops produced by small-scale

farmers are not captured in post-harvest surveys, which makes it difficult to assess

outputs in this area. Most of the recognized agricultural gains are confined to large-scale

producers and emerging farmers, i.e., new entrants to agribusiness that have achieved

some scale. The World Fact Book (2003) reveals that the number of households in the

small-scale farming category has been increasing, while the numbers of medium- and

large-scale farmers have remained largely unchanged over the years. Increased

unemployment, which was estimated at 50 percent in 2006, has encouraged many people

to take up small-scale farming.

The composition of Zambia‘s GDP has not changed significantly during the past decade.

The proportion attributable to agriculture remained virtually unchanged at around 20

percent of GDP. The contribution of the agriculture sector to output, especially crop

130

Annual Survey of Industrial Production and Performance, 2008. 131

Interviews, Tanzania Grain Millers Association, February 2011.

279

production, has varied mainly because the sector is highly weather-dependent. Frequent

droughts in some years and unusually heavy rains during others have often resulted in

widespread crop failure that is further exacerbated by land degradation, poor husbandry

practices and lack of appropriate seed varieties. The sector contribution to GDP of 20

percent is well below the average of 32 percent in sub-Saharan Africa.

Figure 50: Zambia GDP by Source, 1994-2008 (Billion ZMK)

Source: Constructed from CSO database

The sector‘s contribution to GDP measured at current prices has increased from 15.5

percent in 1996 to 20 percent in 2000 (Figure 50). By 2008, agriculture comprised 19.3

percent of GDP. The percentage change in sector contribution to GDP averaged 1.5

percent between 2005 and 2008. GDP data further reveals that agro-processing industries

that depend directly on agriculture constitute 60 percent of Zambia‘s manufacturing.

The rapid growth in copper and copper by-product manufactured exports reduced the

share of agricultural exports from 25 percent of total exports in 2001 to 9 percent in 2009

(Figure 51). Though some agricultural products are exported as raw materials, the bulk is

exported as processed products such as foodstuffs, textiles and garments.

280

Figure 51: Agricultural Products Share of Non-traditional and Total Exports

Source: Compiled by ZDA Exporter Audit Reports, various issues.

Similarly, agricultural products‘ contribution to non-traditional exports (NTEs) declined

from 65 percent in 2001 to 47 percent in 2008. This is explained by rapid growth in the

export of metal products stimulated by the strong performance of copper production,

especially between 2005 and 2008 (Figure 52).

Figure 52: Proportion of Agricultural Exports in Non-Traditional Exports, 2001-

2008 (US$000)

Source: Compiled from ZDA and CSO data sets.

The composition of agricultural exports is presented in Table 159. Primary agricultural

products accounted for more than half of total agricultural exports between 2004 and

2008, with tobacco, maize, coffee and tea the highest contributors.

Total exports

281

Table 159: Prominent Agricultural Exports

Product Export Markets

Beef Angola, Kenya, Malawi, Namibia, Tanzania

Beeswax EU, South Africa, US

Coffee Asia, EU, South Africa, US

Cotton EU, South Africa, US

Cotton lint Asia

Eggs Angola, Kenya, Malawi, Tanzania, Namibia

Floriculture and horticulture products EU, South Africa, US

Honey EU, South Africa, US

Leather EU, South Africa, US

Maize Democratic Republic of the Congo, Zimbabwe

Processed foods Botswana, Burundi, Rwanda, Swaziland

Spices EU, South Africa, US

Sugar Angola, Botswana, Burundi, EU, Democratic Republic of the

Congo, Kenya, Malawi, Namibia, Rwanda, South Africa,

Swaziland, Tanzania, US, Zimbabwe

Tea Angola, Democratic Republic of the Congo, Kenya, Malawi,

Namibia, Tanzania, Zimbabwe

Textiles EU, South Africa, US

Tobacco Asia, EU, South Africa, US Source: Compiled by Global Development Solutions, LLC, based on ZDA exporter audit reports and CSO

database.

In terms of employment, the agriculture sector is the largest employer in Zambia. It

absorbs about two-thirds (70 percent) of the labor force and thus is the main source of

income and employment for the majority of Zambians in rural and peri-urban areas.

Agriculture offers both informal and formal employment opportunities in the country.

However, only a limited number of those employed in the agricultural sector are formally

employed, that is, engaged on a contract that guarantees them periodic pay such as a

monthly salary. In terms of formal employment, the sector accounted for an average of

15 percent between 1960 and 2006. Agriculture has consistently been the second largest

source of formal employment after the services sector, which absorbs over two-thirds of

the formally employed Zambians due to the large pool of government employees in

education and health services. Agriculture sector employment is estimated to be 330,500

of which 83 percent are male and 17 percent are female. The majority of companies are

operating informally (85 percent).

282

Table 160: Employment Statistics for Zambia Food Processing Sector

Company Size

Estimated

Number of

Companies

Percent of

Companies

by Size

Estimated

Number of

Employees

Average

Employees

per Company

Small 10,000 83.42% 200,000 20

Medium 2,000 16.50% 120,000 60

Large 100 0.08% 10,500 105

Subtotal 12,100 100% 330,500

Informal 10,285 85% 280,925

Formal 1,815 15% 49,575

Gender

% Male 83%

% Female 17% Source: MCTI, CSO and Zambia National Farmers Union

The key challenges facing the agricultural sector in Zambia generally are related to value

addition and productivity. Factors that affect crop productivity include:

Lack of government and institutional support;

Limited irrigation (rain dependent);

Inadequate research and development for improved seed varieties;

Weak business orientation of farmers;

High transaction costs including high transport costs;

Non-codified land tenure system;132

Poor trade policies and low competitiveness; and

Limited agricultural finance.

Factors affecting livestock productivity include:

High prevalence of animal diseases;

High cost of veterinary drugs;

Inadequate livestock nutrition and water;

Poor animal husbandry practices/management;

Inadequate marketing infrastructure; and

Lack of appropriate livestock research.

VI.13.4. Sector Profile: Agribusiness/Food Sector in China

Accounting for approximately 12 percent of GDP, China‘s agricultural sector grows

approximately 8 percent annually. More than 300 million people work in agriculture

132

About 80 percent of the land in Zambia is under customary law governed by traditional rulers versus

individually owned and deeded. Land users typically do not have title or ability to use the land as collateral

to secure financing and can be evicted from land by the tribal rulers/chiefs at any time.

283

related jobs, which is almost half of the Chinese workforce. China is the world‘s leading

producer of many crops, including significant staples of soybeans, wheat, rice and corn.

Arable land in China is less than 1ha per household (versus 100ha in the US, for

example). More than 75 percent of the country‘s arable land is used for producing food

crops – a full quarter of the country‘s arable land is used for cultivation of its most

strategic crop, rice.

The Chinese agricultural technology is slowly improving, but the production efficiency

continues to lag behind western countries. With decreasing supply of soybeans, corn and

wheat in the face of increasing demand, China has changed from being a net exporter to

being a net importer of major agricultural crops. In 2009, China imported agricultural

products worth US$46 billion while it exported US$38 billion worth of the same. The

most sizeable trade imbalances were in oilseeds oleaginous fruits (net import of US$19

billion), animal or vegetable fats and oils (US$7 billion) and meats (US$1 billion).133

In the case of the Chinese dairy industry, according to National Bureau of Statistics of

China, total annual output in 2009 was 35 million tons worth US$29 billion. The sector

employs 10 million people. More than 13,000 firms are involved in milk production

alone.

Some of the key challenges of the agricultural sector in general are related to:

Agricultural productivity/technology – because China feeds so many people

(1.3 billion) on relatively small land size, the country needs increasingly

higher utilization of high productivity/technology agriculture to meet its

increasing food needs. To date, Chinese agriculture is relatively limited in

terms of high productivity/technology compared to developed economies. For

example, some experts estimate that by 2030, if water usage continues at

current levels, there will be a shortage of water that will put China into a crisis

level - China uses 70 percent of its water for agriculture but improved

irrigation techniques are not commonplace.

The rural-urban migration – in 1960s, 20 percent of China‘s population was

urban. In 2007, the urban population was 42 percent of the total. By 2025, 65

percent of Chinese are expected to live in urban areas. This seemingly

unstoppable urbanization of the Chinese population has serious implication

for labor availability in rural/agricultural areas.

133

Data compiled from UN Comtrade

284

VI.13.5. Sector Profile: Agribusiness in Vietnam

Vietnam‘s growing agricultural sector accounts for over 27 percent of the country‘s

combined GDP and employs over 70 percent of its workforce. In 2009, Vietnam

achieved bumper harvests of its two main export crops, rice and coffee. The production

of rice reached 35.6 million tons (up 6.8 percent), of which 5.75 million tons were

exported during 2009 – 2010. Export of coffee grew 7.3 percent to reach nearly 1.2

million tons. With domestic consumption of coffee being less than 5 percent of

production, the coffee sector is highly reliant on export markets. The total export of food

and agricultural products is estimated to be approximately US$3.2 billion.

Despite strong growth in the agribusiness sector, according to the Ministry of Industry

and Trade (MOIT), the country continues to import significant amounts of food and farm

products. During the first two months of 2010, the country imported over US$280

million worth of food and agricultural products, an increase of 56 percent from the

previous year. The largest increase in imports included vegetables (127 percent); refined

vegetable oil and fat from Indonesia and Malaysia (96 percent); finished products from

cereals, starch and milk from Australia (99 percent); and fish and animal meat from India

and US (79 percent). In 2008, total import of food and agricultural products was

approximately US$7.3 billion. Vietnam‘s main sources of imports for food and

agricultural products are: India (16 percent), US (13 percent), China (11 percent), Hong

Kong (7 percent) and Indonesia (6 percent).

Under the ASEAN-China Free Trade Agreement and CEPT, commitments among

ASEAN countries have made import products cheaper where import tariffs are between 0

– 5 percent. While such agreements are favorable for consumers, there is concern that

Vietnam will need to reduce its reliance on imported food and agricultural products

through more stringent application of technical and quality specifications.

VI.14. Economic Efficiency and Competitiveness in Food Processing - Wheat

Milling

VI.14.1. Ethiopia: Wheat Milling

The aim of this section is to establish the basic economics of a representative agro-

processing activity - the wheat milling industry - and its competitiveness vis-à-vis

imports. The comparison with imports is justified because Ethiopia is a net importer of

milled grains. The analysis provides a complement to the VCA by establishing whether

the industry can be competitive, the ground that it has to cover to become competitive or,

alternatively, how well it can maintain competitiveness. The VCA itself looks into more

detail at the strategic and business process opportunities for cost reduction, upgrading,

expansion and investment at each production stage over the next five years.

285

The six Ethiopian firms covered in the VCA survey produce wheat flour for the domestic

market only. A composite domestic wheat mill has been created for this analysis by

taking a weighted average of the cost structure of these firms. Average unit economic

cost is calculated according to the following procedures:

Import duties and VAT are deducted from the market price data; and

Capital assets are valued at replacement cost, and an annual charge is derived by

the application of a capital recovery factor for a ten-year life and 12 percent

discount rate.

In order to assess the economics of wheat milling, it is necessary to take into account the

by-products of the mill and how far the overheads and operating costs are allocated to by-

products. The output data from the VCA refer to milled wheat flour, and the share of

output of the by-products bran, waste and germ is applied to these output figures to

estimate total by-products. The reported share of bran is approximately 25 percent of

output for all of the surveyed firms, and here this is valued at the local market price,

which is equivalent to approximately US$90/ton; lower valued by-products of waste and

germ are small enough in both quantity and value to be ignored. For the composite firm,

the value of by-products derived in this way is deducted from production cost to give the

net cost of milled flour. Hence, by-products are not included in the benefit stream for the

efficiency calculations.

Before the adjustment for by-products, the average unit economic cost is US$391/ton of

wheat flour, with domestic wheat providing the bulk of this (around 75 percent). When

by-product costs are deducted, the economic cost of milled wheat alone is US$368/ton

(Table 161).

Table 161: Ethiopia Wheat Milling: Average Unit Economic Cost for Composite Firm

Composite Total Average Unit Cost

Quantity 111471.2

Revenue 57040791.0 511.71

Imported Inputs 5982535.0 53.67

Domestic Inputs 33681768.0 302.16

Packaging 95012.8 0.85

Labor 291800.0 2.62

Electricity 142662.8 1.28

Water/Fuel 77845.2 0.70

Laboratory Testing 64074.2 0.57

Professional Services 10592.6 0.10

R and M 77185.2 0.70

286

Admin 2414267.0 21.66

Capital Cost 754500.2 6.77

Total 43592243.0

Average Unit Cost 391.06

By-Product 2508102.0 22.50

Average Unit Cost Net of By-Products 368.56


This composite average economic cost is below the range of market price costs (US$415

- US$458) reported in the VCA survey largely due to the omission of import duties and

VAT. For the economic analysis, wheat flour is treated as an importable, and the average

unit cost in Ethiopia is compared with the reported FOB prices from China plus transport

margin to Ethiopia. A range of FOB prices of US$295 to US$324 are reported in the

VCA survey, and the bottom of the range plus a 33 percent margin for transport and other

trade costs (i.e., US$392/ton) is used as the regional CIF price for exports from China

into the region. The high transport and trade margin is based on data collected for the

study on the cost of shipping by container from Chinese ports to Djibouti with an

addition for the cost of port handling and insurance. The estimated figure of

approximately US$96/ton refers to shipment in 20-foot containers with a cargo of 20 tons.

This margin added to an FOB price of US$295 is used as the maximum possible import

price in the regional market.

As with other products, the indirect foreign exchange content of electricity, water/fuel

and capital costs is approximated and the net foreign exchange effect is calculated by

taking output valued at the CIF price from China minus the sum of direct and indirect

imports. Currently, with an average unit economic cost of US$368, Ethiopian production

is efficient due to the strong natural protection afforded by distance from China, showing

a DRC ratio of 0.93 (Table 162). The value attributed to domestic wheat is the key

element in determining costs, and were this to rise by 8 percent it would make domestic

wheat milling uncompetitive with Chinese flour.

Two sources of possible increase in competitiveness are examined: a) Ethiopian

productivity, and b) real exchange rates of competitor sources.

With regard to productivity, the VCA analysis does not show significant differences

between mill-level labor efficiencies in Ethiopia and China/Vietnam and therefore no

‗catch-up‘ effect has been projected in Ethiopia through these means. Labor costs are a

very small component of total milling costs in Ethiopia compared to China/Vietnam

because of very low Ethiopian wages. Thus even if there were potential labor

productivity gains in the mill they would not make a significant difference to

competitiveness.

287

Since wheat milling currently is competitive, any advantage obtained by exchange rate

movements would be unnecessary. Any real appreciation of the RMB in the medium

term serves to improve the competitive position of Ethiopia. Table 162 shows the DRC

estimate in 2015 for alternative real appreciations of 8 percent and 16 percent of the

RMB (assuming all imported flour imports into domestic milling come from China) and

the switching values for the cost of domestic wheat. Under these scenarios, the DRC

ratios fall to 0.86 and 0.80, respectively. In such cases, it would be possible for the price

of domestic wheat to increase and still remain a competitive product.

Table 162: Competitiveness Table

Year 2010 2010 2015 2015

Assumptions Base Year No by-products

8 percent real

RMB

appreciation

16 percent real

RMB appreciation

DRC Ratio 0.93 1.0 0.86 0.80

Level of

Competitiveness EFFICIENT

MARGINALLY

EFFICIENT EFFICIENT EFFICIENT


The sale of by-products partly to offset the costs of milling is an important factor in

making the wheat mills competitive, and with no allowance for by-products, milled flour

is only marginally competitive in 2010 with a DRC of almost exactly 1.0. For current

competitiveness it is thus important to ensure adequate revenues are obtained from by-

products.

The capacity utilization of Ethiopian mills at 70 percent is well below those of China

(100 percent reported) partly because Chinese mills are both smaller in scale and closer to

sources of supply, resulting also in lower wastage rates, transport costs, etc.

Downscaling and decentralizing milling activities may be an important strategy for

Ethiopian investors to consider in order to maintain competitiveness. But, short of the

longer term change in technology and organization, there do not seem from the data to be

major potential relative productivity gains in milling. The major cost of milling derives

from further up the value chain, that is, in the cost of material inputs, which in Ethiopia

comprise over 80 percent of costs (at market prices currently paid). Therefore, the key

long term change that would decrease production costs further is improvement in

agricultural practices leading to higher productivity through methods like greater use of

irrigation and higher yielding seeds.

In the medium term, Ethiopian wheat milling will maintain its competitiveness against

Chinese imports due to natural protection through high transport costs from China and

from anticipated changes in relative exchange rates. Modernization and improvement in

288

agricultural practices would ensure this position vis-à-vis more distant competitors,

although competition from neighboring African countries might be a factor.

Table 163: Ethiopia Wheat Milling: Efficiency Estimates 2010

Costs

Imported Inputs 5982535

Domestic Inputs 33681768

Packaging 95012.75

Labor 291800

Electricity: Local 71331.41

Electricity: Foreign 71331.41

Fuel/Water: Local 46707.13

Fuel/Water: Foreign 31138.09

Laboratory Testing 64074.22

Professional Services 10592.59

R and M 77185.19

Admin 2414267

Capital Cost: Local 280296.8

Capital Cost: Foreign 474203.4

Total 43592243

Foreign Exchange

Saving 43735725

Use 6559208

Net 37176517

Domestic Resources 34524933

DRC 0.928676


VI.14.2. Tanzania: Wheat Milling

The aim of this section is to establish the basic economics of a representative agro-

processing activity - the wheat milling industry - and its competitiveness vis-à-vis

imports. Tanzania is a net importer of wheat, and therefore, for the purposes of

estimating efficiency, we compare domestic costs with the import price. The VCA looks

in detail at the strategic and business process opportunities for cost reduction, upgrading,

expansion and investment at each production stage, while as in the other cases, the DRC

analysis complements the VCA by establishing whether the industry can be competitive,

the ground that it has to cover to become competitive or, alternatively, how well it can


289



A composite domestic wheat mill has been created for this analysis by taking a weighted

average of the cost structure of the surveyed firms. Average unit economic cost is

calculated according to the following procedures:

Import duties and VAT are deducted from the market price data; and

Capital assets valued at replacement cost and an annual charge is derived by the

application of a capital recovery factor for a ten-year life and 12 percent discount

rate.

In order to assess the economics of wheat milling, it is also necessary to take into account

the by-products of the mill and how far the overheads and operating costs are allocated to

by-products. Based on output data from the VCA, the share of bran, waste and germ is

approximately 25 percent of output for the surveyed firms, and this value was deducted

from production cost to give the net cost of milled flour.

Wheat milling in Tanzania is based on imported wheat, which is imported duty free at a

price of around US$265/ton. Local milling has a conversion ratio of approximately 1.3

tons of wheat per ton of grain. Wheat flour sells in the local market at around US$435

per ton, with the by-product wheat bran selling at around US$110/ton. Only limited data

on productions costs were reported in the VCA survey and the replacement cost of capital

assets has been based on the depreciation charge.

Unit economic cost per ton of wheat flour before deduction of by-product revenue is

US$421, and net of by-product revenue it is US$394 (Table 164). These figures are

between US$26 and US$30/ton higher than in Ethiopia. No data is available on

competing imports of wheat flour to Tanzania. In the Ethiopian case, the competitor

price was taken as the FOB price from China and adjusted for trade and transport margins,

which gave a CIF price to East Africa of US$392/ton of flour. At this price, wheat flour

in Tanzania is marginally uncompetitive with a DRC of slightly above unity (Table 165).

290

Table 164: DRC Analysis: Wheat Milling - Tanzania (US$ cost per ton of flour)

Costs Financial Economic

Wheat 362.08 362.08

Wharfage 10.18 10.18

Stevedoring 7.29 7.29

Insurance 0.44 0.44

Transport charge – port to silo 7.22 7.22

Milling:

Plant/Health/Official Inspections 0.10 0.10

Tallying 0.08 0.08

Power 9.70 9.70

Salaries/Wages 6.00 6.00

R and M (plant/machinery) 1.50 1.50

R and M (building) 1.00 1.00

Insurance of plant machinery 0.35 0.35

Packing material 5.50 4.74

Capital charge 10.00 10.00

Total 421.45 420.69

Minus bran sales 27.50 27.50

Net 393.95 393.19

Conversion 1.39 tons of wheat/ton of flour.

Assume zero tariff on wheat imports.

Depreciation used as capital charge.

Bran by-product 25 percent, i.e., 0.25 tons per ton of flour at US$110.


Table 165: DRC Estimate: Wheat Milling - Tanzania

CIF Price per ton

US$392.00

Foreign exchange savings 392.00

Direct imports 362.08

Indirect imports 7.76

Net foreign exchange 22.16

Domestic resources 23.35

DRC 1.05

Breakeven price 393.19

percent increase for breakeven 1.00


Medium term Outlook - 2015

Wheat milling appears from this data currently to be marginally internationally

competitive. In the medium term, it requires only a 1 percent increase in overall

productivity to bring the DRC ratio down to unity, which suggests this is a promising

291

area for further investment. However, wheat used in the plants surveyed is imported and

is around 85 percent of total cost. Hence, the operation is highly sensitive to the price

and availability of wheat. Current calculations use an import price to Tanzania of

approximately US$260 per ton. If this price were to rise in real terms, it would clearly

undermine the viability of operations.

VI.14.3. Zambia: Wheat Milling

The aim of this section is to establish the basic economics of food processing and its

competitiveness with respect to wheat milling in Zambia. The VCA looks in detail at the

strategic and business process opportunities for cost reduction, upgrading, expansion and

investment at each production stage, while as in the other cases the DRC analysis

complements the VCA by establishing whether the industry can be competitive, the

ground that it has to cover to become competitive or, alternatively, how well it can




In Zambia, wheat is a net export and is therefore valued by reference to export prices.

Wheat milling is based on domestic wheat, but both the milling cost and selling price of

milled wheat flour in Zambia are well above those in both Ethiopia and Tanzania. The

reason for this is partly due to high fertilizer and transport costs. In Zambia, wheat flour

sells for as much as US$700/ton as compared with US$435 per ton in Tanzania (the

reason for the wide discrepancy both between costs and selling price and across countries

may be partly explained by a government regulatory barrier requiring a premix in the

flour). The by-product wheat bran sells at around US$90/ton.

Despite this high price and cost structure, Zambia is a net exporter of wheat flour to

neighboring countries, with an average export unit value of US$690/ton in 2009. Data on

production costs were taken from the VCA survey for two representative firms, with the

data for one appearing to be the more reliable. Efficiency estimates are based on costs

for this firm. No data on the replacement cost of capital assets were reported, and the

per-unit capital charge applicable to Ethiopian mills is used. As in the other country

cases, unit costs are estimated net of by-product revenue, with the by-product output and

price reported by the firm used to derive by-product revenue.

For the economic analysis, the following adjustments are made to financial values:

VAT at 16 percent is deducted from items on which it is imposed;

292

Domestic wheat is supplied from elsewhere in the corporation at a transfer price

of $500 per ton. As this is above the market price for domestic wheat of

US$400/ton, (as reported by the other firm in the VCA survey), the lower price is

used to value domestic wheat; and

An indirect foreign exchange content of 80 percent is assumed for fuel and

electricity.

Unit economic cost per ton of wheat flour before deduction of by-product revenue is

US$543/ton (as compared with US$421 in Tanzania), and net of by-product revenue it is

US$518 (as compared with US$394 in Tanzania) (Table 166). These figures are around

US$150/ton higher than in Ethiopia. In the Ethiopian case, the competitor price was

taken as the FOB price from China and adjusted for trade and transport margins, which

gave a CIF price to East Africa of US$392/ton of flour. At this price, wheat flour in

Zambia clearly is uncompetitive with a DRC of 1.33. However, if exports to the regional

market at the price of US$690/ton are sustainable, then production is competitive at this

high export price with a DRC of 0.75 (Table 167).

Table 166: DRC Analysis: Wheat Milling – Zambia (US$ per ton)

Wheat 24000 tons US$ per ton 622.30

Bran 5040 tons US$ per ton 90.00

Cost Financial Economic Per ton

Imports 248900.0 248900.0 10.37

Domestic 14936000.0 11948800.0 497.87

Packaging 188323.4 162347.8 6.76

Wire/thread 7180.9 6190.4 0.26

Plastic bags 212.8 183.4 0.01

Labor 111063.8 111063.8 4.63

Electricity 3191.5 3191.5 0.13

Fuel 29783.0 29783.0 1.24

Safety equipment 3000.0 3000.0 0.13

R and M 6383.0 6383.0 0.27

Admin 339439.8 339439.8 14.14

Capital charge 35280.0 7.00

Total cost 15873478.1 12894562.6

Average unit cost 542.80

Less By-product 453600.0

Total economic cost 12440962.6

Average unit economic cost 518.37


293

Table 167: DRC Estimates: Wheat Milling - Zambia

Border price CIF US$392 FOB US$690

Foreign exchange value 9408000.0 16560000.0

Direct imports 250000.0 250000.0

Indirect imports 26379.6 26379.6

Net foreign exchange 9131620.4 16283620.4

Domestic 12165683.1 12216883.1

DRC 1.33 0.75


Medium Term Outlook – 2015: While the DRC estimates suggest wheat milling is likely

to be actually or potentially competitive, the differential in effective border prices shows

that there is considerable uncertainty regarding price data for wheat milling in Zambia.

When compared with Chinese imports of wheat flour to East Africa, domestic costs are

very high, and the activity is uncompetitive. However, Zambia is a net exporter at a price

well above the CIF price from China and also well above domestic prices in Ethiopia and

Tanzania. Transport cost advantages and bilateral trade preferences may explain some of

this differential, along with government regulation, but such a high differential is unlikely

to persist into the medium term, especially if maintained by regulation or market

irregularities. In these circumstances, competitiveness of the sector will require a

reorganization of some markets (e.g., fertilizer) or a major restructuring to bring costs

down to the level in other regional economies. Since wheat is the bulk of the cost of

wheat flour, the price of wheat is the critical variable in determining competitiveness.

The cost in Zambia of US$400/ton of wheat is well above the cost of imported wheat to

Tanzania (of around US$260/ton), and unless wheat prices are lowered in Zambia, it is

unlikely that the sector will be internationally competitive.

VI.15. Value Chain Analysis: Milling (Wheat) 134

The cost of milling wheat in Ethiopia ranges from US$415 - US$458 per ton (including

the cost of processing all by-products such as bran, germ and waste). By comparison,

costs in Tanzania range from US$420 – US$512 per ton, and in Zambia US$662 –

US$758 per ton. China ranges from US$322 - US$377 per ton and Vietnam from

US$359 - US$463 per ton. The key difference is the cost of wheat, type of wheat used

(hard vs. soft wheat), time of wheat sourced (as prices fluctuate widely in international

and local markets) and origin and mix of wheat used (local vs. imported). In Ethiopia,

for example, the cost of locally produced wheat averages around US$333/ton, which is

73 percent higher than the cost of domestic wheat in China (US$192/ton) and nearly 40

134

Value chain diagrams in this section reflect actual data from export oriented best practice firms.

294

percent higher than domestic wheat in Vietnam (US$269/ton).135

In Tanzania, local

wheat prices reached as high as US$365 in 2010. In Zambia, domestic wheat prices are

the highest and millers reported paying from US$400 to as much as US$500 per ton in

2010.136,137

Note that 2010, the year pertaining to this analysis, was an exceptional year in the world

wheat markets. Due to weather conditions mainly in Russia (and to some degree in

Canada), wheat prices in international markets soared more than 40 percent in one month

in August, the highest monthly increase in over 50 years. In Tanzania, for example,

Russian soft wheat was quoting in April at US$237/ton FOB Dar es Salaam, and by

September prices of the same wheat shot up to over US$350/ton. International wheat

prices continued to change thereafter in 2010, albeit the rate of change was not as high as

the July/August spike. Therefore, price variations of raw materials (wheat) presented in

this analysis, as reported by producers in the select African countries, should be read

within this context of extreme wheat price volatility during 2010.

Key Characteristics: The cost of raw material (wheat) generally constitutes the largest

portion of wheat milling value chain.

Table 168: Raw Material Input Comparison

Raw material inputs as % of

value chain

Total cost of raw material per

ton of wheat flour* $322

% of Total

Input $323

% of Total

Input $408

% of Total

Input $363

% of Total

Input $625

% of Total

Input

Wheat (cost/ton): Domestic $192 60% $269 $333 $300 - $365 $400 - $500 68%

Wheat (cost/ton): Imported none none $208 $304 $261 - $328 none none

* Amount reflects by-product content in wheat grains, conversion losses and waste - Includes 10% duty for imported wheat in Tanzania

Global Development Solutions, LLC

78.1% NA

China Vietnam

85% 81%

73.7%

Ethiopia Tanzania Zambia

93% 86% 87%

Given the high cost of domestic wheat, raw material input accounts for more than 93

percent of the overall value chain in Ethiopia, while in Vietnam wheat accounts for only

81 percent of the entire value chain (refer to above). Note, however, that in both Ethiopia

and Vietnam, the price of imported wheat is less expensive (by as much as 29 percent in

the case of Vietnam) than locally produced wheat, which raises some concerns regarding

the efficiency of farming operations in both countries, as well as the difference in

incentive structures that impact the cost of agricultural inputs in all three countries.

135

Raw material input as a percentage of the value chain reflects the total value of wheat required to

produce one ton of flour. The difference with percentage of cost for wheat price reflects by-products,

waste and milling losses. 136

Raw material input as a percentage of the value chain reflects the total value of wheat required to

produce one ton of flour. The difference with percentage of cost for wheat price reflects by-products,

waste and milling losses. 137

The company reporting US$500 per ton of wheat in Zambia was acquiring the raw material through a

sister company and has no flexibility to shop for lower price. The parent company states that this is market

rate with costs of transport and handling fees factored in to the price.

295

As the value chain diagrams below indicate, the distribution of costs along the value

chain differs between the countries compared.138

Specifically, in the case of Ethiopia,

administrative overhead, and transport and delivery (to buyer) costs accounted for more

than 6 percent of value chain, while in Tanzania, handling/transport to mill and milling

and packing account for little over 10 percent of the value chain. In Zambia,

administrative overhead alone contributes more than 11 percent in the VCA as shown in

Figure 55 but reportedly is as high as 20 percent in some companies. High overhead

costs in Zambia are attributed to high export taxes (10 percent) and duties (5 percent). In

China, handling and storage, and transport and delivery (to buyer) account for nearly 10

percent of the value chain, of which cost of labor accounts for over 73 percent of both

activities. In Vietnam, however, milling and packing accounts of nearly 10 percent of the

value chain, while administrative overhead cost accounted for 6 percent of the value

chain.

In Tanzania, all the imported wheat comes in via the port of Dar es Salaam, where,

according to millers, major bottlenecks occur. Mandatory stevedoring charges (paid to

Tanzania Port Authority - TPA) range between US$6/ton to US$8/ton; the cost of doing

business is increased further by the following inefficiencies at the port:

TPA infrastructure for unloading dry bulk is often dysfunctional and importers

have to pay additional stevedoring charges to private companies – US$600 per

days to hire a grab unloader.

TPA port weighbridge(s) at port are either inaccurate (500 kg variance on 10,000

MT weighing is commonly reported)139

when they function or are dysfunctional

and private services have to be hired (US$800/day).

Unloading a 10,000 MT load takes approximately 6 days.

Once the wheat is loaded onto trucks, millers generally do not report any major

transportation-related or other bottlenecks. Even though traffic congestion is a problem,

most mills generally are within the vicinity of the port. Due to the short distances, the

transport costs from port to mill are generally US$0.25-US$0.50 per kilometer-ton for

10-20 kilometer trips. Transportation cost of domestic wheat over much longer distances

(500-1200 kilometers) is much cheaper (US$0.05/km-ton).

The Zambian mills interviewed reported using only domestic wheat. Although the prices

are high, according to interviews and backed by trade statistics, wheat imported into

Zambia is even more costly. UN Comtrade statistics displayed in Table 169 show the

extremely high cost of imported wheat for Zambia.

138

The raw material (wheat) value includes by-products, conversion losses and waste. 139

According to third party information, such as information bulletins to its members sent by ship

insurance and risk underwriters P&I Club from the UK, ―the Club strongly recommends 1. That members

be aware that port weighbridge figures in Dar es Salaam could be suspect…‖. UK P&I Club, Bulletin 258.

296

Table 169: Zambia Imported Wheat Prices

Year Ton Value (US$) US$/ton

2008 29,954.8 17,988,127 $600.51

2009 14,072.7 7,232,213 $513.92

2010 0.5 1,479 $2,749.07 Source: UN Comtrade Compiled by Global Development Solutions, LLC

297

Figure 53: Wheat Milling Value Chain Diagram, Ethiopia

Figure 54: Wheat Milling Value Chain Diagram, Tanzania

Wheat milling Dar es Salaam Tanzania Unit production cost ($/ton) 421 $ Price of Wheat $/ton Imported $261-$328 Domestic $365 Skilled:Unskilled Worker Ratio 2 Additional income from sales of bran ($/ton) $110 - $150

Raw material Transport (to mill)

Handling/Storage (Silo or Mill) Milling/Packing

Transport/Deliver y (to buyer) Admin/OH

86.0% 5.9% 0.3% 5.5% 0.0% 2.4%

Wheat 90.9% Port Charges 50.9% Labor 26.0% Duty 9.1% Insurance 1.3% Electricity 42.1%

Transport 47.8% Packing 23.9% Other 8.0% Global Development Solutions, LLC

Wheat milling Kality Ethiopia Unit production cost ($/ton) 439 $ Price of Wheat $/ton Imported $304 Domestic $333 Addition income from sales of bran ($/ton) $89 Skiled:Unskilled Worker Ratio 1:7


Handling/Storage (Silo or Mill)

Milling/ Packing

Transport/Delivery (to buyer) Admin/OH

92.9% 0.2% 0.1% 0.4% 0.5% 5.9%

Wheat 100.0% Labor 39.6% Admin OH 98.9% Fuel/oil/ water 26.5% Financing charges 0.7%

Raw material 407.54 $ 92.9% R & M 5.9% Prof services 0.3% Labor 2.30 $ 0.5% Packing material 28.0%


298

Figure 55: Wheat Milling Value Chain Diagram, Zambia

Figure 56: Wheat Milling Value Chain Diagram, China

Wheat milling Jiangsu China Unit production cost 322 $ per ton Price of Domestic Wheat $/ton $192 Addition income from sales of bran ($/ton) $230 Skilled:Unskilled Worker Ratio 1:9



Milling/ Packing

Transport/Delivery (to buyer)

Admin/OH

85.1% 1.8% 6.9% 1.9% 2.9% 1.4%

Wheat 100.0% Labor 75.4% Labor 72.9%

Fuel/oil/ water 3.0% Packing material 20.1% Raw material 273.91 $ 85.1% Electricity 9.8% Fuel/oil/ water 3.6% Labor 33.71 $ 10.5% R & M 11.9% Electricity 1.7%


Wheat milling Chisamba Zambia Unit production cost ($/ton) 730 $ Price of Wheat $/ton Domestic $500 Addition income from sales of bran ($/ton) $89 Skilled:Unskilled Worker Ratio 1:5

Raw material Transport

(to mill) Handling/Storage

(Silo or Mill) Milling/ Packing

Transport/Delivery (to buyer)

Admin/OH

87.0% 0.0% 0.0% 0.5% 1.0% 11.4%

Wheat 98.4% Labor 0.6% Admin OH 17.0%

Fuel/oil/ water 14.0% Taxes & levies 82.2%

Raw material 635.42 $ 87.0% R & M 0.2% Labor 3.24 $ 0.4% Packing material 85.3%


299

Figure 57: Wheat Milling Value Chain Diagram, Vietnam

Wheat milling Binh Duong Viet Nam Unit production cost 400 $ Price of Wheat $/ton Imported $172 - $243 Domestic $264 - $273 Addition income from sales of bran ($/ton) $259 Skilled:Unskilled Worker Ratio 1:2.3



Milling/ Packing

Transport/ Delivery (to buyer) Admin/OH

81.2% 0.5% 0.0% 9.6% 2.7% 6.0%

Wheat 100.0% Labor 46.2% Admin OH 69.4% Electricity 33.2%

Raw material 324.56 $ 81.2% R & M 20.6% Labor 18.81 $ 4.7% Global Development Solutions, LLC

Packing material 10.93 $ 2.7%

300

VI.15.1. Benchmarking Key Variables

The value chain analysis identified a number of key factors impacting the

competitiveness of the milling sector in general, and wheat milling in particular. First,

note that in Ethiopia, Tanzania, Vietnam and, to a slightly lesser extent, Zambia, the mills

tend to be large and centralized (installed capacity of 50 – 120 tons/day in Ethiopia, 115 –

1,000 tons/day in Tanzania, 58 – 96 in Zambia and 21 – 700 tons/day in Vietnam), as

opposed to China where the mills tended to be smaller in size (installed output capacity

of 15 – 30 tons/day), decentralized and located closer to the source of wheat production

(Table 170 below).

Partly as a consequence of operating large centralized mills, capacity utilization in

Ethiopia is as low as 57 percent in some mills, while in China, capacity utilization ranges

between 95 percent - 100 percent. In addition, Ethiopia continues to operate old

equipment (some as old as 63 years old), which is reflected in the high operating cost

(particularly electricity, fuel, and repair and maintenance costs).

Table 170: Benchmarking Key Variables for Wheat Processing China Vietnam Ethiopia Tanzania Zambia

1.0 Factory

1.1 Capacity utilization 95% - 100% 80% - 90% 57% - 96% 60% - 100% 80% - 95%

1.2 Installed capacity (tons/day) 15 - 30 21 - 700 50 - 120 115 - 1,000 58 - 96

1.3 Labor absenteeism rate (%) 1% - 5% 3% - 14% 1% - 3% 5% - 10% 2% - 5%

1.4 Average salary/wage/month

1.5 Skilled $398 - $442 $181 - $363 $89 - $141 $200 - $250 $320 - $340

1.6 Unskilled $192 - $236 $78 - $207 $26 - $52 $100 - $133 $131- $149

1.7 Days of operation/month 27 - 28 25 - 26 26 25 - 26 26

1.8 Average age of major equipment 3 - 8 0.6 - 5 3 - 63 5 - 10 3 - 10

2.0 Exported Output (finished primary product)

2.1 Direct Export without consolidator/broker 0% 0% 0% 0% - 20% 0% - 85%

2.2 Indirect Export Through Local Consolidator 0% - 20% 0% - 100% 0% 0% 0%

2.3 Indirect Export Through Overseas Consolidator 0% 0% 0% 0% 0%

3.0 Domestically Sold Output (finished primary product)

3.1 Direct Sales to Wholesalers/Retailers without consolidator 0% 0% - 68% 0% 0% - 80% 0% - 10%

3.2 Direct Sales Through Own Outlets/Shops/Showrooms 80% - 100% 0% - 100% 100% 70% - 100% 0% - 5%

3.3 Indirect Sales Through Local Consolidator/Trader 0% 0% 0% 0% - 30% 0% - 60%

4.0 Unit production cost ($/ton) - incl byproducts $322 - $377 $359 - $463 $415 - $458 $422 - $433 $662 - $758

4.1 Ave Selling Price ($/ton) - wheat bran $230 $259 $89 $135 80$

5.0 Ave Selling Price ($/ton) - wheat flour

5.1 Factory gate $228 - $265 $348 - $404 $444 - $489 $435 - $448 $702.13

5.2 Wholesale $273 - $325 $390 $467 - $504 $448 - $461 $723 - $943

5.3 FOB price $295 - $324 na na na na


Capacity utilization at the low end (60%)

Relatively low absenteeismrate in ET & ZM

Relatively low wages(ET), high wages (TZ) and even higher in ZM

Old equipment

High milling cost reflects high cost of wheat. Extremely high cost in Zambia

Low price for byproducts reflectsabsence of active local value addedproduction for food and non-food items

Relatively large-scalemilling,particulalryin TZ, & ET

With respect to labor cost, on average, skilled labor is three times less in Ethiopia when

compared to China, and over five times less for unskilled labor. Perhaps the most

surprising labor related benchmark is the relatively low labor absenteeism rate reported in

Ethiopian mills (1- 3 percent) when compared to Vietnam where the absenteeism rate

ranged from 3 - 14 percent. The most likely reason for the low absenteeism rate is that in

the case of Ethiopia the use of casual (temporary) labor accounts for 85 percent or more

301

of the work force in mills, while in Vietnam and China, permanent (albeit unskilled

labor) accounts for majority of the labor force in the mills.

The cost of producing a ton of wheat flour (including processing costs for other by-

products) ranges from US$415 – US$458/ton in Ethiopia, which is on average 25 percent

higher than in China where processing cost ranges from US$322 – US$377/ton.

Similarly, the cost of wheat processing in Ethiopia is approximately 6 percent higher

(US$359 – US$463) than in Vietnam.

Typical for milling operations, the ability to process and sell wheat by-products (such as

bran and germ) in addition to the wheat flour is vital in the overall economics of a mill.

As Table 170 above indicates, wheat flour production cost is higher than the average

selling price of wheat flour. This is because the millers recuperate a significant portion of

the milling costs by processing and selling by-products. In this context, the selling price

of flour does not include proceeds from sales of bran and other by-products.

In China and Vietnam, by-products are highly valued thanks to a well-developed value-

added food processing and animal feed sector. There, millers are able to fetch between

US$230 – US$259/ton for bran, which is the most abundant by-product of wheat milling.

In Ethiopia, however, the market value of bran is only US$89/ton, suggesting a

potentially underdeveloped feed and food processing sector where there is limited

demand for highly nutritious consumables such as bran. The case is similar in Zambia

where bran price is even less at US$80/ton.

In China, wheat flour sells for roughly 30 percent over and above the price of wheat. In

Ethiopia, wheat flour sells for nearly 50 percent over and above the price of wheat. Thus,

in the current conditions, Ethiopian flour prices are significantly high and uncompetitive,

not only because the wheat prices are higher in Ethiopia, but also because millers pass on

a very high proportion of the already pricy wheat to the price of flour due to their

inability to obtain favorable prices for bran and other wheat by-products. Although the

markup is not quite as high in Zambia (40 percent over the price of wheat) the situation is

similar in Zambia. With the low value of bran, millers have to compensate for the high

production cost by charging higher margins: they cannot recover costs by selling bran. In

Tanzania, wheat bran in 2010 sold, on average, for US$135/ton, with exports to the

Middle East commanding higher prices.

302

Table 171: Wheat Purchase Price vs. Wheat Flour Selling Price

China Ethiopia Tanzania Zambia

Wheat grain $192 $320 $316 $500

Wheat flour (factory gate) $250 $470 $446 $702

Price of flour over grain 30% 47% 41% 40%


In addition to the substantially higher price of domestic wheat, millers in Ethiopia must

operate under poor operating conditions where the percentage of time off the electricity

grid is as high as 4 percent to 12 percent. The poor quality of electricity in Ethiopia is

reflected in the high fuel and oil usage which ranges from 0.42 to 1.15 liters/ton of milled

wheat (67 percent higher than in China and 39 percent higher than in Vietnam).

Table 172: Benchmarking Key Variables for Wheat Processing (Part 2)

China Vietnam Ethiopia Tanzania Zambia

6.0 Avg Spoilage & Reject rate: List different types (3)

6.1 Reject rate by client 0% - 1% 0% 0%

6.2 Product rejection at factory 1% - 3% 1% - 2% 1% 0% - 2%

7.0 Avg Waste & losses: List different types (% of total )

7.1 Milling ratio 70% 75% 75% 72% - 77% 79%

7.2 Other waste 0% - 1% 0% - 1%

8.0 Electricity

8.1 On grid (Cost/kWh) $0.15 $0.04 - $0.06 $0.04 - $0.05 $0.06 - $0.14 0.04$

8.2 Off grid (Cost/kWh) - self generated 0 $0.26 - $0.28 $0.24

8.3 % of time off grid/month 0% - 10% 1% - 8% 4% - 12% 0% - 20% 5%

9.0 Water (m³) $0.44 - $0.45 $0.25 - $0.28 $0.11 - $0.28 na

10.0 Fuel & Oil (liter) $0.96 - $1.01 $0.63 - $0.83 $0.78 - $0.99 $1.13 $1.49

11.0 Productivity & Efficiency

11.1 Labor productivity: Tons/person/day 0.2 - 0.4 0.6 - 8.6 0.6 - 1.9 1 -22 0.62 - 1.57

11.2 Electricity usage: On-grid (kWh/ton) 9.3 - 14.8 2.07 - 37.49 7.8 - 48.8 57 - 65 4.16 - 61

11.3 Electricity usage ($/ton) $1.23 - $2.19 $0.11 - $2.02 $0.43 - $2.67 $8.01 - $9.70 $0.16 - $2.44

11.4 Water usage (m³/ton) 0.31 - 0.47 0.04 - 0.12 0.08 - 0.4 na

11.5 Water usage ($/ton) $0.14 - $0.21 $0.01 - $0.03 $0.01 - $0.06 na

11.6 Fuel & oil usage (liters/ton) 0.36 - 0.58 0.02 - 1.11 0.42 - 1.15 na 1.05 - 10.12

11.7 Fuel & oil usage ($/ton) $0.61 - $0.89 $0.02 - $0.92 $0.20 - $0.99 na $1.56 - $15.07

11.8 Transport ($/km-ton) $0.15 - $0.66 $0.03 $0.05 - $0.11 $0.05 - $0.50 $0.03 - $0.06


Poor quality ofelectricity

High fuel consumption forgenerating electricity

High cost of fuel

In addition, given the old age of the milling equipment used in Ethiopia, the electricity

consumption rate of mills in Ethiopia is, on average, 2.3 times (7.8 – 48.8 kWh/ton) more

than smaller, more efficient mills in China.

Despite all of the high costs associated with milling in Ethiopia, given the use of

inexpensive casual labor, the average wheat processing costs in Ethiopia – excluding the

cost of wheat grain and packaging – is US$29.46/ton, over 85 percent less expensive than

China (US$54.55/ton) and more than twice as inexpensive as similar plants in Vietnam

(US$89.49) and Zambia (US$88.32) (refer to Table 173 below).

303

Table 173: Benchmark of Average Wheat Processing Costs (Excluding Wheat and Packaging)

China Vietnam Ethiopia Tanzania Zambia

Avg. Processing Costs ($/ton) $55 $89 $29 $23 $88


The value chain analysis suggests that despite all of its challenges, wheat processing is

seemingly competitive in Ethiopia. With this noted, however, the industry is destroying

value by selling valuable by-products in the local market at a price nearly three times

lower than the international market. While there is a need to reduce the cost of producing

wheat in Ethiopia, equally important is the need to develop a more robust value-added

food and animal feed sector able to absorb and transform by-products into marketable

products for both local and regional markets.140

With respect to the production of wheat in Ethiopia, there are a host of challenges

requiring attention. Specifically, yield rate for wheat in Ethiopia is generally less than 1

ton/ha, while in Zambia and China yield rate can reach as high as 6 tons/ha and in

Vietnam, approximately 4 tons/ha. In this context, Ethiopia suffers from a number of

challenges in producing staple crops:

Shortage of high yielding variety seed supply and agricultural inputs;

Lack of irrigated farming;

High concentration of smallholder and subsistence farmers and few commercial

farms;

Lack of infrastructure for appropriate storage;

Absence of market mechanism to predictably stabilize prices; and

Lack of working capital for wholesalers.

In this context, the critical challenge for Ethiopia is to identify and secure consistent

sources of cash crops until such time that some of the fundamental problems facing the

agricultural sector are addressed. At the same time, given the high value losses

associated with by-products, it is not obvious that Ethiopia should actually import wheat

to be milled locally, but rather to import flour instead to help curve the loss of value

through milling. In this context, the challenges and bottlenecks identified in the wheat

milling value chain analysis point to a much larger issue of the need to develop a more

robust value added food and animal feed sector in the country.

140

Given the low volume and high cost of wheat production, combined with high cost of shipping,

exporting bran without any further value added processing would not be economically viable. In this

context, investments in further local value addition are required to maximize the potential of the milling

sector in Ethiopia.

304

VI.15.2. Benchmarking Best Practice Firms

Benchmarking the best practice firms in China and Ethiopia provides some insights into

the difference in production approach taken by the two countries. Specifically, the size of

decentralized mills in China have installed capacity which are one-sixth that of Ethiopia,

but at the same time the capacity utilization is 100 percent in the small scale mill as

opposed to the large, centralized mill in Ethiopia where the capacity utilization rate is

only 67 percent (refer to Table 174 below).

Table 174: Benchmarking Selected Variable for Best Practice Firms in China and Ethiopia

Benchmarking Best Practice Firms - Milling China Ethiopia

Capacity utilization 100% 67%

Installed capacity (tons/day) 21 120

Average age of major equipment 8.0 3.0

Skilled 398$ 98$

Unskilled 206$ 43$

Unit production cost ($/ton) - incl byproducts 322.49$ 426.84$

Ave Selling Price ($/ton) - wheat bran $230 88.89$

Milling conversion ratio 70% 75%

Electricity usage: On-grid (kWh/ton) 9.52 23.01

% of time off grid/month 10% 4%

Fuel & oil usage (liters/ton) 0.43 0.59


The labor costs in China are more than 4.5 times that of Ethiopia, but given the high cost

of wheat in Ethiopia, the unit production cost is 32 percent higher in Ethiopia. Perhaps

equally important is the loss of value reflected in the selling price of wheat bran. The

average selling price of wheat bran is nearly 2.6 times in China, which reflects the

robustness of the value added food and feed sector in China and its capacity to transform

by-products into marketable products.

Although the Chinese mill is using equipment five years older than that of Ethiopia, the

electricity usage rate in the Ethiopian mill is nearly 2.5 times more. Furthermore, the

decentralized mill in China is closer to the source of wheat production, which places

them somewhat off the main electricity grid. This is reflected in the fact that the

percentage of time off the grid per month for the Chinese mill is more than two times that

of the mill in Ethiopia. And yet, the fuel and oil usage rate (primarily to operate backup

generators) in Ethiopia is approximately 40 percent higher than in China. These figures

provide insights into challenges faced by millers in Ethiopia with respect to level of

inefficiency and production management, both which seem to be rooted in the low level

of labor and management skills.

305

VI.16. Conclusions: Policy Issues and the Possibilities and Actions for Achieving

and Maintaining Competitiveness in Wheat Milling

Given the differences in agricultural practices, land productivity and processing

technology the target countries, this chapter has examined the potential for wheat milling

in Ethiopia to become competitive. Combining economics and VCA in a medium term

framework, a series of recommendations have been developed on how milling costs can

remain competitive with imports. Domestic production costs are high by international

standards and the cost of milling in Ethiopia is significantly (between 15 percent - 25

percent) above reported FOB prices in China. However, wheat flour is a low value-to-

weight product and the relatively high transport and other trade costs associated with

moving wheat from East Asia to East Africa gives significant natural protection (although

this is not protection relative to other regional competitors). Hence, despite its current

short-term competitiveness, the industry needs to improve on existing levels of cost for

its longer-term viability.

The key conclusions that underlie increased efficiency at the industry level fall into three

broad categories as follows:

1. Effects of relative exchange rate changes

Taking into account wheat and its by-products, in the shorter run the key condition for

increasing the competitiveness of the Ethiopian milling industry relative to East Asian

producers over the next five years is the likely changes in relative Real Exchange Rates.

Even though Ethiopian mills are import-intensive (importing raw materials), it is likely

that relative movements in the Chinese and Vietnamese RER still will benefit Ethiopia by

increasing the relative costs of these competitive suppliers.

2. Effects of mill-level labor productivity changes

Because of the extremely low real wage costs in Ethiopia compared to China and

Vietnam, labor productivity changes in Ethiopia would make an insignificant difference

to its competitiveness. In fact, survey data do not in any case point to major differences

in factors such as absenteeism or wastage rates compared to other industries. Thus such

changes have not been factored in.

3. Effects of longer term changes in technology and agricultural practice

Because material inputs comprise the large part of the costs of milled wheat, Ethiopian

costs per se will only tend to fall significantly in the longer term as a result of changes in

306

agricultural practices such as greater use of irrigation and higher yielding seeds. Costs

could probably also fall due to changes in wheat processing technology and organization,

which might increase capacity utilization and lower transport costs and wastage rates

(through reducing the scale and changing location of the mills to be closer to the farms).

Although wheat is competitive with imports from China based on current technology,

securing its longer term position vis-à-vis, for example, other African producers would

require developments in technology and organization at both farm and processing stages.

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