Ethiopian Business Review

Making the most out of Ethioia's Skin Resources

In 2012, the Ethiopian government introduced a 150Pct export tax on hide, skins, and semi-processed leather products in order to encourage local value addition. The following years saw an increase in export revenues from finished leather products. Although the introduction of the tax created an opportunity for tanneries and leather factories by making a large amount of hide and skin available for the local market, a significant percentage of the raw materials available in the local market still remain unused. EBR’s Ashenafi Endale explores the reasons behind this. 

As he typically does on Christmas, Samuel Gebremichael, a father of two, slaughtered a sheep he bought for ETB2,600. A day after the holiday, Samuel looked for buyers who would purchase the sheepskin at a good price. After several negotiations, he sold the skin for ETB20 to a middleman, a hide collector who sells to larger collectors who supply tanneries.

“It is surprising, skins get cheaper and cheaper, and the price of livestock mounts,” a frustrated Samuel told EBR.

Currently, goatskin is sold for five to ten birr, while cowhide fetches less than three birr per kilogram. Three years ago, the price of sheep skin had reached ETB45, while goat and cowhide could fetch up to ETB25 and seven birr per kilogram, respectively. 

Big hide collectors have the ability to warehouse the material, and supply the hide and skins to tanneries that also buy directly from abattoirs. The tanneries then process the hide and transform it into finished and semi-finished products ready for the local and international market.

Hamid Mohammad is a skin and hide collector in Lideta District. “There is not enough demand for hide and skin right now,” says Hamid. “I collect and give the hides and skins to larger buyers located in Merkato. But they do not pay on time.” Hamid used to collect up to 300 sheep and goatskin during holidays like Christmas three years ago. This Christmas, he collected about half that. 

Bigger collectors complain that they supply hide and skin for tanneries mainly on credit, and at a cheaper price. “We cannot pay small collectors before the tanneries pay us,” explains Seid Muktar, who runs a hide and skin warehouse around Kera, in Kirkos District. “Tanneries are reluctant to pay on time because they say most of the hides and skins supplied are defective, and their intake capacity is limited.”

Abattoirs that operate in the industry and supply hide and skin directly to tanneries echo the same concerns. “We have a large amount of outstanding invoices because tanneries always purchase hide and skin on credit,” says Ghidey Gebremedhin, director of Frigorifico Boran Foods, a subsidiary company of a globally renowned Indian meat processor and exporting firm, Allana Group. It recently opened two abattoirs in Modjo and Adami Tulu at total cost of USD100 million. “The tanneries do not pay back on time because they know we have no option but to sell to them.”

Industry players like Ghidey and Seid, who are part of the supply chain, stress that the market currently offers a much lower price than in the past. They also have the same opinions on the cause of this. “It is after the introduction of the export tax that the gradual price fall began,” says Seid. 

In March 2012, when the government introduced a 150Pct export tax on rawhide and skin, and semi finished leather products, it was with the goal of encouraging value addition and stimulating leather manufacturing industries. “It was necessary to feed local tanneries and encourage local value addition,” explains Birhanu Sirjebo, director of Communication Affairs Directorate at Leather Industry Development Institute (LIDI). 

This, however, means that hide and skin suppliers, as well as abattoirs, have no choice but to sell their supply of rawhide and skin to local tanneries at lower prices. Since the number of tanneries and their operating capacity is limited, the market for hide and skin is almost saturated. As the result, they ask the government to lift the tax on export to revive the sector.

“We can’t generate income from hide and skin. We must have the right to use every part of the animal we slaughter, since we bought it. The government must lift the tax at least for abattoirs like us,” says Ghidey. 

“Our company is trying to compensate for the losses we incur while exporting meat by utilizing every by-product of the slaughtered animals. The meat export business is not very profitable because of many factors.”

Despite such calls, however, Birhanu stresses that the government will not lift the export tax, at least for the coming years. 

“Since the export earnings from the leather sub sector almost doubled over the past decade, we can say the tax is encouraging local value addition. More investments are also flowing into that sector, and we need this to create jobs.”

According to data from the LIDI, leather sub sector export earnings in 2010/11 fiscal year, just before the tax was levied, stood at USD76 million. One year after the introduction of the export tax, the earning jumped to USD104 million. Last year, the figure stood at USD115.4 million.

While finished leather products and footwear showed a significant increase, the export of rawhide and skins, and semi processes leather, declined. Just after the introduction of the export tax, the export revenue from hide and skin, and semi-processed leather products stood at USD120 million, according to the information obtained from the Ethiopian Revenues and Customs Authority. 

Despite a steady increase in the initial years after the introduction of tax, the numbers around export revenue from finished leather products are beginning to look less and less exciting. For instance, in 2016/17 export increased by three percent only when compared with the performance of the previous fiscal year. In 2019/20, the end of the second phase of the Growth and Transformation Plan (GTP II) period, Ethiopia aims to earn USD800 million from exports of value-added leather. However, the country is far from achieving this target. 

In the past five months of the current fiscal year, USD57.1 million worth of leather products were exported from the country. Finished leather and footwear generated USD31 million and USD22 million respectively. Leather gloves generated USD3.1 million in earnings and bags and other leather goods accounted for one million dollars in earnings.

The export of footwear, gloves, and bags essentially started in the last five years. Factories engaged in the sub sector currently employ 25,000 people.

“In order to attract investment and create more job opportunities, the export tax is essential,” argues Birhanu. “Besides, the price of rawhide and skin on the international market is also decreasing”.

Birhanu argues that value added leather products from Ethiopia are penetrating the international market. “There is a tough road ahead when it comes to diversifying the export destinations, however. We do not have big international buyers and companies yet.”

Gizaw Molla, who served as director of strategic planning at the Ethio-Leather Industry (ELICO) until a few months ago, thinks that Ethiopia’s leather products have great potential at the international market. “Due to its fibre strength and natural contents, products manufactured with local hide and skins have great acceptance globally.”   

Established in 1997 with a registered capital of USD7.6 million, ELICO is a private company owned by Mohammed Hussein Al Amoudi. Four companies operate under ELICO: Awash, and Abyssinia tanneries, Universal Leather Product Factory, and Fontania Shoe Factory. 

Indeed, studies conducted on the subject reveal that leather products manufactured using hide and skin from Ethiopia have good standing in the international market due to their unique strength, texture, thickness, and flexibility.

According to a study conducted by Ahmed Mahmud, expert at the former Livestock Marketing Authority entitled Development Potential and Constraints of Hides and Skins Marketing in Ethiopia, many unique features allow hide and skin from Ethiopia to fetch higher prices in the international market. 

For instance, goatskin that comes from the highland areas, which is known as “bati-genuine,” is known globally as the highest quality goatskin. Cowhide branded as “Zebu type” that comes from Western and South Eastern part of the country is well accepted due to its fine grain pattern and fibre structure, which is ideal for the production of high quality leather.

Gizaw, a World Bank technocrat and advisor to the late Ethiopian Prime Minister Meles Zenawi, stresses that local industries are unable to benefit from the global reputation of Ethiopia’s rawhide due to poor capacity. “The industries are utilizing a small fraction of their potential and capacity.”

Currently, tanneries are utilizing 20Pct to 80Pct of their capacity, according to LIDI. Due to this, they are unable to buy all the available hide and skin in the local market. That’s why the price of hide and skin keeps falling. 

Based on an assessment conducted by the Central Statistics Agency, which puts the off-take rate of cattle, sheep and goat at 7.0Pct, 33.0Pct and 35.0Pct respectively, the potential production of hide and skin is estimated at 3.1 million cowhides, 7.8 million sheepskins and 8.2 million goatskins, annually. 

However, the hide and skin is mainly channelled from local areas where basic facilities for slaughtering and subsequent marketing are limited. Insiders further stress that the scattering of slaughtering centres across the country, and the lack of proper facilities, along with the volume and quality of hides and skins in the market negatively affect the entire industry.

For Gizaw, it is a matter of quality rather than quantity.  “Over 80Pct of the total annual supply of hide and skin comes from household level slaughter.  At this level, the quality of hide and skin is reduced by 50Pct, due to lack of modern animal husbandry, poor skinning skills, and limited preservation and storing mechanisms. So even if it seems like there are plenty of raw materials in the local market, due to the poor quality, only a small portion is fit for use.” 

“Often, most of the rawhide and skin supplied to tanneries does not meet our requirements.  The collectors simply bring all types of hide and skin mixed together, rather than supplying what the industries desire.”

Abdissa Adugna, secretary general of the Ethiopian Leather Industries Association (ELIA), says there are different types of animal skin diseases, which are difficult for collectors to identify before buying from households and supplying to industries. “The supply chain is also longer, which has its own effect on the quality of hides and skins.” 

Industry movers stress that there are no tanneries employing diversified technologies in Ethiopia that process the different mix of hide and skin. This, in turn, results in wastage of rawhide and skin.

The manager of a tannery that stopped operation a few months ago told EBR that due to the unavailability of chemicals used to preserve skin, tanneries are unable to purchase as much as they desire; “importing the chemicals from abroad is very difficult due to lack of finance and foreign currency.” 

Gizaw is also aware of the problem. “Except for common salt, over 70Pct of preserving chemicals are imported. The chemical industry has a huge impact on the growth of the leather industry.” 

The state-owned Industrial Inputs Enterprise recently started an initiative to tackle the issue, but Gizaw says it is incapable of meeting the demand. 

“Most tanneries in Ethiopia process a limited amount of hide and skin, rejecting those which could be utilized using chemicals and advanced technologies,” argues Gizaw. “So, instead of lifting the export tax, it is better to find ways of utilizing the large portion of the raw material that is left unused.”

To support this argument Gizaw points out the recent action taken by the government of Kenya. “Kenya has followed in Ethiopia’s footsteps and introduced a 50Pct export tax on hide and skin, which is expected to reach 150Pct in the next two years, in order to boost local value addition. This shows that Ethiopia’s move is right.”

LIDI, on the other hand, is taking another approach to solve the problem observed in the supply chain. The Institution submitted a draft amendment of the proclamation that governs the marketing of hide and skin, which is expected to replace the one from five years ago. Before 2013, the proclamation was amended twice. 

“The draft is expected to be ratified in three months’ time,” says Birhanu. 

If ratified, the draft proclamation will make every business deal made between hide and skin sellers and buyers, on a contractual basis only. If one or both parties fails to live up to the agreement, for instance by delaying payment, the seller can take the matter to court and demand justice. Currently, there is no legal framework that forces parties to enter into contractual agreement so parties do business without legal indenture. 

Yet, stakeholders demand the government give more attention to the sector instead of fixing small problems here and there.

“The sector lacks attention from the government and there is no fitting strategy so far,” argues Abdissa. “That is why the amendments of the proclamation introduced so far could not bring any substantial change.”

Of course, the livestock sub sector has been given little attention in the past and different government institutions involved often creates complexity. Two years ago, the sector was managed by the Ministry of Agriculture and Natural Resources. This was before the newly established Ministry of Livestock and Fishery (MoLF) took over that responsibility. The marketing of hide and skin is still under the Ministry of Trade, while tanneries are regulated under the Ministry of Industry. 

Abdissa insists that the newly established MoLF should take concrete steps in this regard. “FDI is flowing into the sector, primarily attracted by the huge livestock potential of the country. However, investors are not getting what they came after.”

For Gizaw, better animal husbandry to get hides that are free of diseases, standardized skinning, more investment support for tanneries (so they can employ diversified processing technologies), and easy access to preserving chemicals are essential to reducing wastage and bringing about fundamental change in the sector.


6th Year . February 16  - March 15 2018 . No.58 


 

 

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