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Leather:
the Dwindling Sector
By Wondirad
Seifu, July 29, 2007, Addis Fortune
A decade ago the Ethiopian leather sector was losing
about 14 million dollars annually due to poor quality hide and skins (HS).
The same figure was echoed a few weeks ago despite accelerated
deterioration of the same resources of late. The statistics continue to
plague the industry and policy makers, defying attempt to capitalize on a
promising sector.
Leather production in the country has great potential in
terms of input supply. Ethiopia ranks first in Africa and 10th
in the world in terms of livestock population, even amidst rampant disease,
smuggling and poor productivity in the sector.
The industry standard of establishing rank by counting
horns reveals that the productivity of the livestock is low in Ethiopia by
any standard. For instance, the country‘s share of the world leather trade
is less than 0.5%, which accounts for about 40 billion dollars a year.
Ethiopian’s leather sector emerged a century ago and
passed through three remarkable phases that may be described as
introduction, modernisation and proliferation during the Imperial, Derg and EPDRF regimes, respectively. In the current
phase, the number of tanneries has jumped from less than 10 to about 20.
However, their contribution to the sector of these new
capital investments is unremarkable as producers compete for the existing
nominal profit of the sector instead of developing innovative strategies to
expand the market.
The leather sector registered revenue amounting 650
million Birr in 2006 while the unit price of the sector’s export soared
from 10 Br per kg in 1988 to 43 Br per kg in 2006 alongside birr
devaluation from two to nine against the dollar. Still, the volume of
export was nearly constant and overall growth of the sector averaged four
per cent over the past 20 years.
The major constraints to the sector growth may be
divided into three categories: supply, quality and product mix.
Being a by-product of meat production, the supply of HS
does not respond to its price changes, meaning that a rational person will
not slaughter a sheep for the sake of its skin. HS is price inelastic,
valued at less than 15 per cent of a live animal; but it is income elastic;
as earning rise, so does meat consumption, and also supply of HS.
Accordingly, following the transformation of the country
from a command to quasi-market economy, the price of sheep skins has surged
from seven Birr to around 40 Br. However, the change has not affected the
supply of HS; because the country’s per capita income plunged into the
absolute poverty basket.
Strangely enough, the higher market price has not even
discouraged the traditional uses of HS, nor its smuggling. Studies revealed
that over 1.5 million HS failed to reach the tanneries and/or central
markets. Illicit trade of live animals and HS has been mounting on an
unprecedented scale, worth over 100 million dollars, according to the
Ministry of Agriculture and Ruler Development (MoARD),
albeit independent sources claimed a figure many times higher than the
stated amount.
Furthermore, Ethiopia’s purchasing power continues to
decline and has displaced meat from many people’s diets. The country’s per
capita consumption of meat is not more than 15 kg as opposed to American’s,
119 kg. Although, Ethiopia comfortably beats India whose per capita meat
consumption is 3.4 kg.
The national price index for meat has been galloping
from 80 to 200 along with a 20 percent inflation that troubles the country.
Though the population grows as usual, it does not help to augment HS supply
amid meagre household budgets.
In spite of a large disparity in meat consumption, a
commercial fattening of livestock has been widespread at unprecedented
rate. As such, it is likely to reduce the supply of HS because only a
single large ox is slaughtered to produce the same quantity of meat instead
of two or more lean oxen as it used to be.
In many ways, the supply constraints of HS, along with
newly established tanneries, have imposed excess capacity for leather
production. As a result, the tanneries are forced to operate under half of
their installed capacity. Paradoxically, they are enjoying substantial
profits, which may signal the need to come up with more economically sized tanneries.
Ethiopians tanneries are bulky as compared to those in
other countries. For example, Italy is said to have 400 tanneries amidst
its limited livestock population. Economic theory suggested that as the
number of firms rise in a specific industry, so dose its efficiency.
Most Ethiopian tanneries are designed on “copy and cut”
basis, are inefficient and suffer from a lack of leadership quality.
Perhaps the existing tanneries should be scaled down, allowing for more
efficient smaller factories to enter, as well as tanneries specialized in
certain products.
The quality trends of Ethiopian leather are also
disturbing. Leather quality is noted by a grade based on the proportion of
defect-free surface measured. Best quality (grade one to three) leather
commands higher prices; bellow this level the product loses around half of
its value. The share of best grade leather in Ethiopia has plummeted from
75 percent to less than 25 percent. However, these figures are questionable
as re-grading is common in the industry.
Although, USAID has generously speculated that the
Ethiopian leather sector will earn 200 million dollars annually by 2010,
the decline in quality will be a major hurdle to reach this figure.
Alternatively, one may exercise a conservative
projection given all relevant knowledge unchanged to avoid bias and rosy
assumptions. A more sober assessment shows the targeted amount (200 million
dollar) will require about 26 years at a four percent annual growth rate, starting
from the 2006 revenue of 72 million dollars.
However, current trends may extend this date as the
volume of leather that failed to fit within the grading scale is mounting
at alarming rate. Leather of this poor quality is rejected and has no economic
value. Although the official value lost due to poor quality HS is limited
to 14 million dollars a year, some in the industry suspect it to be much
higher due to lack of statistical updates.
A number of defects contribute to poor quality HS:
parasite damage, scratches, hinge cuts and poor presentation. Of these,
parasite damage and scratch are the dominant ones and have a strong
correlation: a parasite may cause
the animal itch with any solid object; in the meantime inflammation and
scratch are formed on the skin, relegating to a lower grade or reject
rating. The poor animal is also unproductive, as the parasite harms feeding
habit.
A study conducted by an international organization
revealed that a parasite dubbed ekek was the
most prevalent species causing harm. Although the organization also came up
with an eradication plan, so far nothing has been accomplished worthy of
mention. It is imperative to eradicate ekek because it is biggest threat to the leather sector.
Conversely, a coalition of government and non-government
organisations, whose mission is to “take care of Ethiopian livestock” has
focused on the many trivial defects, such as knife-cut, cruel slaying,
brand mark, wrong ear tag, etc.
The trials of the leather sector cannot continue forever
as synthetic leather is seen as a close and competitive substitute by many
and a perfect replacement for the others. Synthetic leather has captured
the interest of leather goods manufacturers for not being susceptible to
defects.
Another threatening revelation is the declining
value-added trend of the sector. A typical leather sector’s products can be
categorised under four conversion phases, namely (in ascending order);
semi-processed, semi-finished, finished and ready to use goods. A move
along each phase adds value to the tune of 400 pc.
The country’s leather sector exports are dominated by
semi-processed leather. In 2006, the share of finished leather was only 14
pc while ready to use goods represents less than three per cent.
The process of altering semi-process leather in to
finished leather coincides with a loss of half of its weight. Therefore,
the rise in export volume from 8.6 million tonnes in 1996 to 15.3 million
tonnes in 2006 is deceiving with a view to the progress of the sector in
general.
Although the Book of statistical Abstracts published by
the Central Statistical Authority poorly designated products of the leather
sector, no one disputed the ranking of the sector at a lower stage of
development.
While Ethiopia’s leather sector has received great
attention and massive investment, such as that originated from the Leather
and Leather Products Institute, which is now struggling not to lose its
relevance, the productivity, quality and value-added figures are
disappointing.
The loser in all this is in many ways the supplier of
the raw material for the manufacturers, the peasant who raises the
livestock. Without an efficient buyer turn his HS into valuable goods, the
peasant fetches below potential prices.
The government’s agricultural strategy seems oblivious
to the quality of HS as it includes protectionist policies that shelter the
sector from competition and thus hinders its development. The two tired
pricing system where imports and domestic leather are valued differently is
heavy-handed protectionism and encourages smuggling.
It is incumbent on the government to create an
environment conducive to efficient development of a sector in which
Ethiopia enjoys many competitive advantages.
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