VZCZCXRO9936
RR RUEHROV
DE RUEHDS #0191/01 0241216
ZNR UUUUU ZZH
R 241216Z JAN 08
FM AMEMBASSY ADDIS ABABA
TO RUEHC/SECSTATE WASHDC 9292
INFO RUCNIAD/IGAD COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
UNCLAS SECTION 01 OF 02 ADDIS ABABA 000191
SIPDIS
SIPDIS
DEPT FOR EEB
DEPT PLEASE PASS TO USTR BILL JACKSON
E.O. 12958: N/A
TAGS: EAGR ECON ETRD EINV EAID ET
SUBJECT: ETHIOPIA'S HIDES, SKINS AND LEATHER SECTOR
1. SUMMARY: The hides, skins and leather (HSL) sector is a priority
area in the Government of Ethiopia's (GoE) economic development
plan. While Ethiopia has the potential to produce large amounts of
very high-quality leather, problems of poor quality inputs,
over-capacity in tanneries, and a low starting base are challenges
to sector expansion. The U.S. Government and other donors are
offering technical assistance to assist growth in HSL production and
quality improvement, with promising results to date. END SUMMARY.
A FOCUS FOR GOE'S POVERTY REDUCTION PLAN
----------------------------------------
2. Ethiopia's Plan for Accelerated and Sustained Development to End
Poverty (PASDEP), a five-year plan covering 2005-2009, targets the
leather and leather products industry as key to raising export
income and reducing poverty. The PASDEP targets the leather,
leather products and shoe sectors with a goal of increasing export
revenue to USD 500 million by 2009/2010. According to statistics
provided by the National Bank of Ethiopia, the value of leather and
leather products exported rose from USD 52.2 million in 2002/3 to
USD 89.6 million in 2006/7, a 71.6% increase. Leather is currently
the fifth leading export from Ethiopia following coffee, oilseeds,
gold and chat.
PROGRESS BEING MADE, CHALLENGES REMAIN
--------------------------------------
3. Following the GoE's declared focus on leather and leather
products, the international donor community responded with programs
to assist. USAID's Agribusiness and Trade Expansion Project, for
example, is partnering with the Ethiopian Leather Industries
Association (ELIA) with a goal of increasing exports by 70%. This
project aims to improve the quantity and quality of leather by
restructuring the value chain, increasing the quality of raw stock,
enhancing value added production, and expanding market outreach.
4. Other donor-funded projects include the "Made in Ethiopia"
project led by the United Nations Industrial Development
Organization (UNIDO), which has assisted in the formation of the
TAYTU brand of high-end, high-fashion handbags. This month, Addis
Ababa is the venue for the All Africa Leather Fair, expected to
expose thousands of buyers to Ethiopian leather. Although early
results of assistance are positive, with joint efforts lending to a
19% increase in leather exports in 2006/7, challenges remain to
further expansion.
QUALITY INPUTS
----------------
5. With one of the largest livestock herds in the world, Ethiopia
has a vast potential in HSL. Ethiopia's cattle herd is 7th largest
(20 million), its sheep herd is 9th largest (24 million), and its
goat herd is 8th largest (18 million) in the world. Moreover, the
highland environment is amenable to producing thick, dense skins and
the Ethiopian variety of sheep skins is also renowned
internationally for its dense fiber texture and elasticity which
makes top quality gloving leather. Roughly 60% of the world's
finest sheep skins for gloves come from Ethiopia and the name "Bati
Genuine" has been coined by the international leather market for
high quality goat skins after the Ethiopian province of Bati where
animals of this variety are raised.
6. Despite the large number of animals, Ethiopia's tanners face
difficulty in obtaining high-quality, undamaged raw materials. This
is due to a number of factors in the supply chain. First, almost no
professional slaughtering is done in Ethiopia. Most animals are
slaughtered for meat consumption, primarily around major religious
holidays. The "slaughter boys" and rural farmers are not trained in
butchering and skinning, and as a result the skins are often damaged
at the time of skinning. (NOTE: Technically a hide is from cattle
and skins are from sheep and goats. This cable will use the term
"skin" for all types of animals. END NOTE.)
7. After slaughter, the skins face an extensive journey to the
tannery. In rural areas, families take the skin to the nearest
market town where it is sold to a trader. When the trader has a
donkey-load of skins, they are taken to a larger town. There,
another trader will purchase the donkey-load and wait until he has a
truck-load. The truck-load of skins (still unpreserved through this
point) is then taken for sale to a tannery. The time from slaughter
in a rural area to delivery to a tannery can be up to two months,
during which the skins can deteriorate significantly. Urban
slaughter cuts transit time to approximately one week, but given
Ethiopia's highly rural population, very little urban slaughter
takes place propotionally.
8. An additional challenge to quality supply is the presence of skin
diseases such as ecto-parasite, known locally as Ekek, that degrade
the skin. Currently, there is no incentive paid by traders or
ADDIS ABAB 00000191 002 OF 002
tanneries for quality, undamaged skins -- the price is solely based
on the size of the skin. These factors lead to over 50% of skins
being rejected at the tanneries. Additionally, there are defects in
some skins that cannot be detected until the tanning process is at
least partially finished.
TANNERIES AND TRADE REGIME
---------------------------
9. There are currently 26 tanneries in Ethiopia employing nearly
5,000 people. One tannery is owned by the GoE and managed by
Pittards Limited of the UK under a five year management contract,
while all others are privately owned and operated. The total
capacity for processing is 28 million hides and skins per year, and
a 2002 study estimated that the tanneries are operating at about 65%
capacity for skins (sheep and goat) and 80% capacity for hides
(cows). The primary reason for operating below capacity is lack of
quality raw skins for input.
10. The export of unprocessed skins is currently prohibited under a
law dating to the communist Derg regime. Most factories are
producing semi-processed leather (at the pickle, wet blue, and crust
stages) at the request of their customers. The semi-finished
product is exported to European and Asian countries for finishing
and production. The GoE is moving aggressively to promote
higher-level in-country processing. In January, the Ministry of
Finance and Economic Development (MoFED) got approval from the
Council of Ministers to impose an export tax on semi-processed
leather in a further effort to promote finished leather. The tax
still needs Parliamentary approval, but recommendations by the
Council of Ministers are widely followed. However, the chairman of
the Ethiopian Leather Industries Association (ELIA) questioned the
ability of companies to effectively respond to this "incentive"
since upgrading tanneries to produce finished leather requires huge
investments.
11. According to the senior trade attorney on USAID's WTO Accession
Plus project, this export tax will apply to both unprocessed and
semi-processed skins. From a WTO accession standpoint this is a
positive move, as it replaces a more restrictive quantitative
measure with a less-restrictive one that still addresses Ethiopia's
pursuit of value addition. However, MoTI and MoFED argued that
lifting the ban on unprocessed skins at a time when tanneries are
already facing severe supply shortages could lead to the closure of
up to half of Ethiopia's tanneries, as happened in Uganda and Kenya
when similar measures were taken.
BUT WHAT DOES THE CUSTOMER WANT?
--------------------------------
12. Despite the challenges cited above, Ethiopia produces some of
the best quality leather in the world. Why, then, is most of the
product exported as semi-processed? Simply put, it is the current
preference of the customer. By purchasing Ethiopia's strong, supple
skins at a semi-processed stage, foreign manufacturers are able to
apply proprietary techniques, processes, and dyes to produce a
unique finished product. While the British company Pittards has
begun finishing shoe leather in-country, most customers prefer to
finish in other locations including Japan and Italy. Ethiopia does
offer a cost savings in terms of labor, but Pittards has found that
while their labor cost is only USD 1 million per year, productivity
is only one-third that of their UK workers.
13. COMMENT: Given the country's vast livestock and labor resources,
Ethiopia's emphasis on HSL as a priority sector is logical, and the
GoE is dogged in its pursuit of growth in the production of finished
leather. With the right conditions, Ethiopia could become a
world-leading center for finished leather and leather goods
production, and some experts argue that it is poised to do so in the
immediate future. However, the recently proposed tax increase on
semi-processed leather may dampen progress in the sector if neither
tanneries nor customers are ready to make a fast leap.
Additionally, if the export ban on unprocessed leather is lifted,
tanneries may not have enough input to continue operation. Donor
programs such as USAID's which focus on improving the value chain
and upgrading tannery capacity are making strides. As quality and
consistency of the end product and awareness of Ethiopian leather
grows in the world market, the country should reap rewards in
increased foreign exchange revenue. END COMMENT.
YAMAMOTO