Cablegate: Ethiopia's Sugar Rush

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1. SUMMARY: The sugar and ethanol industries have recently garnered
much attention in Ethiopia, with India's ExIm Bank providing a $640
million line of credit to fund expansion of Ethiopia's state-owned
Finchaa sugar factory and construction of a new factory at Tendaho.
Ethiopia is expanding sugar production both to meet rising domestic
consumption and to export to Europe under the "Everything but Arms"
agreement. Ethiopia's Minister of Trade and Industry is now
touting sugar along with other priority sectors such as textiles and
hides, skins and leather, as a focus for economic growth.
Additionally, extra capacity in the country's refineries can be used
to make ethanol, a biofuel that can be used in fuel blending or
clean-cook stoves. Sugar is, however, a volatile place to stake a
claim. The world sugar market is notorious for its fluctuations,
and sugar and ethanol expansion pose significant environmental and
humanitarian concerns. END SUMMARY.

Sector Overview

2. Ethiopia currently has three operational sugar factories at
Finchaa, 170 km northwest of Addis Ababa in Oromia, Wonji/Shoa 100km
east of Addis Ababa and Metehara 250 km east of Addis. A new
factory is planned at Tendaho in the Afar region, which will employ
80,000. Currently, all factories are state-owned.

3. Total sugar production capacity in Ethiopia stands at
approximately 275,000 tons per year (tpy). Finchaa has a production
capacity of 80,000 tpy, Metahara produces 125,000 tons per year
(tpy) and Wonji/Shoa produces 75,000 tpy.

4. India's ExIm bank has provided a $640 million soft loan at 1.75%
interest to cover part of an ambitious expansion project. The GoE
states that it will finance the balance of $660 million, but the
details of financing are not clear. The expansion project will
raise Finchaa's production capacity to 270,000 tpy. The new factory
at Tendaho will have a capacity of 600,000 tpy- Ethiopia's largest.

5. In addition to the Indian-funded projects, Wonji/Shoa is
upgrading its capacity to 350,000 tpy and Metehara will increase
capacity to 190,000 tpy. A private Pakistani investor has been
granted permission to develop a 70,000 hectare sugar plantation and
factory in Oromia, which will be the country's first private-sector
sugar project. In total, the new factory at Tendaho along with
expansion at Finchaa, Wonji/Shoa and Metehara will raise production
capacity to 1.41 million tpy.

Why Sugar and Why Now?

6. At first glance, sugar is an odd sector for such aggressive and
rapid expansion. Sugar is notorious as one of the most volatile
commodities, with frequent and large price fluctuations. Ethiopia
is poised, however, to take advantage of several factors that may
make their sugar investment pay off. First, Ethiopia's domestic
demand for sugar is rising as the country develops. New candy and
cookie factories have increased industrial demand, and as rural
farmers gain income through increased commodity prices they are
substituting sugar for more traditional honey or salt in coffee.
Currently, domestic demand is about 300,000 tpy, in excess of
national production.

7. In addition to satisfying the domestic sweet tooth, Ethiopia is
taking advantage of the European Union's "Everything but Arms"
program. This program offers the ability for certain least
developed countries, including Ethiopia, to export sugar tariff-free
to the EU. Ethiopia plans to export 24,000 tons of raw sugar to
Portugal. This export, while it may currently be at the expense of
domestic consumption, will earn much-needed hard currency for the
foreign-exchange strapped GoE. Once the proposed expansions and new
factory are on-line, Ethiopia should be able to both meet domestic
needs and export up to its quota for EBA and have excess to sell on
additional world markets.

8. Another reason Ethiopia is eyeing increased sugar production is
not sugar itself, but a byproduct -- ethanol. Ethiopia is 100%
dependent on outside sources for petroleum products, and the
country's fuel bill takes up 75% of its export revenues. Ethanol is
cheaper than benzene (gasoline) by about 6 birr per liter at current
prices and its use would save scarce foreign currency reserves.
With this in mind, the Ministry of Mines and Energy has initiated a
program of fuel blending, with the aim of substituting 30 million
liters of benzene per year with ethanol.

9. Beginning in October 2008, fuel stations in Addis Ababa will sell
a blend of 95% benzene and 5% ethanol. Finchaa is currently the
only factory producing ethanol, in the amount of 8 million liters
per year. Plans are in place to increase Finchaa's ethanol
production to 17 million liters per year. Wonji/Shoa plans to begin

ADDIS ABAB 00000438 002 OF 002

ethanol production in 2008 with an initial capacity of 12.2 million
liters per year. The new Tendaho factory will have the greatest
ethanol impact with a 17.6 million liter per year potential,
bringing total production to nearly 37 million liters per year.

10. Ethanol can also be used in clean-cooking stoves as a substitute
for kerosene or biomass. As kerosene prices rise in tandem with
other petroleum products and the population, especially in urban
areas, moves into more dense housing, these clean-burning stoves are
important for economic, environment and health reasons. Currently,
the GoE is reluctant to make ethanol available for projects other
than fuel blending.

Not So Sweet Side Effects

11. While touted as an environmentally-friendly fuel, ethanol has
advantages and disadvantages. If it is solely a byproduct of
existing sugar plantations and if it is used for stoves that
mitigate the use of biomass, then it is very environmentally
friendly. If, on the other hand, sugar is grown as a biofuel crop
that requires excessive inputs of water and fertilizer and displaces
food crops or rangelands, and if the ethanol is then used for fuel
blending it is not environmentally friendly.

12. The massive construction at Tendaho is taking place in an area
primarily inhabited by pastoralist Afars. A 2.8 billion cubic meter
dam will be constructed on the nearby Awash River to provide
irrigation for the plantation's 60,000 hectares of cane. A press
release in 2007 from the Afar Human Rights Organization (AHRO),
however, states that up to 500,000 pastoralists could be displaced
by the dam and plantation. The GoE states that 10,000 hectares of
land have been set aside for the pastoralists to develop for pasture
or to use for sugarcane cultivation. However, the reduction in
their rangeland and/or settlement for cane cultivation represents
significant disruptions to the traditional livelihoods of the

13. AHRO is also concerned about hundreds of thousands of
"highlanders" (a term typically used to denote ethnic Tigrayan or
Amhara Ethiopians) being brought into their territory to construct
the dam and later staff the plantation and factory. The Afars also
state that the Awash River, already polluted, will be further
damaged by the industrial waste from the factory and fertilizers
used for cane cultivation, thus posing an environmental threat to
their livelihoods.

14. COMMENT: Ethiopia is in the midst of an attempt to transform its
economy in order to lift its population from the lowest rungs of
development and poverty. By concentrating on sectors where it has a
natural competitive advantage, particularly agriculture-related
sectors, Ethiopia hopes to boost exports, foreign exchange earnings,
employment, and GDP. Sugar had emerged recently as a potential
"sweet spot" for Ethiopian economic development. Sugar is a risky
gamble, though, based on world market volatility and environmental
concerns. The sugar gamble can be seen as a grab for foreign
exchange on two fronts- first by exporting sugar at the expense of
the domestic market in exchange for foreign exchange and second by
substituting indigenous ethanol for imported benzene. Post will
continue to monitor this sector both to see if the GoE's plans come
to fruition and to determine any unhealthy outcomes of Ethiopia's
sugar binge. END COMMENT.


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