This archive report was first published on 30 June 2021.
Kenya's Steel Sector Faces Challenges Amid Rising Costs ¶
The demand for steel in Kenya is increasing, driven by government-driven infrastructural development and commercial and residential buildings. Steel is a core piece of the modern economy, used as a paradigm to gauge the overall economic status of a country.
Kenya's steel sector is strongly linked to the growth of complementary sectors such as housing and construction, energy and electronics, and chemical and allied. The sector forms approximately 13% of the manufacturing sector, with an overwhelming majority of its products used in the construction industry.
The direct and indirect consumption of steel in the country is projected to increase as the country embarks on development activities as envisioned in Vision 2030. The sector has an opportunity to enhance the country's infrastructure through the purchase of locally manufactured steel products, further bolstering the growth of players within the value chain.
However, the sector continues to face various challenges that hinder its competitiveness. Key among them is the cost of raw materials, which has been driven up by the domestic iron ore supply shortage in China and India. The World Bank estimates that iron ore prices will be 30% higher this year compared to last year.
Another contributing factor to the increasing prices is the high transport and logistics cost. Following COVID-19 containment measures, sea freight cost rose by 57.14% from $40 per tonne in March 2020 to $70 per tonne in May 2021. Additionally, transport from Mombasa to Nairobi increased from $25 per tonne in March 2020 to $30 per tonne in May 2021.
As an Association, we acknowledge that external factors are driving the prices of locally produced steel. However, it is critical that the government supports the steel sector, which is currently absorbing the increasing costs.
The government can support the sector in three main ways. First, by reducing the cost of electricity to US cents 9/kWh. Electricity is a key input in the manufacturing process, and our electricity tariff stands at an average of US cents 18/kWh for industrial consumers.
Second, zero-rating Import Declaration Fee (IDF) and Railway Development Levy (RDL) for raw materials used in processing. The cost of imported industrial inputs is a key determinant of industry's competitiveness. Imported raw materials attract Import Declaration Fee (IDF) and Railway Development Levy (RDL) of 1.5% each, amounting to a cost-disadvantage of 3%.
Lastly, we must unearth the potential of the sector by incentivizing local industries to harvest raw materials from local deposits of iron ore and coal. This however requires huge capital investments. A few local industries have presently set out as pioneers to make this a reality. For them to succeed, the government must accord them all support to become competitive, including banning exports of natural resources without being value-added (iron ore).
Time is of the essence in nurturing the growth of the local steel sector and value chain, given its critical role in the modern economy. It is paramount that our policies look at supporting its growth, without which many of our developmental ambitions will be unsuccessful.
