Traders court politicians to back duty-free cement

By John Njiraini

Against a backdrop of a biting cement deficit in East Africa, a clique of traders have their guns pointed at the industry with the intent of shipping in cheap imports.

With the help of politicians, they argue the region is facing a major deficit that is hampering the full potential of the building and construction industry thus slowing down economic growth.

The importers also say cement manufactured in the region is expensive and allowing imports could drastically reduce the cost of construction, particularly for the common mwananchi.

According to industry statistics from the East African Cement Producers Association (EACPA), the region is facing a deficit of 700,000 tonnes annually as the six cement manufacturers have a production capacity of 5.5 million tonnes per annum against a demand of 6.2 million tonnes.

The importers contend that if duty is scrapped, the cost of a 50 kg bag of cement that costs Sh700 could reduce by as much as 60 per cent. The radical proposal, however, spells doom for the survival of the region’s established cement manufacturers.

The resolute traders have taken a proposal by Ugandan Minister of Finance Syda Mbumba to zero rate cement importation as a timely blessing and are engaging politicians in protracted lobbying to have it fully implemented.

Extraordinary meeting

In September, Mbumba petitioned his regional counterparts at a East Africa Community Extra-Ordinary Meeting for Finance to reduce the common external tariff (CET) on cement downwards to mitigate the effects of high cement prices on the construction sector.

According to the CET, import duty on cement is capped at 25 per cent after it was reduced from 40 per cent last year. Now Uganda, and Rwanda want it abolished.

Local cement manufacturers have come out strongly against the proposal arguing duty-free imports will kill the industry.

"The pressure coming from politicians that duty on cement importation be removed is linked to importers," said Athi River Mining Managing Director Pradeep Paunrana, who is also the EACPA spokesman.

More worrying for cement manufacturers is the understanding that numerous local and some multinational construction companies operating in the region are silently in favour of the move.

Though most are reluctant to come out openly, the feeling among construction companies is that sourcing for cheap cement in countries like Egypt, India, Pakistan and China would translate to more profits. Pakistan, in particular, has become a favourite region’s source for cheap imports. Indeed one Pakistani company, Lucky Cement Ltd, boosts of a well-established export market in East Africa that accounts for about nine per cent of exports.

According to the company’s website, East Africa is marked as being among its top export regions after the Middle East and Afghanistan. Most of this export is sold in Tanzania, where imports have drastically increased.

In its financial report for the nine months ended March 31, Lucky Cement states that exports grew by 50 per cent to compensate shortfall in domestic sales.

"It is true that contractors only care about cheap cement. But we also need to take cognizance of the long term effects," said Mr Steve Oundo, Architectural Association of Kenya chairman.

But while Kenyan companies have adopted a silent endorsement of zero rating, leaving the push to traders and politicians, companies in Uganda and Rwanda are not concealing their need to have duty on cement abolished. Two leading Rwandan companies, DN International and Fair Construction, have said allowing importation of cement duty-free would result in a drastic reduction of prices, thus benefiting consumers.

"Zero rating of imports is advantageous as it reduces the cost of construction," said DN International Chief Executive Nathan Lyod recently.

Investment loss

But as the new cement barons lobby politicians through legal and illegal means to push for removal of duty, analysts contend the move could have far reaching ramifications not only on cement manufacturers but also on the region’s economies.

First, it could wipe out investments in the excess of $1.1 billion and rendering about 10,000 people it employs directly jobless.

It could also deny the Government’s in the region a whooping Sh124 billion in taxes annually.

The move would put more pressure on local currencies due to huge demand of foreign exchange to import the commodity.

Estimates indicate that Kenya, for instance, would require an extra $1 billion in foreign exchange reserves to import cement to meet demand if the local industry were to collapse.

This could in effect result in the shilling weakening against major world currencies, something that could come with ripple effects like making it expensive for other sectors that rely on imports.

Currently the country’s usable foreign exchange reserves stand at $3.391 billion, or 3.72 months worth of imports according to the Central Bank of Kenya. This is below the required four months threshold.

While the call for zero rating is still a proposal, the effects are being felt in the cement industry.

"We can sue the governments for not protecting our industries from dumping from China and Pakistan in accordance to the WTO (World Trade Organisation) rules," said Paunrana.

Already the industry is feeling the pain of dumping because China is subsidising exports by selling cement at $25 (Sh1,875) per tonne in East Africa, while selling the product at $70 (Sh5,250) in her home market.

Besides calling for abandonment of the zero rating proposal, the industry is asking for anti-dumping protection through the introduction of a $50 (Sh3,750) per tonne .

The industry is also recommending that cement be treated as a sensitive product that requires special protection and CET reverted to the agreed 35 per cent as per the Customs Union Protocol agreement.

"There is no doubt local manufacturers are facing unfair competition because their costs of production are high," noted Oundo.

Electricity, which accounts for about 40 per cent of the production cost, is expensive in the region where it costs an average of 10 US cents compared to three US cents in China and Egypt.

Although the region is experiencing a cement deficit, by 2013 it is projected there will be a surplus of about three million tonnes a year. This is because producers are expanding their capacity, while two other producers have entered the industry.

—[email protected]