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High cost of inputs hurting crucial steel sector

OPINION
By Bobby Johnson | July 18th 2021

The direct and indirect consumption of steel is projected to increase. [Courtesy]

Demand for steel is increasing as government-driven infrastructural development, commercial and residential buildings surge. Steel is a core piece of the modern economy. It is used as a paradigm to gauge the overall economic status of a country, as well as an indicator of the investments dedicated to infrastructure and subsequently, a measure of progress and stability.

Kenya’s steel sector is strongly linked to growth of complementary sectors such as housing and construction, energy and electronics and chemical and allied. Presently, Kenya’s metal sector (iron and steel) forms approximately 13 per cent of the manufacturing sector, with an overwhelming majority of the sector’s products used in construction industry.

The direct and indirect consumption of steel is projected to increase as the country embarks on development activities as envisioned in the Vision 2030. The sector, therefore, has an opportunity to enhance infrastructure through the purchase of locally manufactured steel products, further, bolster the growth of players within the value chain. Consequently, create jobs and wealth.

Despite this role, the sector continues to face various challenges that hinder its competitiveness. Key among them is cost of raw materials. Kenya has for years imported raw materials to produce steel products. This makes the sector subject to changes in the global prices. The price of imported raw materials increased by at least 4 per cent on account of the exchange rate depreciation. Reason being, the shilling traded at an average Sh107.43 in May 2021 compared to Sh103.74 in March last year.

As an association, we acknowledge that external factors are driving the prices of locally produced steel.

The government can support the sector in three main ways. First, by reducing cost of electricity. Electricity is a key input in the manufacturing process however, our electricity tariff stands at an average US cents 18kWh (CI2) for industrial consumers. The cost remains high in comparison with our neighbours who have led to Kenya’s industrial sector remaining uncompetitive.

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. If both IDF and RDL are zero-rated, this will reduce the cost-competitiveness disadvantage. Lastly, we must unearth the potential of the sector by incentivising 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, but need government support.

-The writer is Kenya Association of Manufacturers Metal and Allied Sector chairman. [email protected]

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