Rise in steel prices could slow down property growth

Ronald Ngala Utali college in Kilifi County under construction. Cost of construction in the country is likely to go up as a result of a rise in steel prices. (PHOTO: OMONDI ONYANGO/ STANDARD)

Rising steel prices might slow down real estate growth in the country. Industry players say that global steel prices have more than doubled as Chinese manufacturers reduce their output.

This has been made worse by shortage of local scrap. Insiders say there is a very small fraction of scrap that can meet industry demand current.

Kenya imports steel as an intermediate good, meaning it is used in the eventual production of a final product and not consumed directly. Increase in the price of steel is thus like to increase the price of the final product.

Last year, property boom was partly attributed to low global steel prices and other vital building materials like cement.

A spot check among steel traders shows prices have increased by between 10 and 20 per cent.

Kenya is a net importer of steel and should thus benefit from low prices of the commodity. Steel lost $280 (Sh28,000) per metric tonne or 57.14 per cent in the last 12 months from $490 (Sh49,000) per metric tons in January of 2015, creating a windfall for steel importers and a boom in the construction industry.

In 2015, for example, the volume steel and iron imports rose by 28 per cent from 1.2 million tonnes in 2014 to Sh1.5 million tonnes.

The increase was also evident in cement clinkers, used as the binder in many cement products, with volume of imports of the material rising from 1.3 million tonnes in 2014 to 1.97 million in tonnes in 2015.

But the industry was soon flooded by cement after duty on cement imported into the East African region went down from 35 per cent to 25 per cent, heralding good news for the construction sector.

This saw the building and construction industry, the real estate sector to be specific, play an instrumental role in the growth of the economy by 5.6 per cent last year. The economic growth was 5.3 per cent the previous year.

Francis Mwangi, an investment analyst at the Standard Investment Bank, says that the prices, although going up, are still fairly low compared to the 1990s levels. He believes a price hike in steel might affect the sector.

According to data from the 2015 Economic Survey, the construction sector recorded the fastest growth of 13.6 per cent in 2015 compared to 13.1 per cent in 2014. Growth in construction activities was mainly driven by the ongoing public infrastructure development, coupled with the resilient private sector’s expansion in the real estate sector, said the survey.

The sector has maintained a positive growth, increasing by 56.9 per cent between 2011 when it contributed Sh300.4 billion to the gross domestic product (GDP) to Sh471.3 in 2015. In 2014, the sector contributed Sh416.1 billion to the GDP.

Major real estate projects that were underway in 2015 included the construction of the Sh25 billion Two Rivers Mall in Kiambu County, Garden City Mall on Thika Superhighway, Comesa Shopping in Nairobi’s Eastleigh, and Karen Water Front.