High input costs damage the crucial steel sector

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

The demand for steel is increasing as government-driven infrastructure development, as well as commercial and residential buildings, increase. Steel is at the core of the modern economy. It is used as a paradigm to measure the macroeconomic status of a country, as well as an indicator for investments in infrastructure and subsequently as a measure of progress and stability.

Kenya’s steel sector is strongly linked to the growth of complementary sectors such as housing and construction, energy and electronics, and chemicals and related sectors. Currently, Kenya’s metals (iron and steel) sector accounts for around 13 percent of the manufacturing sector, with the overwhelming majority of the sector’s products being used in the construction industry.

Direct and indirect steel consumption is expected to increase when the country initiates the development activities foreseen in Vision 2030. The sector therefore has the opportunity to improve the infrastructure by purchasing locally produced steel products and to further strengthen the growth of the actors within the value chain. As a result, you create jobs and wealth.

Despite this role, the sector continues to face various challenges that hamper its competitiveness. The key to them is the cost of raw materials. Kenya has been importing raw materials for the manufacture of steel products for years. As a result, the industry is subject to changes in world market prices. The price of imported raw materials rose by at least 4 percent due to the devaluation of the exchange rate. This is because the shilling was trading at an average Sh107.43 in May 2021, compared to Sh103.74 in March last year.

As an association, we are aware that external factors determine the prices for locally produced steel.

The government can support the sector in three ways. First, by reducing electricity costs. Electricity is an important input factor in the manufacturing process, but our electricity tariff averages 18 kWh (CI2) US cents for industrial consumers. The cost remains high compared to our neighbors, which has made Kenya’s industrial sector uncompetitive.

Second, no import declaration fee (IDF) and railroad development tax (RDL) for raw materials used in processing. The cost of imported industrial goods is a critical factor in the competitiveness of industry. Having both IDF and RDL rated zero reduces the cost competitiveness penalty. Finally, we need to unlock the potential of the sector by creating incentives for local industries to extract raw materials from local iron ore and coal deposits. However, this requires huge capital investments. Some local industries are currently pioneering the way to make this a reality, but they need government support.

-The author is chairman of the Kenyan Metal Manufacturers Association and the Allied Sector. [email protected]

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