9th December
2003
Cement firms find it hard to beat Egypt
High energy costs are to blame
Faced with high electricity costs, local cement manufacturers
are finding it difficult to compete with Egyptian imports.
They have appealed to the government to impose duties on Egyptian
imports on grounds that the cost of electricity has pushed
their consumer prices 25 per cent higher than international
figures.
The views are contained in a lobby document prepared by the
industry.
The local manufactures are lobbying the government to fight
to have cement included on the “sensitive products list”
under which Kenya can charge duties to cover high energy costs
as long as it is less than the top rate.
Comesa rules allow for these actions to be taken where satisfactory
conditions exist.
The local cement makers have also been hit by low capacity
utilisation rates.
Although the domestic market size is 1.2 million tons, the
installed capacity for the local companies is 3 million tons,
which means that the capacity utilisation currently based
on domestic demand is 40 per cent.
The current situation is attributable to the mid 1990’s
when, buoyed by bullish attitudes and over-optimistic growth
projects, the three cement producers invested $140 million
both in new plant, and in revamping operations.
This projected growth did not come, however, and the manufacturers
have had operated in a stagnant market.
The industry is also taxed at 15 per cent on average for most
spare-parts used in cement manufacture and certain fuels.
In 2002, the cost of power in Kenya was 74 per MWh compared
to 25.6 per MWh in Egypt. The International average was $40
per MWH.
As evident, power costs have afforded Egyptian producers a
major competitive advantage.
Cement production requires three forms of energy – electricity,
fuel oil and coal. Energy costs amount to about 40 –
45 per cent of total production cost of cement.
In the same year, companies operating in Mombasa paid on average
7.43 US cents per Kilowatt-hour, while those in Nairobi paid
6.6 US cents.
These figures compare very poorly with what obtains in other
Comesa countries.
Worse, concern still exists that the prevailing high prices
may increase if a major drought were to erupt, as was the
case in 2000 when prices peaked at 12 US cents per kilowatt-hour.
The situation is compounded further by the fact that while
electricity prices remain high in Kenya, the trend in the
rest of the Comesa countries is that rates have continued
to come down due to concerted efforts to make power more affordable.
An example is Uganda where the tariff has dropped to less
than 4.8 US cts/Kwh recently.
In Kenya, the Association of Large Electricity Consumers has
recommended that measures be initiated to bring down electricity
tariffs to less than 5 US cts/Kwh.
This, according the association, is what is needed to bring
the situation in Kenya closer to international averages.
It must also be noted that over and above the impact of high
tariffs, frequent outages and poor quality of supply also
adversely affect the competitiveness of our companies.
With most of the operations going on for the 24 hours, regular
and uninterrupted power supply is a must.
Poor power quality results in unplanned shutdowns, damage
of equipment damage to work in progress.
What this means is that without major investment in equipment
which allow the Kenya Power and Lighting Company to reduce
transmission and distribution losses, currently at about 21
per cent, the competitiveness of cement companies are bound
to remain poor.
Another factor hampering the competitiveness of the local
cement manufacturers are fuel costs.
The Mombasa-based plant which uses coal is better placed.
In Nairobi the plants which use fuel oil have had to live
with high costs.
Still, Kenya is unlikely as a country to reach international
averages for energy costs because all fuels are imported.
The cement industry in Egypt which is the biggest threat to
Kenya, is a strong position indeed, considering the fact that
market is currently in an estimated excess capacity situation
of 8 million tonnes.
Annual cement consumption is 27.5 million tonnes while production
capacity is 35.5 million tons. With a utilisation rate of
77 per cent – a market size which is 23 times that of
Kenya, and 10 times that of East Africa – producers
in the Comesa member state have a strong competitive advantage-indeed.
In addition to the problem of overcapacity, cement consumption
per capital is low in Kenya, partly because the level of spending
by governments on infrastructure and public works is low compared
to Egypt.
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