PUBLISHED ON March 2nd, 2015

Reduced duty on imported cement sparks furore among EA producers

The duty on cement imported into East Africa has been lowered from 35 per cent to 25 per cent, heralding good news for the construction sector. But manufacturers warn that the resultant price crash could send them out of business and lead to massive job losses.

According to a gazette notice of the EAC released last month, apart from the reduction in the common external tariff (CET), cement has also been removed from the list of sensitive products that require protection until domestic industries can compete.

Decisions on the CET are made by the East African Council of Ministers.

Despite the current 35 per cent duty on cement from non-EAC countries, imports are still largely cheaper than the locally produced commodity. Cement manufacturers fear the latest move is opening a window to cheaper cement imports that are likely to leave them staring at idle capacity and losses.

“This will only create unnecessary competition from manufacturers outside the region, leading to an influx of cheap cement imports,” said Ronald Ndegwa, Savannah Cement chief executive.

Mr Ndegwa said that the costly business regime in East Africa will render the local firms uncompetitive against rivals who operate in “subsidised economies.”

Electricity, which on average makes up 40 per cent of the direct cost of cement manufacturing, is four times cheaper in Asian countries.

“Until the cost of production in the region comes down, we still feel that it is unfair to remove cement from the sensitive items list it is likely to put the ongoing industry expansion plans in jeopardy,” said Mr Ndegwa.

Pradeep Paunrana, the managing director of Athi River Mining Ltd said that the reduced tariff would encourage dumping of cement from Pakistan and the Middle East in the region.

“We are currently producing seven million tonnes of cement and the demand is about four million tonnes. This is why we need more protection from external competition,” said Mr Paunrana, adding that the regional demand for cement in 2014 was 11.4 million tonnes against an installed capacity of 16 million tonnes.

A bag of cement in Kenya costs between Ksh560 ($8) and Ksh700 ($8.5). Uganda’s average price was Ush32,000 ($12) as at December last year. A 50-kilogramme bag of imported cement in Tanzania retails at Tsh12,500 ($7.8) while locally produced brands are selling at between Tsh13,000 ($8) and Tsh15,000 ($9.3).

This year, the East African region is expected to produce about 12.9 million tonnes against a demand of 11 million tonnes, leaving a surplus of nearly two million tonnes or 15 per cent of production.

Cement manufacturers have now lodged a petition with the East African Business Council (EABC), the apex body of business organisations in the region, to have the decision reversed.

“We shall discuss the matter in the upcoming Sectoral Council of Minister’s meeting scheduled for April, and we shall petition the ministers to immediately rescind the decision in order to save the industry from “imminent collapse,” said Andrew Luzze, the EABC executive director.

“EABC is currently collecting data on cement that we shall use to counter the decision by the ministers.”

EAC countries agreed to set the CET high in order to allow local cement manufacturers to become internationally competitive. Under the sensitive list of products covered by the EAC Customs Union Protocol, cement imports into the EAC were to face a 55 per cent tariff but this was to be reduced at a rate of five per cent per year from 2005.

The partner states had also agreed that the CET on cement be reduced by five per cent each year of the subsequent four years to stabilise at a target rate of 35 per cent by 2009.

This is not the first time cement is being removed from the EAC list of sensitive products. In 2008, member states removed the product’s sensitive status due to shortages, and reduced the import duty from 40 to 25 per cent, a decision that was later reversed to protect the industry.

East African cement consumption has been growing over the past decade at a rate of 14 per cent and is expected to continue growing in the near future at around 8 per cent per annum with total capacity expected to reach 14.4 million tonnes by 2017.

Kenya cement firms increased their production last year by 15.2 per cent to 4.24 million tonnes compared with 3.68 million tonnes in 2013.

Excess production

In Tanzania, the 2013 production capacity was at three million tonnes per annum, against a demand of 2.2 million tonnes. Uganda’s production capacity stood at 1.9 million tonnes last year against a demand of 2.4 million tonnes; one of only two market where demand surpassed supply.

In Rwanda, Cimerwa, the country’s sole cement producer, produces 100,000 tonnes of cement a year. It plans to increase the capacity to 600,000 tonnes by the end of this year to match the demand, which is estimated at 500,000 tonnes a year. The gap is currently filled by imports from its regional neighbours.

Imports from India, Pakistan and China have been blamed for flooding the market in East Africa. In Tanzania for example, producers estimate that 300,000 tonnes of cheap cement could be finding its way into the market every year.

Last year, the average profit margins for Kenya’s cement firms hit an all-time low of 24.7 per cent. ARM Cement, for example, made $0.13 in net profits for every $1.16 it received in revenue, compared with the $0.17 it made a year ago.

For Bamburi Cement, the net earnings were at $0.15 for every $1.16 it generated in revenue last year, compared with $0.19 the previous year, in the wake of a steep jump in operating expenses.

In Kenya, almost one in every four bags (23 per cent) of cement produced this year will not be consumed, according to industry projections by African Alliance. The country will be producing about 6,768 tonnes and will consume 5,184, translating into an excess of 1,584 tonnes. This excess production means that the pressure on prices is likely to increase.

The case will be replicated in the three East African countries of Kenya, Uganda and Tanzania, which are expected to have 14 per cent of combined excess production.

Another product whose duty was revised downwards is wheat or meslin flour, from 60 per cent to 50 per cent.

Cheese is the biggest beneficiary of the revised duties. The dairy product has been listed among the sensitive commodities of the region and the duty rate increased from 25 per cent to 60 per cent. According to the gazette notice, the new duty applies to all cheese types.

“Cheese is produced in large quantities in the partner states,” said Mr Luzze. “An increase in duty will help curb competition from outside supplies, thus protecting our local companies.”

He said that with the European Union-EAC Economic Partnership Agreement in place, it was necessary to shield our local companies from competition and also allow them to export cheese to the European countries, which are major consumers of the product.

A survey of the major hotels in the region indicated that cheese consumed in these facilities is sourced locally, and that prices have remained constant for a long period.

“Cheese is always available from our local supplies but our main consumers are foreigners,” said the head of procurement at a Nairobi hotel who requested anonymity.

Other changes in CET

The other changes in CET in the gazette notice include bars and rods of iron and steel in Tanzania and Uganda remaining on the stay application of the EAC CET, and that they should apply a duty rate of 25 per cent up to June 30; flat rolls of iron and steel in Uganda to stay application of EAC CET and apply a duty rate of 10 per cent instead of 0 per cent up to June 30.

The duty on paper weighing 40g square per metre or more but not more than 150g per metre square in sheets with one side not exceeding 435mm and the other side not exceeding 297mm in unfolded state, to be increased from 10 per cent to 25 per cent.

For welding electrodes, Tanzania is to stay the application of EAC CET and apply a duty rate of 10 per cent instead of 25 per cent for one year.

Source: The East African

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