Kenya: Levy exposes the grim in-fights among cement firms

Kenya’s National Treasury, on recommendation from the Ministry of Trade and Investment, introduced a 10%  Export Promotion Levy on clinker as a solution to Kenya’s limited forex outflow and the high trade imbalance as part of the new administration’s budget announcement.

But some cement manufacturers are concerned that the levy will create a monopoly in the industry, as there are very few Kenyan cement manufacturers that have the capacity to manufacture clinker domestically. This will force them to either buy the product from rivals or import expensively – subsequently passing the cost on to the consumer.

In a presentation to the Finance and National Planning Committee at the end of May this year, Cemtech (a subsidiary of the National Cement Ltd, Kenya’s biggest cement producer) suggested the levies could go further – to 25% or more and fixed for a minimum of 15 years. “This is the only way Kenya will develop its industries,” Cemtech said in the presentation.

The levy – which has also been extended to other construction materials like steel and wire rods – was initially proposed at 25% by the Ministry of Trade, before the 10% levy was agreed on.

Sufficient volumes

Mombasa Cement and National Cement Ltd are the only two firms producing their own clinker and proposed a 25% duty on clinker from 10% in 2021, arguing that they have sufficient volumes to serve the market.

On the other side, Savannah Cement – which has contracted a Chinese company to install a clinker factory in Kitui with an annual capacity of 2.7m tonnes – actually opposed the proposal alongside Bamburi Cement, Rai Cement and Ndovu Cement, which hugely depend on clinker imports.

The four players said the move will lead to unfair competition and destroy investments. On the back of divergent views on the quantity and quality of clinker, there was a 2021 National Independent Clinker Verification Committee report that recommended Kenya not to impose higher duties on clinker until 2026.

“The position of the association has been clear that we are not in support of the levy on clinker because of concerns that have been raised by our members,” says Anthony Mwangi, CEO of the Kenya Association of Manufacturers (KAM).

“[The levy] doesn’t guarantee fair competition. Our plea to the government is please respect what members agree on even if other members come separately,” he says.

The verdict of that report is that Kenya is not at the point where it can levy imported clinker.

Some, however, say while Kenya does have clinker manufacturing potential, the plan to impose taxes should wait until the current deficit is bridged to avert a sudden price hike and increased importation of ready cement. “We’ve been running on 40% deficit on clinker over the year,” says Nashon Okowa, the chairperson at the Association of Construction Managers of Kenya.

“We import 60% from Egypt always. There is this suggestion that we can produce clinker locally, but until then, there is no guarantee we will meet our production goals,” he says. “My suggestion is that we close the deficit first then begin to raise the export levy.”

Kenyan government figures say the sector suffers from a 3.3m-tonne deficit of clinker.

Concerns dismissed

The Trade ministry, which hopes to collect KSh1.2bn annually from the levy to support domestic investment and fund export promotion activities, has dismissed some of the concerns. “I insist there is no monopoly because there is more than one company producing clinker,” says Abubakar Hassan, the Principal Secretary for Investment Promotion under the Ministry of Trade.

In the unlikely event that a monopoly becomes reality, “the Competition Authority will give us the way forward,” and questions of quality and standards are topics that have not come up, he says.

According to the Kenya National Bureau of Statistics (KNBS) data, cement consumption increased by 5.1% by December 2022. Meanwhile, the quantity of clinker imported dropped by 38.4% over the same period but this was largely linked to global supply hitches that triggered price overshoot of cement and steel amid a surge in fuel costs.

Retail cement prices have fallen to a range of KSh750-KSh850 per 50kg, compared to the previous cost of up to KSh1,000 early last year as clinker importation and production have increased.

Government plans upended

On the government’s side, the cost impact of the levy on the construction sector could upend President William Ruto’s affordable housing projects – 259,000 built annually – especially should there be an immediate significant decline in the importation of the raw materials and local producers fail to seal the void.

The Clinker Verification Committee report, conducted in collaboration with KAM, National Treasury, Trade and Industry Ministry, Petroleum and Mining Ministry, Kenya Bureau of Standards (KEBs), and cement players, has largely been ignored by the government and some players and is now coming back to haunt the sector.

“The verdict of that report is that Kenya is not at the point where it can levy imported clinker. This was universally agreed and it was valid all the way for four years. We stand by that national verification exercise that brought government and private sector together,” says Mwangi.

Unlike other raw materials for making products with domestic deficits, clinker importation has not been given any duty-free window from July.

But even as the government rushes with the tax plan, it faces a twin challenge of investors’ flight and delayed issuance of mining licences, all of which are likely to derail the targeted boosting of domestic cement production and export.

Some manufacturers have threatened to divert investments worth over $1bn (KSh140bn) from Kenya to neighbouring countries if the taxes hold. This will be a blow to a country that is facing a massive foreign investment deficit, something that Ruto’s administration is battling to reverse.

In addition, the government has yet to lift the freeze on issuing new mining licences, meaning the few firms who might want to start mining raw materials like limestone for clinker production could wait longer.

The freeze was made in 2015 but the current administration insists it must finish the geo-survey first to ascertain the availability of minerals within the country before issuing licences. Miners are now forced to only operate under a limited window of a gazette notice.