A steep rise in the cost of building material could give impetus to the price bubble in the real estate market. Photo/FREDRICK ONYANGO
A sharp rally in commodity prices underpinned by the global economic recovery has sparked a surge in cost of local goods such as tyres, construction materials and fuel products, exposing Kenya to imported inflation and exchange rate instability.
The prices of metals, crude oil, oil seeds and grains - which form the bulk of Kenya’s industrial raw materials - have risen to levels last seen in 2008 on renewed demand from countries such as China and India, posing a fresh challenge to economic management in emerging countries.
This upturn in commodity prices in the international market is translating to expensive fuel, motor tyres and construction materials such as corrugated iron sheets, paints, metal reinforcements and electricity cables.
Households are also paying more for food items such as cooking oil, clothing and books on soaring costs for palm oil, cotton and paper prices as local producers increase prices to offset the rising cost of raw materials.
The International Monetary Fund (IMF) in its latest global outlook has warned that prices of commodities will continue rising this year supported by the recovery of the global economy, especially in Asia.
“Looking ahead, commodity prices are expected to rise a bit further supported by the strength of global demand, especially from emerging economies,” said the IMF, adding that the rise will be steepest in oil and metal prices.
This outlook means that there will be additional pressure on the cost of living or inflation that has remained stable on account of falling food prices, a move that could slow down demand and threaten the swift recovery of Kenya’s economy.
Inflation increased to 4.51 per cent in December from 3.84 per cent in November—its highest level since February on high energy costs.
The surge in commodity prices could also weaken the Kenya shilling against the dollar as demand for the greenback rises among importers seeking more dollars to import the commodities given that Kenya buys more from the world market than it sells.
It could also reduce the profitability of industrialists who face less demand when prices rise and cannot pass on the entire additional costs to consumers for fear of losing market share to rivals.
Already, Kenya’s manufacturing is coming from a bad year after more than half of the 13 manufacturers listed at the Nairobi Stock Exchange (NSE) failed to grow their profits and two reported net losses.
Three have issued profit warnings as other sectors reported double digit growth in profits.
The biggest impact on inflation is set to come from the rising oil prices, with analysts led by Goldman Sachs saying that crude prices will hit $100 a barrel in coming weeks on rising demand.
On Tuesday, crude stood at a 27 month high of $92.58 having risen from $77 in September, also driven by the global recovery as well as oil cartel OPEC’s reluctance to increase supply to meet the rising demand.
Inflationary pressure
This is set to reduce the impact of the new retail price regulation on household budgets as oil marketers forecast that pump prices could move closer to Sh100 per litre on January 15 when pump prices are set for review by the government.
The Ministry of Energy has capped a litre of premium petrol at Sh94.39 in Nairobi and diesel at Sh87.45 until January 14.
The forecast rise in petroleum prices will push up the cost of transport and ultimately the cost of goods and services renewing inflationary pressure in the entire economy.
Crude oil prices crossed the $100 a barrel mark in March 2008, pushing local pump prices to Sh110 a litre.
After hitting record highs in mid 2008, metal prices declined more than 50 and 60 per cent in the aftermath of the global recession.
But the rebound of the global economy is leading a recovery with copper prices having risen 44 per cent since June followed by Zinc (39 per cent) and aluminium (27 per cent), according to the IMF.
Forecasts by Platts - a commodity dealer - indicate that metal prices could increase by double digit this year.
As a result, the costs for metal-related products, especially construction materials look set to rise further, according to manufacturers of the products who also rely heavily on oil to run their machines.
This includes corrugated iron sheets, paints, metal reinforcements and electricity cables.
Already, East Africa Cables has increased the prices of cables by 80 per cent in an effort to cover for rising metal prices in the international market and push the company back to profits.
The cable firm said it has been absorbing part of the additional costs as competition has made it difficult to pass through the extra expenses to consumers, further hurting margins.
“The 100 meter role measuring 1.5mm squared mainly used in domestic and industrial cabling is now retailing Sh1,800 compared to Sh1,000 per role in October,” said Joseph Kinyua, the head of finance at the cable firm, adding that other products have also increased by the same margin.
Makers of metal reinforcements and corrugated sheets are also expressing similar comments.
“Metal constitute over 40 per cent of our production costs, we anticipate to increase our prices by between 9 to 14 per cent later this year to cover for this metal soaring prices,” said Raval Narendra, the managing director of Devki Steel Mills—which makes construction steel bars, metallic pipes, telecommunication masts and corrugated sheets.
Paint makers led by Crown Berger and Sadolin paints says they will increase their prices by about 10 per cent this month due rising raw materials such as oil and Titanium dioxide.
A steep rise in the cost of building material could give impetus to the price bubble in the real estate market pushing home ownership beyond the reach of a large segment of Kenya’s middle class.
Tenants could also feel the heat as landlords adjust the rents upward to capture the additional costs incurred in the development of new homes.
The rise in cost of building materials comes at a time when the price of land in key cities such as Nairobi has been rapidly escalating helped by increased demand and heavy speculation.
Motorist who face expensive fuel are also paying more for their tyres as manufacturers such as Sameer Africa look to increase their prices to cushion their profits from rising rubber costs, which have risen 30 per cent $2.10 per pound in the last six months.
Increased competition
The tyre firm increased its product prices by eight per cent in October having made another 10 per cent increment in June and it said it was still watching rubber costs and that it make another review this year should the raw material continue rising.
But the commodity boom could hurt other players who due to increased competition in their sectors have been forced to absorb the additional costs, putting their profits at stake.
A good example is the cement players who have been hesitant to increase their prices despite the rise in prices of coal—which they use to drive their machines—due to stiff competition that has spurred a price war.
Coal has increased from $89 a tonne in August to a two-year high of $107, reflecting a 20 per cent rise, on growing demand for the commodity, especially from China.
