Egypt’s doubling energy costs throw Kenyan firms a lifeline

Egypt has significantly cut billions of dollars worth of subsidies that kept energy prices at rock bottom levels, raising production costs for its manufacturers.

The move offers Kenyan industrialists some relief from cheap consumer goods imported from the North African nation. However, costs will still remain relatively lower in Egypt which retains close to $14 billion in energy subsidies.

Egyptian President Abdel Fattah al-Sisi last Saturday ordered cuts in petroleum and natural gas subsidies, raising their prices by up to 78 per cent. These are part of measures to plug Egypt’s huge budget deficit, which has grown in the past three years as political turmoil destroyed economic activity.

The cash-strapped government spent 144 billion Egyptian pounds ($20 billion), around a fifth of its budget, on energy subsidies in the fiscal year that ended on June 30.

The increases came just days after the month-old Sisi government raised electricity prices, which have long remained below the cost of production. The average price for a kilowatt hour, currently around 0.23 pounds ($0.03), is expected to reach almost 0.51 pounds after gradual increases over five years.

Under the new pricing, 95-octane gasoline increased to 6.25 pounds per litre from 5.85 pounds and 80-octane, which many drivers favour, rose 78 per cent to 1.60 pounds from from 0.9 pounds.

Diesel fuel, used in trucks and minibuses, was raised 64 per cent to 1.80 pounds from 1.10 pounds.

Natural gas will now cost Sh700 per million thermal units for the cement factories and Sh610 for the iron, steel, aluminium, copper, ceramic and glass industries or nearly double the previous prices.

The changes are expected to affect imports from Egypt into Kenya. The two countries are members of the 19-country Common Market for Eastern and Southern Africa (Comesa) bloc, which allows preferential terms of trade. They also have a free trade area (FTA) pact that allows for exchange of goods without payment of duty.

READ: Egypt denies claim of dumping goods

Firms such as Colgate Palmolive and Procter & Gamble have taken advantage of the FTA arrangement to move their manufacturing operations to Egypt where they cheaply produce items like toothpaste, washing powder, sanitary towels and diapers for shipment to Kenya. Such goods only have to meet a 35 per cent local value addition rule.

Kenyan industrialists described removal of Egyptian subsidies as a game changer for local firms.

“The future looks good. The removal of subsidies makes it possible to effectively compete with Egyptian imports,” said Jaswinder Bedi, a former chairman of Kenya Association of Manufacturers.

“I can see more of our manufactured products finding their way into Egypt and other low-cost markets such as South Africa and India as Kenya continues to address energy and labour costs which have held us back.”

In addition to subsidised gas and fuel, Egyptian manufacturers have enjoyed power that are five times cheaper than Kenya’s Sh17.4 per KWh.

Information from Kenya’s Cairo Embassy shows that Egypt also ships to Kenya rice, sugar, fish, textiles, cosmetics, resins, leather, paper, iron and steel which are in direct competition with local products.

A number of pharmaceutical brands, fertiliser and construction materials like glass and ceramics originating from Egypt are also shipped to Kenya every year.

The emigration of manufacturing firms from Kenya to Egypt saw imports from the North African nation overtake the East African nation’s exports to Egypt for the first time in 2012.

The value of Egyptian exports to Kenya last year dropped to Sh25.6 billion from Sh29.8 billion the previous year. Kenya’s exports to the North African nation also dropped from Sh21.5 billion to Sh17 billion during the same period.

Unprocessed tea leaves account for 96 per cent of Kenya’s annual exports to Egypt. The list includes spices, tobacco, textile fibres, powder milk, aluminium, sisal, soda ash and fresh fruits.

Kenya has lined up a crash programme to generate additional 5000 megawatts in the next two years and to halve the cost of electricity from the current price of Sh17 (KWh).

Cheaper power from renewable sources such as geothermal, wind and solar are expected to pull down electricity costs to around Sh8.7 per KWh, putting Kenya at par with most Asian nations but still above South Africa, its major competitor, whose firms buy power at Sh2.70 per KWh.

Under pressure from local industrialists to reduce the cost of doing business, the government  this year declined to adjust minimum wages in May — its time-honoured Labour Day ritual.

The State has also cut bureaucratic red tape at the agencies manning key export/import facilities such as ports and transport corridors to raise Kenya’s status as the region’s manufacturing hub.

On Wednesday, officials said removal of subsidies only helps speed up the goal of getting Kenya’s cost of energy below Egypt’s.

Kenya Investment Authority (KenInvest), an agency charged with attracting FDI, said removal of Egypt’s energy subsidies significantly boosts Kenya’s chances of attracting investors eyeing the Comesa market.

“There will no longer be any ground for a company producing for the regional market to move to Egypt,” said David Mugambi, the investments promotion manager at KenInvest.

Mr Mugambi said that the only advantage Egypt now has over Kenya is its proximity Europe, but that has nothing to do with Comesa or the East African market.

For Kenya’s fledgling steel industry, the removal of energy subsidy in Egypt throws a much-needed protection around it. Treasury recently raised import duty on iron and steel to 25 per cent in its 2014/15 Budget to shield the industry from external competition, create more jobs and raise additional Sh2.6 billion in taxes. The tariff, however, does not affect Egypt, which is a Preferential Trade Area for the Eastern and Southern African States (PTA) member.

Steel valued at Sh81 billion was imported into Kenya last year, making it the third-biggest import item after oil and industrial machinery.

“The industry has been dying gradually in the past 35 years that we have been operating in Kenya. It’s been very difficult to compete with cheap imports from countries that have export compensation schemes,” Narendra Raval, CEO of Devki Steel Mill, told the Business Daily in an earlier interview.

Demand for iron and steel is set to rise significantly in East Africa as the region begins to implement joint flagship projects like construction of a standard gauge railway, crude oil pipelines, petroleum production and building of transnational highways.

Consultancy firm, PKF, estimates that 70 per cent of $50 billion for developing Uganda’s oil wells will be spent on purchase of steel and iron.