Commodity rally gives cover against drought, politics

Kenya’s economy is under immense pressure this year. A prolonged drought into the first-half of the year coupled with jitters about an extended electioneering window has left the economy heading south.
Latest quarterly GDP data by the Kenya National Bureau of Statistics (KNBS) indicate that the economy expanded by five per cent in the second quarter of 2017, lower than the expansion witnessed during similar period a year ago by 1.3 percentage points.

This is due to a 1.7 per cent contraction in agriculture output as a result of the failed rains. In addition, manufacturing, financial services, accommodation and food services rose at a slower pace in the period to June.

The economy could, however, get unexpected support from huge rallies in the prices of key export commodities, including tea, coffee, horticulture and titanium.

A strong performance by these commodities helped to raise the value of domestic exports by 0.6 per cent to Sh132.4 billion in the second quarter of 2017 compared to Sh 131.6 billion registered in a similar period in 2016, the KNBS said.

“This was mainly on account of increased foreign earnings from tea, horticulture, unroasted coffee and titanium ores during the quarter under review. Titanium ore is becoming an important foreign exchange earner,” the bureau said.

Data by the bureau showed in the six months to June the overall unit price of tea rose to Sh314.88 per kilogramme from Sh240.40 per kilogramme, while that of unroasted coffee increased from Sh484.91 per kilogramme to Sh591.08 per kilogramme.

The rally in tea and coffee commodity prices extended into the third quarter of the year-strengthening prospects of an overall raise in earnings this year.

The average price of coffee sold through the Nairobi Coffee Exchange (NCE) jumped 20 per cent in the full year to September compared to the previous year, lifted by the effects of prolonged drought that hit output in key growing areas.

This pulled up earnings to Sh16.39 billion from Sh15.33 billion the previous year.

“The overall earnings for the season were up because of the better prices driven by demand for the fewer volumes available in the market.

The drop in production can be explained by the lower crop realised due to adverse weather conditions experienced across the coffee growing regions,” Daniel Mbithi, chief executive of the NCE, said.

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Prices at the Mombasa tea auction hit a seven-month high late September as traders made panic purchases due to anxiety about the impending October 26 repeat presidential election.

Data from East African Tea Traders Association (EATTA) indicate that a kilo of tea was sold at Sh310 on average during the September 26 auction, up from the previous week’s Sh297 — the highest since February.

“Drought experienced earlier in the year has reduced supply in the market, the current political situation has led to panic buys as buyers anticipate a cut in supply,  higher average have pushed earnings up, and the trend is likely to continue through to the end of the year,” Peter Kimanga, director at Global Tea and Commodities Limited, said.

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Earnings from horticulture exports in the six months to June jumped 11 per cent to Sh64.75 billion compared to a similar period of 2016.

“Most of the exports were destined for European countries,” the State Agriculture and Food Authority (AFA) said in an update on the first-half performance of the horticulture sector.

Proceeds from titanium exports also jumped 30 per cent to Sh4 billion in the three months to June, an all-time high.