Cement makers have increased retail prices in response to the government’s recent decision to impose a new levy on key raw materials setting the construction industry on an inflationary path.
The cost of building houses, roads, airports and ports is expected to rise significantly under the new construction materials pricing regime that has seen ex-factory cement prices rise by at least Sh20 per bag beginning this week.
The latest price increase is in response to a government directive requiring cement makers to pay in Sh140 tax per tonne of cement, which translates to about Sh7 per bag.
“We have increased prices by Sh20 effective Monday,” said a sales representative at Bamburi Cement. This has pushed Bamburi’s ex-factory prices to Sh660 from Sh640 for a 50-Kg bag of cement.
Savanah Cement said that though it had not effected price changes it was bound to pass on the levy to the consumer.
“It is a burden that is obviously over and above our usual cost of production and we shall not soak it but pass it on to the consumer,” the company’s chairman Benson Ndeta said without disclosing the details.
Distributors expect other cement producers, including East Africa Portland Cement Company (EAPCC) and ARM Cement (ARM), to make similar moves. Kenya’s cement industry is tightly knit and players tend to act in unison while making critical decisions such as pricing.
The new levy is expected to earn the government at least Sh659.5 million a year going by Kenya’s 2012 total cement output.
In a gazette notice signed on December 18, Mining secretary Najib Balala said cement producers would be required to pay a Sh140 tax for every tonne of cement produced — repealing a previous notice that charged the levy at the rate of one per cent of turnover.
The new levy applies to both miners and importers of cement, unlike the previous proposal which only applied to local producers.
Three-quarters of all royalty fees received will be allocated to the national government, 20 per cent to the county government, and five per cent to communities living around the cement-making factories. Mr Balala’s latest gazette notice also increased levies charged on fluorspar and soda.
The minister, however, offered reprieve to miners of fluorspar and soda by spreading out the five per cent royalty fee over a five-year period ending 2019.
The new cement prices have brought to an end the prolonged period of stable prices that was mainly attributed to market wars among the country’s seven manufacturers.
Until this week, ex-factory cement prices averaged Sh645 a bag compared to a peak of Sh740 in 2008 and 2009.
“Cement prices must climb now because what is at play is a mandatory government levy that cannot be overlooked,” Sam Chege, a salesman at hardware shop on Nairobi’s Gaborone Road, said.
The price increases are expected to hit bulk cement buyers hard because of the large amounts of units involved.
Highly priced construction material poses the risk of slowing down activity in the real estate sector that has grown robustly in the past eight years, supported by a swelling middle-class with disposable income.
Cement production grew by 3.6 per cent to 4.63 million tonnes in 2012, according to Economic Survey 2013. Cement consumption and stocks rose from 3.8 million tonnes in 2011 to 3.93 tonnes in 2012.
The government has defended the introduction of the new mining sector taxes and royalties and levies arguing that the proceeds would be used to support the economy.
Some analysts, however, expect stable prices of other key construction materials such as iron, steel and timber to slow down inflationary pressure in the construction sector in the short term.
“Steel prices have remained stable at about $1,020 a tonne and we expect that to continue for some time,” said Narendra Naval, the managing director of Devki Steel Mills.
The International Monetary Fund (IMF) has in a new commodity outlook report released on Tuesday said increased capacity has pulled down overall global prices of metal by about seven per cent.
“Metals prices rose by 0.8 per cent in December on declining stocks and ongoing recovery in global industrial activity,” the IMF said. Continued buildup of supply capacity has, however, continued to weigh on markets, causing prices to ease in early January.
All metals prices fell in 2013 except iron ore which gained five per cent on strong import demand from China.
Timber dealers’ prices have also remained stable over the year helping to stabilise costs in the construction market. George Gitonga, a trader and former national chairman of the Timber Manufacturers Association (TMA), said prices remain stable and are expected to stay so in the near term.