KENYA STEELMAKING(2019)

-The study established that the country has 20 steel mills serving a Kenyan market of 1.6 million
tons/year. These steel mills have a combined installed capacity of 340,000 tons of liquid steel, a
finished production capacity of 555,000 and 245,000 tons of light long and flat products
respectively. However, there is seemingly no production of HRC, heavy sections and steel plate
within the country which creates an investment opportunity. Demand for steel in the country
was projected to rise from 1.6 million tons (2014) to 7.1 million tons by 2020 and 8.4 million
tons by 2030. Of the 1.2 million net imports in 2014, 704,000 tons were HRCs signifying a
massive near-term investment opportunity in this area. The study established that with the
country investing in this near-term opportunity, it would have a market of about 1 million tons
to serve by 2018, a value which was projected to rise to 2.5 million tons by 2020 and 3.6 million
tons by 2030. The study also determined that an establishment of a steel mill within the country
would best be approached in two phases; (Phase I) being to set up an Electric Arc Furnace (EAF)
steel plant producing 1 million tons of HRC and the second phase (Phase II) would work to
supplement the scrap in Phase I through provision of more iron units to the EAF in the form of
Hot Briquetted Iron, Direct Reduced Iron or Hot metal as the demand for HRC increases to
values beyond 2 million tons by years 2020 and beyond. However, the choice of technology to
use for the Phase II facility would largely be dictated by the type of iron and coal found present
in the country. However, guided by a developed choice matrix, this study proposes the use of
Corex Technology as it has the capacity to utilize the locally available resources and has a wide
reference having been used in South Africa. The study therefore proposes that the process
design for a steel manufacturing plant in Kenya should be approached as follows; A phase I EAF
facility with an output capacity of 1 million tons per year, a phase II facility to supplement the
Phase I facility when demand above 2 million tons per year and a phase III facility for
downstream operations at a later stage.

-In Kenya currently, steel making process is only centred in melting steel scrap in induction
furnaces and manufacture of wire and wire products, pipes, cold-rolled steel products and 2
downstream finishing process such as galvanization (Machira, 2011)

-In Kenya currently, iron ore smelting is not carried out since an integrated steel plant has not
been set up.

Factors that affect the setting up of an integrated steel mill in Kenya

-Insufficient credible information on state of iron and steel raw materials in Kenya.

Though the process of exploration, quantification and determination of quality of the raw
materials for iron and steel production in Kenya has been on going, there is no significant
credible information on the sources, qualities and quantities of the raw materials particularly
iron ore and coal.

Government policies on taxation

 A key issue hampering the manufacturing sector has to do with tax policy implementation. For
example, Value Added Tax (VAT) refunds from KRA take too long to come through, which
constrains activity in the manufacturing sector and limits cash flows. This is a concern for a
sector that is capital-intensive. This has become a key worry for industry players, as the money
could be used for industry activity. Further, there are concerns about government tariff
application which requires to be addressed.

Access to finance

Although there is a willingness to finance the manufacturing sector in Kenya, conditions of

financing are unfavourable and reduce uptake. Interest rates are very high, often around the 35
18% range and, although smaller financing is available via microfinance institutions, this is at
even higher rates. Second, low tenure is partly informed by banks wanting to limit exposure to
risks associated with the uncertainty of doing business in Kenya. As they stand, conditions of
financing are difficult because the manufacturing sector needs patient capital of longer duration,
as working capital cycles last six months on average. Thus, although it is relatively easy for
formal manufacturers to obtain access to finance, because of the presence of assets that act as
collateral, conditions of financing are negative. Both the interest rates and the duration of debt
in local markets translate to an inability to access financing. The interest rate issue is of
particular concern and puts the manufacturing sector in Kenya at a disadvantage because it is
competing with international players, some of whom can access financing at interest rates of 2–
3% (Anzetse,2016). Thus foreign manufacturing firms not only can take up such financing but
also do not have to push for large profits to meet debt servicing obligations. They can make a
10% margin and still service the loan. In Kenya, the margin has to be far higher if a firm is to
service the loan (Anzetse,2016). However, the Kenyan government is trying to make access of
financing in Kenya affordable. Recently, the government has introduced an interest rate cap to
cushion consumers from exorbitant bank interest rates.

Un-enabling business environment issues

The World Bank Kenya Economic Update (2016) notes that, a comparison of the World Bank’s
Enterprise Surveys from 2007 and 2013 suggest that the business climate is deteriorating. Firms
in 2013 experienced higher financing costs, higher insecurity and more unreliable access to
infrastructure. Kenyan firms make 30 contributions a year, and take 201 staff hours to calculate,
file and pay their taxes. For traders, logistics are a major hindrance. On average, the procedures
and documentation needed to import or export take 26 days; connecting to the power grid in
Nairobi requires six steps, takes more than five months and costs on average 10 times the per
capita gross national income. Specific elements of this business environment negatively affect
the manufacturing sector. Registration and licensing is a concern as there is no one-stop shop
for investors looking to start manufacturing in the country. There is no check-list on how to set
up a business and what is required. If there were, all the different requirements come from
completely different and unrelated entities. The Kenyan government has however introduced
eplatforms to ease the processes of registration and licensing among other issues. These
eplatforms include, but not limited to e-citizen and i-tax.

Electricity concern
 The Kenyan population and industrial activity have grown but the production, transmission and
distribution infrastructure of electricity has not grown with the same measure. Poor electricity
transmission and distribution infrastructure leads to erratic power supply and outages which
costs manufacturers as it leads to idle time. Further, power outages mean manufacturers are
forced to buy generators, which are an added cost in terms of purchases and operations.
Fluctuations in power and power outages lower productivity as machines have to be restarted
and machine lifetime is shortened. Early breakdown can occur because of the sensitivity of
machines used in production.

Land

Land tenancy establishment is difficult in Kenya, in that land titles are not clear and sometimes
overlap. Thus land issues (land title disputes, long transaction times, corruption) make it difficult
to establish business activity.

Other issues affecting the setting up of an iron and steel plant in the country include stiff
competition from regional and international markets, technology issues, regional import and
export tariffs, political instability, corruption among others.

Research design

The research design adopted for this study was an exploratory research design. According to
Polit et.al (2001), explorative designs are undertaken when a new area is being investigated or
when little is known in the area of interest. It is used to explain the full nature of a phenomenon
and other factors related to it. Steel data in Kenya is scanty and the available one is scattered all
over. Little is known in terms of quantities of steel used in Kenyan heavily consuming
industries. In this research, steel usage across in the country was explored. The research design
assumed two types; case study and analysis of secondary data designs.

The case studies included China, India, Japan, South Africa and South Korea because they form
the major trading partners with Kenya on iron and steel products (Trading Economics,2016).

In this study, data was obtained from Numerical Machining Complex (NMC), Kenya National
Bureau of Statistics (KNBS), Ministry of Industry and Trade Cooperatives (MITC), Ministry of
Energy, Ministry of Mining and Petroleum and other key players in the manufacturing industry.
The choice of these ministries was because each had a critical part to play in ensuring that the
dream of setting up an integrated steel mill was achieved.

Availability of raw materials

This data was sought from the Ministry of Mining, Ministry of Industry, Trade and Cooperatives,
Ministry of Energy and Numerical Machining Complex. It was purposely used in determining the
state of raw materials in Kenya for an iron and steel plant in terms of availability, quality and
quantity. The data also sought to determine other alternative sources of raw materials in the
event that the materials present in the country were insufficient.

Steel usage
The data was sourced from local and international agencies and bodies having authority in steel
production. The bodies included, but not limited to, KNBS and Worldsteel.

Kenya steel trade

Data on the country’s steel trade with her neighbours and the international market was also
sought. This data was used to provide information on the type of finished or semi-finished steel
products that Kenya largely imported from other countries.

The Intensity of Use Technique (IOUT) can also be employed in forecasting steel usage. This
technique has been used by different scholars in determining the intensity of steel use in
different countries. The technique is usually modelled for different end-use industries in a
country. Roberts (1990) used this approach to estimate steel consumption in the US over the
period 1984-2010 by disaggregating the total steel use in the country into the amounts
consumed in each of the machinery, transport and infrastructure industries. Crompton (1990)
used IOUT to determine steel consumption in Japan over the period 1997-2005. He identified six
steel-consuming industries; machinery, electrical machinery and equipment other
manufacturing, construction and fabricated metal products.

Steel status in the country

There is no single comprehensive source that clearly outlines the current up- and downstream
steel-making capacity in the country. Moreover, the little available data and information is
scanty and scattered all over making it difficult to find a credible source, rich with information.

There is seemingly no production capacity for heavy sections, steel plate and hot-rolled coil
within the country. However, it is worth noting that Devki Steel Mills plans an expansion of its
steelmaking capacity, with investment in a new 125,000 tons per year melt shop and billet mill
in Kitui.

Kenyan steel trade

Kenyan trade in steel has increased significantly since 2010 from net imports of 695,000 tons
(2010) to 1,167,000 tons in 2014. By way of comparison, Ethiopia, Tanzania and Sudan recorded
steel net imports of 780 000, 710 000 and 380 000 tons by 2014 respectively (EAC, 2015).Out of
the 1,167,000 tons net steel imports in Kenya in 2014, approximately 740,000 tons comprised of
hot-rolled coil, which was majorly imported from South Africa, India, Japan and South Korea..

Steel production and demand in Kenya

Statistical data for steel production in Kenya is scarce. However, a simple approach was

carried out to get an estimate of the values:

• The amount of steel scrap used in the industry provided an estimate of liquid stee production.

• Liquid steel production levels together with billet import volumes were used to givea fair
estimate of probable light long production volumes.

• Assumptions about flat product plant capacity utilization (which for steel mills is
normally in the 50-90% range) provided further estimates of cold rolled and coated

product production volumes with the upper limit on Kenyan flat product production

set by the volume of hot-rolled coil imports.The demand for steel can be seen

to rise from 804,000 tons to approximately 1.6 million tons. The calculated steel demand

compared well with world steel estimates

1 Near-term supply gap based on imports

An appraisal of the capacity structure of the Kenyan steel sector (Table 4.1) indicated that

there is presently no Kenyan production of hot-rolled coil. Moreover, import statistics

showed that in 2014, imports of hot-rolled coil averaged 740,000 tons, a figure that has

ranged between 400,000 tons and 740,000 tons since 2010. The appraisal also indicated a

combined average of 391,000 tons worth of HRC imports in the neighbouring countries (NMC,

2015).

Significant volumes of semi-finished steel (mostly billet) are also imported into Kenya, with

2014 imports standing at 168,000 tons/year. It is noted, however, that Devki’s capacity

expansion plans which involve a construction of a 125,000 tons/year billet plant at Kitui

should largely substitute these billet imports.

The biggest immediate volume opportunity for Kenya, therefore, lies in the production of

hot-rolled coil which is quantified on the basis of:

 100% import displacement of current HRC imports into Kenya.

 50% share of current HRC imports into neighbouring countries.

Ferrous Scrap

Steel scrap production levels stood at about 250,000 - 300,000 tons per year (EAC,2015) as of
2015. This has been attributed to the low steel scrap generation in the country. The main
sources of this local scrap are Nairobi and Mombasa areas. Nairobi area contributes the largest
percentage of local steel scrap. However, scrap is also available in other parts of the country
though in small quantities. Due to the limited nature of the raw material in the country, South
Africa will play a very key role in supplying this commodity. It is worth noting that South Africa's
annual net exports for ferrous scrap stand currently (as of 2016) at 1.2 million tons (Worldsteel
2016).

2 Iron ore
Since 2014, exploration of iron ore has been going on in the country. Whilst the approximate
locations of the main deposits are known, the size and quality of the deposits are not well
understood and there is no significant production as of today, 2016. (NMC,

2015).

Generally, further drilling is necessary to better understand the quality, consistency, depth and
size of these deposits. In this respect, one significant limitation is the lack of drilling equipment.
Presently, there is just one drill site (NMC,2015), but with 5 or 6 drill sites, much faster progress
would be made in understanding the potential of these deposits. Since it is expected that at
least 1-3 years’ work will be required for testing any deposit, with a further 1-2 years’ effort
required to prepare any such site for commercial exploitation, it is considered by the ministry of
mining that it will be at least 4 years before commercial exploitation of Kenya’s iron ore mines
can commence.

Labor requirements

A good rule of thumb for a developed steel company is to produce some 2,000 tons per man-
year employed (metal consulting, UK 2014). In this case that would imply a workforce of 500
employees for 1 million tons /year of EAF-based HRC production. However, when allowing for
the presence of an expatriate start-up group of experienced management and operators,
working together with the local and future management and operators, training requirements
and a certain level of early attrition, this number would likely go up. Based on an appraisal by
the Numerical Machining Complex, the study proposes at least 800 persons in the early years.

Capital investment costs

Given that there is no experienced parent steelmaking company yet behind this initiative, and
that there is little heavy industry infrastructure developed, the study considered the only way to
approach this project would be as a turnkey contract (also known as EPC –Engineer, Procure and
Construct) to one of the major equipment manufacturers. The EAF and CSP technology is
essentially of European origin, but the major suppliers are all used to working with contractors
from the Far East (China, Korea, Thailand etc.) to deliver a competitively priced project. Based
upon other recent turnkey projects of similar size elsewhere such as in the Middle East, a
comprehensive package of 1 million ton/year HRC production should be expected to fall within
the $800 – $1,000 million range (Essar Steel Ltd, 2009). This estimate does not include
investment in working capital. It also further assumes that gases are purchased off-site i.e. that
no investment is required in an air separation unit.

Labour costs

Based on the appraisal by Numerical machining complex aforementioned in the preceding

section (4.2.4.6), 800 employees would be required for Phase I production of 1 million tons HRC.
Based on KNBS statistics 2016, a $4501 p.a average workforce labour cost was estimated. This
estimate also factored a 7% inflation rate in wages as in prices. However, it is worth noting that
there exists a great marked variability in average Kenya earnings both in public and private and
therefore this labour cost estimate should be interpreted with caution.

Electricity prices

Kenyan electricity prices are understood to be slightly high in the international context

(Table 4.16) with current electricity price (2016) being close to ~$0.07-0.09 / kWh Since in
practice it requires about 360-400 kWh of electricity to smelt a ton of steel (Jeremy J,1997), this
study therefore determined that the 11kV commercial tariff would be sufficient for an EAF-type
steelmaker based in Kenya. For the financial projection, the study held the electricity charges for
the 11kV commercial tariff constant for the entire period of projection.

2 Heavy fuel oil & natural gas prices

The study assumed a Kenyan heavy oil price of ~$750/ton (NMC, 2015). With a net calorific
value of 41 MJ/kg, this predicts a heavy fuel oil price of ~$14/ GJ. This price was assumed to stay
constant in real terms during the forecasting period.Natural gas was also assumed at $14/GJ
(NMC, 2015). This is just under 20% cheaper than the current world price of $17/GJ (OECD,
2016). With natural gas deposit found in the country offshore, this is probably a realistic
assumption. For this study, a $ 14/Gj price for natural gas was used.

Local steel prices

Kenyan local prices for rebar and CRC were found to be very high compared to the international
market prices. A snapshot of prices as at 2014 showed that Kenya steel prices for rebar and CRC
stood at an average price of 60% above FOB world steel prices (Table 4.18). This could be
explained by the relatively high Kenya electricity prices and existent import tariffs.

-In terms of management, the manufacturing sector has a significant representation of

familyowned businesses. What are the strengths and constraint of this business model? How do
family firm models affect the sector? What can be done to make family firms more efficient,
productive and profitable?

-Informal manufacturing and industry have a strong presence in Kenya’s informal sector. How
can informal firms be made more productive and profitable? Should the sector be formalised? If
so, how can formalisation be incentivised? Who are the key parties that need to be engaged to
drive the informal manufacturing and industry sector forward?
-Kenya has a vibrant technology sector, widely considered to be the leading one in Africa. How
can this sector better interface with the manufacturing sector? What problems in manufacturing
can the local tech scene solve? How can the manufacture of tech products be strengthened in
Kenya?

-In formal manufacturing, sectors identified as the weakest were linked to complex
manufacturing, such as vehicle assembly, electronics and other technology-related
manufacturing. Lack of data meant there was no clear idea as to the weakest subsector in
informal manufacturing. There was a general sense that informal manufacturing outside of
furniture and metal works was weak.
-The creditworthiness of most Kenyans cannot be established.