Grim Prospects For Kenya’s Lethargic Sugar Industry

Grim Prospects For Kenya’s Lethargic Sugar Industry

Kenya’s sugar industry is in a race against time.

Most of its state-controlled sugar milling firms will be unable to compete when the country opens its borders for cheaper imports.

There are plans to privatize all state sugar companies, inject more capital, diversify and introduce early maturing cane varieties to enhance efficiency of the sugar industry and meet sugar safeguard commitments.

Currently, Kenya’s sugar market is protected by safeguards against any duty-free imports from the Common Market for Eastern and Southern Africa (COMESA). Following the launch of the Free Trade Area (FTA) in October 2000 by members of COMESA, Kenya expressed concern that her sugar industry would be unable to compete against sugar from other COMESA FTA countries.

Consultations between the Kenyan government and COMESA resulted in Kenya applying for protection under Article 61 of the COMESA Treaty so that sugar exports from COMESA to Kenya are subject to customs duties.

An initial safeguard of 12 months was imposed on March 2002 to February 2003. Subsequent extensions have been done four times with the last one spanning two years – March 2012 to February 2014.

“Most of these state-owned sugar milling firms have no capacity to modernize their operations or replace their age-old machinery,” said Peter Kebati, managing director of Mumias Sugar Co., the most profitable and only listed sugar miller in Kenya.

Conditions put on the government include offloading its interests in state-owned sugar mills while allowing them to diversity their operations to produce other products such as ethanol.

“State owned firms are also required to encourage farmers and supply estates to plant early-maturing cane varieties as well as seek for strategic partnerships with other investors,” Kebati told AFKInsider.

Kenya’s move towards privatization of state-owned sugar mills has stalled and no light appears at the end of the tunnel as the clock ticks towards the end of COMESA safeguards.

“It appears that the only way out for state-owned sugar mills is to consolidate their operations, looking at the strength of each plant and what is strategic,” said Kebati.

While the future of Kenya’s sugar industry hangs in the balance, some players appear unperturbed by grim prospects if the COMESA safeguards are lifted.

“We are only worried that duty free imports into the country may not be regulated,” said Nzoia Sugar Co. Managing Director Saul Wasilwa. “At the moment, we are less concerned about the safeguards because we are still producing at a high cost and are unable to compete. We need to be more concerned with privatizing and injecting more capital into state-owned mills.”

It costs an estimated $50 million to put up an eco-electricity generating plant and $5.9 million to construct a water bottling plant or an animal feed factory using molasses, Wasilwa said. “We cannot execute any diversification plan because of lack of the required capital.”

Trials are ongoing at the Kenya Sugar Research Foundation to introduce early maturing cane varieties and improve supply to the factories.

Public sector-owned sugar companies earmarked for privatization include Chemelil Sugar Co., Nzoia Sugar Company Ltd.; South Nyanza Sugar Co. Ltd; Muhoroni Sugar Co. Ltd. and Miwani Sugar Co.

Kenya’s potential demand is approximately 800,000 metric tons. However, the country’s domestic production has historically hovered around 550,000 metric tons leaving a net deficit to be filled by imports of approximately 250,000 metric tons.

With this big deficit to be filled, several private-sector players have recently identified investment in the sugar sector as an avenue to deploy capital to obtain a reasonable return. Recent entries to the local sugar industry include Kibos Sugar and Butali Sugar Co. Three factories are at different stages of construction: Sukari, Transmara, and Ramisi.

Kenya’s sugar industry is one of the world’s highest-cost sugar producers. Its production cost is way above the world average as well as that of other countries in COMESA.

When COMESA safeguard measures expire, unrestricted amounts of sugar can be imported into Kenya without attracting any duty. This means that Malawian sugar, produced at $215 a ton, or Swaziland sugar, produced at $275 a ton, can reach the Kenyan market duty-free – a dreadful prospect for a sluggish sugar sector.

Reliance on smallholder production, rain-fed cane growing and low factory capacity are some of the factors attributed to Kenya’s high cost cane production. Higher production costs are also a result of taxation in Kenya.

Production costs will ultimately determine whether Kenya’s sugar industry can compete with duty-free and quota-free imports from COMESA FTA. Industry figures put Kenya’s sugar production costs at $500 compared to Malawi ($200-$230), Zambia ($230-$260), Sudan ($250-$340), Egypt ($250-$300) and Swaziland ($250-$300).