Why Chinese Expats and China Firms’ Earnings Continue to Drop
Chinese expatriates and earnings from China firms in Kenya have dipped as Beijing continues to recalibrate its relations with the continent amid high debt levels in most African countries, new data shows. The data from Johns Hopkins’ China Africa Research Initiative shows that the Chinese firms in Kenya raked in revenues of Sh274.1 billion ($2.106 billion) from the various projects they had in the country by the end of 2022. This was less than half of their peak earnings of Sh591.8 billion ($54.55 billion) in 2016, pointing to a slowdown in Chinese activities in Kenya. Because most of the financing from Beijing for various projects and contractors come together, the number of Chinese workers on contract dropped to a nine-year low of 3,351 in the review period even as China grapples with an economic crisis triggered by the Covid-19 pandemic and aggravated by recent trade hostilities it has with the US and Europe. The data, which was published in March, shows that the last time Kenya had a lower number of Chinese workers contracted on various projects was in 2013 when the country had not begun the construction of the standard gauge railway (SGR), China’s largest infrastructure in the country. At the height of the Chinese construction boom—which started with the building of Thika Superhighway before scaling up to the $5.1 billion SGR—the number of Chinese nationals working on various infrastructure projects hit a record high of 8,503 in 2018 before slowing down as Beijing trimmed its debt financing, the data shows. Since then, China has been shifting from financing the big-ticket projects that characterised the 10 years of retired President Uhuru Kenyatta’s presidency. The debt-financed projects consisting of roads, ports, railways, and power stations contributed to the Sh11.25 trillion debt load which has forced China to go slow on mega infrastructure projects, including the financing of the third phase of the SGR from Naivasha to Malaba. Kenya’s Owings to China Choose Chart TypeAreaColumnLine No Data Found China’s infrastructure financing across the continent has dropped to about $1 billion in each of the last three years from a peak of $28 billion in 2016, said Professor David Shinn, an adjunct professor at the Elliott School of International Affairs at George Washington University and co-author of “China and Africa: A Century of Engagement.” “When financing goes down, construction and labour goes down,” said Professor Shinn, who is also a former US ambassador to Burkina Faso and Ethiopia. Financing from China has reduced significantly, with the share of Chinese loans in Kenya’s debt stock reducing from $6.95 billion in December 2021 to $6 billion by end of December last year, official data shows. “In the previous administration, they did the heavy projects and heavy borrowing from China, and especially on infrastructure wiping out the ceiling for the next administration,” said Dr Caroline Saroni, an international trade and investment expert and director at Afritrade Consulting Group. Left without headroom to borrow, Dr Saroni said the William-Ruto led administration had resorted to public-private partnerships (PPPs) to finance most of its agenda. Chinese labour has also been in decline due to pushback by Africans who want to see more Africans hired for these jobs because eventually, it is them who will pay for the Chinese loans, explained Prof Shinn. “Some of the decrease in financing is being driven by Africans who are concerned about taking on too much debt from China or any other source such as the World Bank or bondholders,” he added. Chinese Imports to Kenya Imports from China hit a new record last year Choose Chart TypeAreaColumnLine No Data Found China has also been refocusing its efforts on the continent from the “spectacles” of mega debt-financed infrastructure into the “small but beautiful” projects such as digital connectivity, food security and health even as the Asian nation continues to grapple with a slowdown in its economy, said Cavince Odhere, an independent analyst on international relations with a focus on China-Africa development co-operation. “The “small but beautiful” concept is an initiative that is now being pushed by China to focus on low-hanging fruits that have the most impact, rather than going for spectacle,” said Mr Odhere. The shift by China is also towards “more environmentally-friendly projects” that do not carry a significant debt burden, said Ken Gichina, an economist. Despite the drop in Chinese financing, Beijing still remains Kenya’s most critical development partner in infrastructure development, not only due to its deep pockets and risk aversion but also the ability to deploy its technology and technical capabilities in Africa, explained Dr Saroni.
Rethink Two Levies Hurting Our Steel, Construction Industries
The construction materials value chain is one of the key value chains under Kenya’s Fourth Medium Term Plan 2023-2027 (MTP IV). It emphasises promoting local production of affordable construction materials such as steel and cement for local and international markets. It is also at the heart of President William Ruto’s affordable housing programme. This may explain why the government has jealously protected the local cement and steel industries. The Finance Act 2022 introduced an Export Levy rate of USD 175 per tonne on iron ore. This is in addition to the already existing 8 per cent royalty based on export sales value. The purpose of this levy was to discourage exports so that our local steel factories utilize the iron ore mined locally. Later, in 2023, through the Finance Act of that year, the government introduced a 17.5 per cent Export and Investment Promotion Levy on semi-finished steel and bars and rods of iron to discourage imports and further protect our local industries, grow our mining sector, increase our exports of value-added products, attract investors, make the country self-reliant on construction materials and save our much-needed foreign currency. While introducing the two levies was well-intended, some critical issues were overlooked. One, though the export of our iron ore was restricted through the 2022 levy, the government did not limit the importation of iron ore and steel coils to encourage the use of locally extracted industrial minerals and grow our mining sector. Hence, even though the government achieved one objective of the levy, that is, our iron ore became uncompetitive in the international market as the levy of USD 175 per tonne on iron ore is higher than the prevailing global market price of approximately USD 115 per tonne, other objectives of the levy are not being realized. Indeed, allowing imports of iron ore and steel coils (used to produce materials for the construction industry, such as building panels, pipes, and reinforcing bars) while at the same time restricting imports of affordable semi-finished steel and bars and rods of iron is counterproductive for two reasons. One, the steel companies are not sourcing iron ore locally to grow the mining sector and ensure that Kenya is self-reliant regarding construction materials as intended by the two levies. Two, consumers are restricted to using locally manufactured steel (which is not necessarily cheap because of different factors) as internationally competitively priced steel is too expensive to import because of the Export and Investment Promotion Levy. According to the Observatory of Economic Complexity (OEC), our total iron ore imports in 2022 from Uganda, South Africa, India, the United Kingdom, and China were worth approximately Sh4.8 billion. In 2023, our imports of iron ore increased instead of decreasing despite the levy, whose aim was to promote the use of locally sourced ironore by our local industries. According to the Kenya Ports Authority (KPA) database, our iron ore imports were approximately 418,500 MT (excluding Uganda’s) between March 13, 2023 and March 3, 2024, valued at approximately Sh6.4 billion. The KPA database further shows that there has been a signifi cant increase in the import of steel coils between December 2023 and March 2024. The second critical issue that was overlooked is the blanket levy on iron ore. In nature, iron ore occurs in two forms – magnetite or hematite. Iron ore magnetite has a dense structure and requires high temperatures and a lot of energy for the reduction process compared to iron ore hematite, which is less dense. Thus, the less dense hematite is preferred as a primary raw material by a majority, if not all, of the country’s local steel and cement factories. Hence, the deposits of iron ore magnetite extracted in Kenya have not been used much in the country. For the levies to achieve the intended objectives, the government should consider restricting the importation of iron ore and steel coils within acceptable trade rules. Unfortunately, following the levy’s introduction, companies that were mining/ sourcing and exporting iron ore magnetite could not export the mineral. Consequently, we risk losing our iron ore export markets (China, Estonia, and South Africa), where we exported iron ore worth USD 5.3 million (Sh678.4 million) in 2022, according to the OEC. Based on our iron ore reserves, one company can export over Sh1.5 billion worth of iron ore annually. In conclusion, despite the levies that were well intended, the local price of steel has increased by approximately 60 percent. As a result, the cost of construction has since shot up. Hence, for the levies to achieve the intended objectives, the government should consider restricting the importation of iron ore and steel coils within acceptable trade rules. This will encourage the use of locally extracted industrial minerals and help our mining sector grow. Concerning the mining sector, the government should consider exempting iron ore magnetite from the export levy to boost our foreign exchange earnings. Additionally, introducing strategic measures in the manufacturing and mining sectors, such as reducing the cost of energy, offering appropriate incentives, and investing in proper infrastructure to reduce logistic costs, will enable our steel companies to produce internationally competitive steel products in terms of price and quality. Other strategic measures for the mining sector include ensuring the availability of proper mining data to both international and local investors to enhance the accuracy of companies exploring minerals in the country and improving the efficiency of government regulatory and compliance processes, including the issuance of mining licenses for pending and new applications following the phased lifting of the moratorium on mining.
Make Kenya a Minerals Trade Hub
The abundance of precious metals in the Democratic Republic of the Congo (DRC) has attracted much interest in the region. DRC is the world’s largest producer of cobalt, one of the key components used in producing rechargeable batteries for electric vehicles. According to the Massachusetts Institute of Technology’s (MIT’s) data platform, the Observatory of Economic Complexity (OEC), the most recent data indicate that DRC produced and exported cobalt worth $5.99 billion, approximately 70 percent of the world’s cobalt in 2022. Other key minerals it produced and exported in the same year include coltan (used in making smartphones, laptops, air conditioners, and refrigerators) and copper. In particular, it exported refined copper valued at $16.3 billion, copper ore valued at $1.55 billion, and raw copper worth $1.37 billion. In total, it exported minerals worth $28.5 billion (approximately Sh3.8 trillion) in 2022. But this is just the tip of the iceberg. According to the International Trade Administration, a US Government agency, most of the country’s mineral resources remain untapped and are estimated to be worth $24 trillion. No wonder everyone is scrambling for a piece of DRC’s mineral wealth, and Kenya is no exception. Although Kenya has in the past played an auxiliary role in the export of minerals from the DRC, with Durban and Dar es Salaam being the preferred exit ports, it is increasingly becoming the route of choice for precious metals from the DRC. This is because more players have been looking to use alternative trade routes due to different concerns in the said two routes, including financial bottlenecks and insecurity concerns for the mineral products and critical staff of the industrial minerals off-takers in South Africa, and port congestion at Dar es Salaam port. Consequently, Kenya, as the best-positioned beneficiary of the slip-ups by South Africa and Tanzania coupled with the discovery of lithium in southern DRC, which places Mombasa as the ideal port due to its proximity, should take advantage and move to fill the void and become Africa’s new mineral hub by offering seamless trade facilitation services to traders. With the recent government and private sector interventions, the port of Mombasa has improved its efficiency in loading and offloading cargo. This has caused it to attract some big names. FUJAX, a leading British commodity trading company, has established a port berth and offices at Comarco Base, Mombasa. Internationally recognized mineral assayers, companies that analyze the composition and quality of the minerals, such as Bureau Veritas, Societe Generale de Surveillance (SGS), and China Certification and Inspection Group (CCIC), have set up agency offices in Kenya. Logistics firms such as Mitchell Cotts have also ventured into the region and are well-positioned to provide the much-needed logistics services for the DRC minerals. Kenya’s robust financial infrastructure for trade finance has also been vital in boosting the country’s position. Our commercial banks are stable and liquid, with a good number rated triple-A, hence most can receive any amount of international Letter of Credit (LC). Also, Equity Bank and KCB have entered the DRC market and are strategically placed to support Kenya as Africa’s mineral trading hub. Major insurance companies have also pitched camps in Nairobi, providing performance bonds required by buyers to secure the LCs. Besides the robust financial infrastructure, Kenya’s predictable legal system has also been a magnet for investors. The country boasts a reliable legal system. The judiciary has embraced alternative dispute resolution (ADR) for commercial matters, and key institutions in the ADR space, such as the Chartered Institute of Arbitrators-Kenya and the Nairobi Center for International Arbitration, are promoting the use of ADR for fast resolution of disputes. The government should strategically create an enabling environment for the private sector, including financial institutions and insurance companies, through adopting policies and incentives that will facilitate, sustain, and retain international trade in industrial minerals in Kenya, thus fully taking advantage of the gap that South Africa and Dar es Salaam have left.
