oil and gas

Storm cooking over edible oil, dollar shortage in East Africa

June 13, 2022

East Africa is facing a shortage of raw materials to manufacture cooking oil, soaps and cosmetics, with no clear signs of availability of such commodities in the next 10 days even as prices soar, adding to consumers’ pain.

But it is the high prices and shortage of edible oil that is cooking up a storm across the region. Data available to The EastAfrican shows that no edible oil-related imports are expected in Kenya this month. According to the Mombasa port ship schedule, more than a dozen vessels are expected to dock laden with different products except for palm and vegetable oil, which are key ingredients in the manufacture of such products.

In the port schedule for June 6-20, 2022, 14 ships are expected to dock carrying containerised cargo: cars (6), clinker (2), bagged rice (1) bulk wheat (1), fertiliser (2) and steel products (2).

Low on priority list

Records from the Kenya Ports Authority indicate that the last palm oil and vegetable oil tankers — MV Maritime Venessa and MV Navigating 8 Guard respectively — docked at the port on May 19, 2022.

Consumers have endured rising prices of cooking oil, blamed on Covid-19, the ongoing conflict in Ukraine and a deficiency of dollars, which has seen at least two Kenyan oil manufacturers reduce operations due to the inability to pay suppliers and get raw materials.

This week, Pwani Oil and Kapa Oil Refineries announced cutting down production in the coming weeks due to the dollar crisis.

“Given the prevailing challenges, Pwani Oil has temporarily halted operations at its refinery in Kilifi as we work to resolve the problem. We, however, wish to assure our customers, employees, suppliers, partners and other stakeholders that this is a temporary measure and the business remains in operations and our products available in retail outlets,” said a public notice by Pwani Oil commercial director Rajul Malde.

The EastAfrican found operations at the Kilifi plant this week going on but sources there indicated that there might be no more raw materials by mid-June.

Kapa Oil Refineries also cited a dollar shortage amid raw material rationing by suppliers abroad.

“Our operations have been hampered by dollar scarcity and inability to access raw materials,” Kapa Oil marketing manager Sid Shah said.

John Muriuki, a Mombasa-based palm oil dealer, confirmed the shortage supply of palm oil, a key ingredient in the manufacture of edible oil.

“The announcement by Indonesia to suspend exports of palm oil affected the cost of key products, ranging from cooking fats to soap and cosmetics. We have had challenges importing the products,” said Mr Muriuki.

Indonesia has since lifted the ban on exports but the government wants producers to supply the local market before resorting to exports.

With the Kenyan companies hard-up for dollars, consumers are bracing for further shortages and price increases.

Pwani Oil’s Malde told our sister publication, the Business Daily in an interview published Friday that banks were only allowing the firm half of its dollar needs as it battles it out with other buyers of the Malaysian products.

“Added to that, we don’t pay on time and so we don’t get prioritised in supply,” he said.

Prices have already risen over 50 percent in the past six months, as factors such as labour shortage in Malaysia to drought in Argentina and Canada — which are the biggest exporters of soy oil and canola oil respectively — affected exports.

Price jump

Manufacturers are now buying palm oil at between $1,760 and $1,980 per tonne. Before the Ukraine war, the commodity retailed at $1,490 per tonne, having more than doubled from $700 per tonne before the onset of the Covid-19 pandemic in March 2020.

The price jump driven by the pandemic was blamed on export restrictions by Indonesia.

Kenya Edible Oils Subsector chairman Abdulghani Alwojih, in an earlier interview said that Covid-related factors caused a jump in the price of a 20-litre jerry can from $h22 to $45 “in under two years and the ban to export by Indonesia will aggravate the problem.”

The edible oil sub-sector needs more than $100 million every month to import raw materials and consumers, industrialists and economists are calling on the Central Bank of Kenya (CBK) to intervene on the dollar issue, even as the CBK insists that there is no shortage.

Others are rooting for local solutions to ease dependence on imports.

Market determination

Former Mandera Senator Billow Kerrow, who is an investor in the sub-sector, called on the CBK to allow commercial banks to sell the dollar at market price.

“There is a serious dollar shortage but the government has decided to bury its head in the sand. Commercial banks are not selling because the CBK has decided to set a price control on the dollars,” said Mr Kerrow. “The CBK Governor knows what is going on. Businesses, not just manufacturers, are facing challenges.”

Kerrow said if there was normal demand and supply the dollar would be selling at Ksh123.

“The government doesn’t want that because it would have to spend Ksh40 billion (341 million) more in servicing its debt.”

Kenya’s debt is predicted to pass the Ksh9 trillion mark ($76 billion) this year as the country’s reliance on domestic and external financing to fund spending continues. This past week, parliament allowed the government to revise the debt ceiling to Ksh10 trillion ($85 billion).

Treasury estimates show that public debt stock is expected to hit Ksh8.6 trillion ($73 billion) at the close of June 2022, before rising to Ksh9.5 trillion ($81 billion) next June.

“There are serious concerns and we have called for a meeting between manufacturers and the government this week,” said Kerow. “The immediate solution is for the CBK to lift the controls.”

The risk assigned to Kenya’s sovereign bonds by international investors has gone up in the past nine months, meaning that the country stands to pay higher interests if it floats a new Eurobond under the current market conditions.

In view of this, the National Treasury cancelled a $1billion sovereign bond and opted for syndicated loans from commercial banks after receiving bids priced at 12 percent.

Ken Gichinga, an economist at Mentoria Economics, said CBK “has to look at price stability as they will not want the shilling to depreciate at such an exorbitant rate.”

The CBK has dollar reserves — there is five months’ worth of reserves, which is way above the recommended limit — so they still have some latitude to release some dollars into the market.

Strategic planning

To avoid a perennial dollar shortage, Mr Gichinga advises players in the edible oil sub-sector to incorporate local raw materials in their business model.

“They should have both long-term and short-term plans,” said the economist. “The short-term plan is to have some negotiations with the CBK over the dollar shortage. The long-term plan is to be more resilient in terms of the supply chain, accommodating both local and international players so that they can easily switch.”

In Uganda, the retail price for cooking oil passed the $4 per litre mark last month, from $2.20. Supermarkets are charging around $3 per litre but supply remains a challenge.

High-level intervention

President Yoweri Museveni, during his State of the Nation address this week, acknowledged the crisis but suggested local remedies.

“When it comes to the recent high commodity prices, caused, initially, by the relaunch of the world economy after the two years of lockdown and, additionally, by the war in Ukraine, our decision, after careful analysis, is to avoid the traps of tax cuts and subsidies,” he said.

“Instead, we are doing two things. One, is to engage the global actors that have caused these artificial shortages. I have contacted some of the actors… The other one is to get our own substitutes — cassava and banana flour for bread and our own sunflower, soya beans oil as we wait for our more quantities of palm oil from Sango Bay, Mayuge, Buvuma, Maruzi, Bundibugyo, etc.,” he added.

“Cutting taxes or subsidies, especially on imports, is suicidal because our people may buy carelessly and we end up draining our forex reserves. Moreover, cutting taxes or subsidising means taking away money from planned projects and putting it in consumption.”

Tanzanian President Samia Suluhu on Thursday ordered authorities in Kagera region to set aside between 70,000 and 100,000 hectares of land for massive cultivation of sunflower and palm oil to end the shortage facing the country.

Tanzania’s annual consumption of edible oil is 650,000 tonnes, but the local production capacity is 290,000 tonnes annually, official statistics show.

“Tanzania has depended on imported edible oil and the country experienced an acute shortage of the commodity during the pandemic, when countries producing edible oil closed its borders,” she told workers of Kagera Sugar Factory.

The President said that to end the shortage of edible oil in the country, there must be massive cultivation of sunflower and palm oil, noting that Kagera possessed huge tracts of arable land that could be used for the project.

Confederation of Tanzania Industries trade policy specialist Frank Dafa, commenting on the budget proposals for the 2022/23 fiscal year, called for tax policies that favour investors. They suggested that import duty on edible oil be slashed from 25 percent to 10 percent.

theeastafrican



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