Packaged goods could become more expensive as the cost of global raw materials and demand rises, posing a major threat to agriculture and manufacturing industries at the vanguard of the economic recovery.
Global prices of packaging material have been on an upward trend in the last year, but government policy is making the situation worse for industries. At plants making fast-moving consumer goods, the price equals up to 10 per cent of the total cost.
The cement industry, whose paper sacks are mostly kraft-based, has been particularly hard hit with the price of a 50-kilogramme bag reported by manufacturers to have shot up from Sh30 to Sh50 even as increasing cement production piles pressure on trading margins - meaning raising prices is not an option in the short run.
There are four Kenyan manufacturers who also feed the East African market. An official at cement maker Athi River Mining who, like Bamburi and East African Portland, also uses polypropylene (alternative for kraft) bags, termed the price rise “drastic”.
“Polypropylene bags are petroleum-based. That is the reason their price has risen 20 per cent in the last one year,” said the top official who prefers not to be named. Also at risk is another huge user of kraft-based packaging, the Sh72 billion horticulture export industry, which uses kraft corrugated boxes.
Fresh Produce Exporters of Kenya (Fpeak), an industry association, says manufacturers had attempted to raise prices last year, but the industry threatened a boycott. “Last year they tried to raise the prices, but we resisted. Now they have said they want to do the same, but we are yet to know what the justification is,” said Fpeak chief executive Stephen Mbithi.
“We are unable to fully pass on the full cost to our customers as the prices keep on going up,” admitted one of the 25 paper converters involved in packaging manufacturing. Another player, Dodhia Packaging Ltd, a major supplier to the horticulture and general packaging industries, said since September alone the cost of inputs has gone up 45 per cent.
“It has been a major struggle passing on the cost especially in view of the economic situation,” said Dhodia marketing manager Kimani Nene.
Protect dormant miller
Sadly, kraft paper maker Pan African Paper Mills is missing out on this windfall as it remains closed after opening briefly ahead of the August constitutional referendum.
However, Treasury still maintains a 25 per cent import duty meant to protect the dormant Webuye-based plant, and Mr Nene says unless this is removed the future of Kenyan jobs is at stake.
Another 16 per cent VAT completes the pricing disaster for local manufacturers using packaging paper. On Monday, Fahim Ahmed,the managing director of Gold Crown Foods, a Sh1.5 billion packed tea exporter, said local taxes have forced the firm to import tea bags and tags, a situation paper convertors say has similarly shifted beer label manufacturing to Tanzania.
“We are forced to maintain three-month inventories worth Sh150 million,” he said illustrating the huge toll the PPM protection (even for goods they never produced) and a raft of taxes and levies are taking on the economy. Goods from the rest of the East African Community are coming in cheaper as no other members impose taxes of more than 10 per cent on raw material.
Tanzania, a member of the Southern African Development Community (Sadc), has the advantage of sourcing zero-duty material from South Africa, thus reducing the competitiveness of Kenyan goods.
Apart from taxation, in the last year a tonne of kraft paper used by convertors has risen from $650 to nearly $1,300 if imported from Europe. Prices according to international reports have rebounded to the 2008 level — before the globe slid into an economic crisis.
A series of natural disasters have equally contributed to the shortage. In August, huge fires burnt Russian forests slowing down paper and pulp exports as well as wheat sales as demand went up.
Earlier, an earthquake in Chile disrupted the supply of pulp and waste paper to industries all over the world even as the World Cup in South Africa scaled up demand for packaging material.
The high prices are likely to put more pressure on the government to do more to incentivise the local packaging industry. Last week tea players cited 47 taxes and levies that are forcing firms to either import material or export goods with little value-addition. They are expected to present a position paper to the government on the effect of its fiscal policy on the industry.
Rather unfortunately, even bulk exports of tea will soak up the high cost of kraft as the bulk sacks are made of kraft material.
With the government having failed to appreciate the connection between manufacturing and packaging, the only hope firms have for reprieve appears to be a future decline in collective global demand.
“Our competitive edge over Uganda and Tanzania is disappearing,” Mr Nene told Sunday Nation. “Some companies are importing cheaper packaging from the Middle East whose landed cost is lower, although the logistics make it less economical.”
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