Alam Group’s $50m steel mill ‘won’t lower prices’

Saturday October 13 2012

Steel bars being loaded on a truck. There is a high demand for steel in East Africa given the budding real estate business. Photo/FILE

Steel bars being loaded on a truck. There is a high demand for steel in East Africa given the budding real estate business. Photo/FILE Reuters

By Isaac Khisa Special Correspondent

As Uganda gets its latest steel plant, high energy costs in the country will continue to keep up the price of one of the most in demand products in East Africa’s booming construction industry.

Alam Group, owners of Steel Rolling Mills, has commissioned a $50 million steel plant that will produce 6,000 tonnes of steel per month in Jinja.

The company plans to source 80 per cent of the iron ore it needs from local deposits, cutting its cost for the most important raw material required in the manufacture of steel.

However, high prices and unreliability of electricity supply have seen the firm back-up its dependence on local electricity with importation of coal from South Africa, which not only raises its power costs but exposes it to currency fluctuations.

Company officials said the firm will spend about $1.5 million on the importation of coal per month in addition to electricity bills.

Energy costs

“This is a big investment, but I do not think the price of steel will fall soon because we are importing coal,” said Hussein Hilal, Alam’s human resource and legal manager in an interview with The EastAfrican.

Uganda has been relying on expensive thermal power since 2004, heavily subsidised by the government to the tune of Ush1.5 trillion ($0.62billion).

In January, the government removed power subsidies in order to accelerate long term Investment in electricity infrastructure, in priority projects such as Karuma Hydro Power Project (600MW), Isimba Hydro Power Project (120MW) and the transmission infrastructure.

This led to a rise in electricity tariffs by between 36 per cent and 69 per cent depending on the sector.

Domestic consumers are paying Ush524.5 ($0.2) per unit. Commercial consumers are currently paying Ush487.6 ($0.19) up from Ush358.6 ($0.14) per unit, medium industries Ush458.9 ($0.18) instead of Ush333.2 ($0.13) per unit and large industries Ush312.8 ($0.12) instead of Ush184.8 ($0.07) for each unit consumed.

Though many steel firms are now eyeing the East Africa region, poor infrastructure, fluctuating regional currencies and high energy costs remain major challenges.

Alam Group has been operating in Uganda since the 1980s, producing steel using scrap metal. However, the coal- based direct reduced iron plant will reduce reliance on scrap.

The company primarily produces reinforcing bars from 8mm to 40 mm in diameter. The Alam Group also operates Kenya United Steel Company (Kusco) in Kenya.

Uganda has iron ore deposits in Kisoro, Kabale districts and other districts in southwestern Uganda, with total geological resources in excess of 50 million tonnes, according to the Ministry of Energy and Mineral Development.

While commending the move to tap local iron reserves, MM Integrated Steel Mills (U) Ltd CEO Narendra Jain says it is not economically feasible, given the size of deposits and the dependence on imported coal.

Demand for steel

In neighbouring Kenya, the demand for scrap metal from both local and foreign steel millers has led to a surge in property vandalism by unscrupulous scrap metal dealers, forcing the country to ban scrap metal exports.

Demand for steel in East Africa has been rising driven by a surge in infrastructure projects, manufacturing and the housing sectors, where it is mostly used to build supporting structures for houses. 

Last year, for example, Kenya spent an estimated Ksh63 billion ($741 million) on the importation of steel and iron products, 50 per cent more than it did in 2010.

The demand for steel in Uganda, estimated at over 150,000 tonnes per annum, is well above the actual steel production of over 60,000 tonnes per annum.

Last month, China Machine Building International Corporation  pledged to establish a $100 million iron ore mining and integrated steel plant in Mbarara District, western Uganda.

The plant whose construction date is yet to be announced, is expected to be fully operational 18 months after its construction has begun.

Data from the Uganda Bureau of Statistics shows that the real estate sub-sector grew by 5.8 per cent in the past year compared to a 5.7 per cent growth in 2009, while in Kenya the sector grew by 4.3 per cent last year, compared with 4.5 per cent the previous year, hence the surge in demand for steel products.

Steel industries already in operation in Uganda include Roofings, Rolling Mills, Steel and Tube Industries Ltd, Tembo Steel Mills, Uganda Baati and MM Integrated Steel Mills.

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