Rising oil sector, a reflection of Zimbabwes manufacturing potential

THE world is ruthless hence it is naive to think that opening markets will simply lead to more sustainable economic growth as well as industrialisation. The argument that is often advanced towards supporting opening of markets is increased consumer choices, more competition and lowering of prices.

All these are good but should be balanced by much more important goals which include developing and promoting local industry, creating local employment, creating opportunities to export, reducing trade deficit and creating a level playing field with own market as the foundation.

Events in the oil sector since 2013 have proved that if an industrial sector has the potential to be competitive, then it must be supported to develop and grow such that the long-term benefits will be immense.

In 2009 the oil expressing sector, like many industries in Zimbabwe was saddled with serious challenges which include access to capital, unfair competition, low input supply among others.

They were uncompetitive and some argued that a dying sector with no hope for resurrection, hence called for traders to be allowed to import as much cooking oil as they can to feed the market.

The competition from imports led to the collapse of the sector. The oil industry leaders put up a fight and government responded positively to provide the much need support, which resulted in the revival of the sector.

Production rose from about two million litres per month to over five million litres per month from 2013 to 2014. Cooking oil prices have also been going down from around US$12 in 2009.

Lack of a level playing field against competition

While addressing CZIs Mashonaland Chamber Executive Committee in early 2014, David Chiweza, author of the book, Out of the Rabble encouraged what he termed the block and tackle strategy where his basic message was to preserve your market for yourself first.

In his book, he writes that, In reality, when your industry is strong, you want others to open their markets to you. When your industry is weak, it makes sense to protect your own market by restricting imports. These offensive and defensive strategies apply in all spheres of Life. Basic economic principles suggest that productivity follows markets.

The oil expressers case was that the zero tariff statutory instrument was hurting local industry leading to some companies closing due to unsustainable competition from South African products. Industry lobbied through Ministry of Industry and Commerce for the reintroduction of duties on all imported products. In response to this request, the Minister of Finance introduced surtax. The objective was to level the trading ground and protect local manufacturers.

With the introduction of these measures, the local manufacturers began to gain competitive advantage in the local market, the country witnessed an increased domestic and foreign investment, increased production and employment levels as well as increased price competitiveness in the oil expressing sector.

The combined capacity stood at 7,4 million litres per month in 2013. Due to the new measures that encouraged new investment in the sector, capacity has since grown to about 12 million litres per month by 2014.

There was resistance to the tariff measures introduced by government with South African companies approaching their minister of trade complaining that Zimbabwe had introduced trade barriers which were hurting South African companies.

However, local industry argued that South African companies were creating unfair competition when local manufacturers ordered bulk crude oil from countries such as Brazil through South Africa companies. Zimbabwean companies were allegedly being charged a price higher than that of similar quantity of fully packed oil. This was viewed as a deliberate strategy by South African companies to make local manufacturers and refining more expensive so that they can continue to supply packed oil from South Africa.

There have been other unfair trade practices. Former chairman on the Oil Expressers Association, Jonah Mushangari once said, The current local oil production in South Africa meets 40 percent of their local demand with balance covered through imports from Malaysia, Brazil and Argentina. All the oil exported to the region is imported oil outside of South Africa. South Africa imports palm oil and palm derivatives from Malaysia, soya bean oil and sunflower oil from Brazil and Argentina to supplement their requirements.

It therefore implied that all exports to Zimbabwe from South Africa did not qualify under the SADC Certificate of Origin rule and should attract duty under the general import protocol which had higher duties than the SADC protocol.

Local oil producers have been supporting contract farming which has helped the supply of cooking oil to increase from 900 000 litres a month in 2009 to 3,3 million litres a month in 2013, before reaching 5,2 million litres in 2014. The by-product from oil expressing is the mainstay of stockfeed manufacturing. Importers do not add this kind of support to any productive part of the value chain but the opposite is true.

The ability of the sector to continue to grow is now being hampered by the inadequate supply of raw materials from the farmer in the form of mainly cotton seed and soya beans. More cotton and soya bean contract funding would help improve oil production.

According to the Oil Expressers Association,In order to meet national demand Zimbabwe needs to produce 350 000 tonnes of cotton annually to give us 200 000 tonnes per year of cotton seed to produce 32 million litres per year of cotton seed oil. Zimbabwe also requires 300 000 tonnes per year of soya beans to produce 48 million litres per year of soya bean oil. The national demand of oils is estimated at 7,5 million litres per month. Current soya beans are 70 000 tonnes per year.

At 300 000 tonnes per year soya beans can bring revenues of US$300 million and there are opportunities for exports to region since no country into the region is self sufficient.

The Oil Expressers Association proposed to government to be more strategic in its support to the production of soya and cotton.

They recommended that duties obtained from oils, bakers fats and margarines be deployed to agriculture particularly soya beans contract farming.

The sector also recommended that duty on all imported products be increased further, as this would increase government revenue collection to fund essential programmes, protect local industry and increase employment through increased production.

Another remaining challenge is the effective implementation of duty regimes.

The porous borders have resulted in the continued inflow of oil and oil products in large quantities minimising the benefits that the country could reap.

Therefore the revenue authorities and the local manufacturers need to do more to combat leaky borders.

The rise of the oil industry is important in that it reflects the potential of local industry. With appropriate policies and predictable local market to supply the recovery and growth of the manufacturing sector would undoubtedly be achieved.

Recently, Zimbabwe Economic Policy Research Unit released empirical evidence indicating that temporary protection has had a positive effect in boosting production. – FinGaz

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