Embassy Urges Ex-Im Support for Locomotive Export

UNCLAS NAIROBI 001705

SIPDIS

DEPT FOR AF/E, AF/RSA, AND EB/CBA
EB/IFD/ODF FOR L CONNELL
DEPT ALSO PASS TO USTR FOR BILL JACKSON, KARL TSUJI, AND
JEAN KEMP
TREASURY FOR LUKAS KOHLER
DOC/ITA FOR ROBERT TELCHIN AND RASHIDA PETERSEN

SIPDIS

E.O. 12958: N/A
TAGS: BEXP ETRD EINV EAID ECON KE
SUBJECT: Embassy Urges Ex-Im Support for Locomotive Export
to Magadi Soda in Kenya

REF: Ex-Im Bank Economic Impact Analysis: AP081717XX

(Kenya-Soda Ash)


1. Summary: Ex-Im rejection of U.S. producer NREC's
application for support for sale of eight locomotives to
Kenya's Magadi Soda would contradict U.S. policy to help
African countries expand their foreign trade, and produce a
terrible optic for the USG. Embassy questions Ex-Im's
projection that Magadi Soda's increased exports would
reduce potential U.S. soda ash exports by $24.6 million
over six years, given the high growth in domestic demand.
It is also questionable that U.S. industry would suffer any
damage, given rising world prices. Magadi's exports are
too small to significantly impact U.S. industry, but
boosting them would assist Kenya's efforts to reduce
widespread poverty and unemployment. Rejecting the
application would also miss an opportunity for NREC to
break into a growing market and encourage Magadi and other
East African firms to buy European or Chinese railroad
equipment instead. End summary.

NREC/Magadi Soda Application
--------------


2. Ex-Im Bank has received an application to support the
$14.4 million export by National Railway Equipment Company
(NREC) of Mt. Vernon, IL of eight (8) refurbished
locomotives to Magadi Railway, a captive railroad of Magadi
Soda Company (MSC),of Kenya. The locomotives are valued
at $14.4 million, and Ex-Im Bank estimates that NREC will
also sell an additional $1.4 million in spare parts, for
total U.S. exports of $15.8 million. The locomotives will
be integral to Magadi's 365,000 metric ton/year soda ash
expansion project expected to commence in late 2006. Ex-
Im's analysis estimates the expansion in Magadi's exports
will cause U.S. soda ash producers to lose a projected
$24.6 million in exports over six years, making it likely
Ex-Im will reject the application.


3. U.S. Embassy Nairobi's FCS and the Economic Sections
have reviewed Ex-Im's Economic Impact Analysis for Magadi
Soda Company's application. It seems much more likely that
the positive impact on the U.S. economy as a result of
increased locomotive manufacturer's business will equal or
exceed any negative impact on U.S. soda ash industry
exports. We offer the following observations and comments.

Projected Export Loss Figure Appears Too High
-------------- --


4. It is reasonable to question this "projected export
loss" figure. Repair of hurricane damage has caused tight
supplies of glass and other construction material. With
forecasts for future active hurricane seasons boosting
domestic demand, we question the claim that Magadi could
displace 48,930 tons of U.S. exports worth $24.6 million,
which would represent only 1.06% of U.S. soda ash exports.
The report itself indicates that U.S. demand is growing
faster than expected. It is possible, if not likely, that
Ex-Im's estimate of displaced U.S. soda ash exports is a
"worst case" scenario unlikely to be realized.


5. Magadi exports 90% of its current production (350,000
tons of soda ash per year),or only 315,000 tons. This is
only 0.75% of the 42 million tons of world soda ash
production in 2005. When U.S. industry exports 4.6 million
tons a year and is by far the world's largest exporter, Ex-
Im Bank rejection of something as modest as routine
assistance in support of a U.S. manufacturer for
locomotives to a relatively tiny (less than 1%) producer in
a struggling, developing country such as Kenya would appear
to be in direct conflict with the USG goal to help
countries like Kenya with economic development.


6. If it is true, as the report states, that since 2003
soda ash demand has grown between 3-4% per year and is
forecast to continue growing at that rate through 2010 --
and that prices are expected to increase in the 25-30%
range -- then "all the boats are rising" and U.S. industry
should have nothing to fear from a very modest increase in
activity by Magadi. In 2005, the U.S. supplied 26% of the
world's soda ash, with 60% of its total production being
consumed domestically and 40% (the 4.6 million tons
mentioned above) being exported. Magadi's exports are


only 1/15 of U.S. exports. Magadi's exports to Asia, where
most growth is expected, are only 1/70th those of U.S.
exports.


7. Competitive "issues" in the application exist. However,
particularly given the huge advantages the U.S. enjoys in
terms of scale, quality, productivity, infrastructure,
etc., the relative size of those "issues" appears
insignificant compared to the certain benefits to U.S.
manufacturers, associated service providers (e.g., shipping
and insurance),Kenyan economic growth, and an enhanced
U.S.-Kenya relationship overall.


8. A global commodities boom and 25-30% increase of U.S.
soda ash prices in 2004 and 2005 led U.S. producers to re-
open closed plants, and since 2003 the U.S. soda ash
industry has been running at 100% capacity. Major
consumers of soda ash, especially in the U.S., reported
sold-out conditions in 2005, causing the U.S. flat glass
industry to express concern about the availability of this
crucial raw material. In short, the outlook for the U.S.
and global soda ash industry has never been more positive.
Under these conditions, a refusal to help both U.S.
manufacturer (in much more tenuous economic conditions) AND
a developing might be tough to defend in the court of
global public opinion, and would hurt the U.S. image in
East Africa.

Ex-Im Analysis Omits Additional Benefits of Project
-------------- --------------


9. The analysis appears to overlook the following
additional benefits of supporting Magadi's loan
application.


10. Creation of additional business for NREC and other U.S.
locomotive and equipment suppliers over the 6-year
repayment period from other markets/industries in Africa --
and thus additional dollars and jobs for the U.S.
locomotive industry. Expanded and improved rail service is
potentially a good growth sector in Africa, particularly in
freight, when much of the world will likely be experiencing
flat growth rates. Mombasa is East Africa's gateway to the
world, and the recent concessioning of the Kenya-Uganda
railway should restore the dilapidated railroad to play a
critical role in relieving freight congestion, cutting
transport time/costs, and stimulating economic growth.


11. U.S. heavy equipment and vehicle manufacturers are not
well represented in Kenya or most of Africa and face very
strong competition from traditional European and very
aggressive Chinese manufacturers. With improvements
planned for the existing Mombasa-Kampala rail line, and
serious studies being undertaken on extending rail service
to southern Sudan, East Africa is potentially an important
market for locomotive and other rail equipment
manufacturers. NREC's contract with Magadi would be a
strong advertisement and toehold in a new market. U.S.
firms should be supported in pursuing opportunities in this
region. (USTDA is also studying significant expansions of
rail freight in Senegal). If Ex-Im rejects Magadi's
application for financing, Magadi may simply buy equipment
from Europe, Japan or China, which will deny the U.S. any
export benefit, and still leave U.S. soda ash producers
facing Magadi.


12. We urgently need a U.S. "success story" in Kenya.
The Boeing sale was a once-in-twenty years one-off -- and
may not create as many jobs in Kenya as the Magadi project.

Rejection of Application Inconsistent with USG Policy Goals
-------------- --------------


13. The U.S. has a stated foreign policy to assist emerging
African countries, and their producers, to improve and
enhance their foreign trade as the most effective means of
attracting investment, creating jobs and fighting poverty.
Fully integrating African countries into the benefits of
enhanced world trade is a U.S. priority. Currently, the
entire continent of Africa accounts for only 2% of global
trade. Ex-Im rejection of the application would create a
terrible optic that would contradict the stated policy.


14. Looking at the bigger picture, the possibility of more


failed or failing states in Africa is a real concern. We
all know that these environments are the best safe havens
for terrorists. Kenya has so far proved itself willing to
democratize at a faster pace than most other African
countries. It remains a poor country, however, in which
56% of the population lives on a dollar a day or less, and
in which unemployment is estimated to be 50%. It should be
supported, primarily through any viable trade and
investment vehicle available. We have already seen that
U.S. support of successful private sector companies leads
to innumerable positive spin-off effects, an excellent
being, to use the example again, Kenya Airways which is
today a truly world class airline in part due to its fleet
of 100% Boeing aircraft.

BELLAMY