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Viewing cable 06NAIROBI1705, Embassy Urges Ex-Im Support for Locomotive Export

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Reference ID Created Released Classification Origin
06NAIROBI1705 2006-04-20 07:05 2011-08-25 00:00 UNCLASSIFIED Embassy Nairobi
VZCZCXYZ0000
PP RUEHWEB

DE RUEHNR #1705/01 1100705
ZNR UUUUU ZZH
P 200705Z APR 06
FM AMEMBASSY NAIROBI
TO RUEHC/SECSTATE WASHDC PRIORITY 1116
RUCPDOC/USDOC WASHDC PRIORITY 2784
INFO RUEATRS/DEPT OF TREASURY WASHDC
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