Upping the energy rate
The effects of a recent governmental decision to increase energy prices paid by heavy industries on prices of end products remain unclear, reports Ahmed Kotb
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Steel is among the industries that are estimated to use approximately eight per cent of the total energy consumption of the industrial sector
Egypt's Minister of Finance Momtaz El-Said announced that, starting this month, prices of natural gas and electricity for 40 heavy industry factories will increase by 33 per cent.
The decision was part of a plan to cut the country's budget deficit by about LE20 billion, to prevent it from ballooning following the economic difficulties Egypt has witnessed since last February. The governor of the Central Bank of Egypt (CBE) had been quoted by Al-Ahram daily as saying that the deficit in the fiscal year that began on 1 July 2011 could reach LE182 billion, compared to initial expectations of LE134 billion.
Following the decision, prices of natural gas available for cement and steel factories will increase to $4 per thermal unit from $3, while ceramic factories will pay $3 instead of $2.3.
Electricity prices, according to Mahmoud Balbaa, head of the electricity holding company, will vary according to the type of voltage. Industries that use super voltage will now pay 7.2 piastres per kilowatt, while others that use high voltage will pay 30 piastres, Balbaa was quoted as saying in a press release.
These industries are believed to be consuming approximately eight per cent of the total energy consumption of the industrial sector.
By introducing new prices, the government will save about LE5 billion of the energy subsidies bill in the current fiscal year, which totals LE100 billion.
There is debate, however, on the usefulness of such measures. Former minister of finance Hazem El-Beblawi was quoted during a press conference last month as saying that subsidising energy consumed by these industries is only benefiting factory owners, instead of consumers.
"The decision is several years late," said Omar Abdel-Alim, an economic analyst. Abdel-Alim agreed that subsidising energy for heavy industries encouraged them to make huge profits without any benefit for the consumers. However, he said, by lifting subsidies on energy provided to these industries, the government should not have the right to intervene in setting prices for their products.
Minister of Industry and Foreign Trade Mahmoud Eissa announced last week that the government will not allow any price increases in response to rising energy costs. "These industries should cut from their high profits and any increases in their products' prices will not be tolerated," Eissa stressed.
Several cement and steel factories have increased their product prices this month. Ezz Steel, the country's largest steel producer, increased prices by LE100 to reach LE4,750 per tonne of steel rebar. Similarly, cement factories added LE20 to the cost per tonne, which is now sold at LE440 despite continued stagnation in the construction sector.
"Raising the prices of our products is not linked to the government's decision to increase energy prices," said George Matta, head of the marketing sector at Ezz Steel. He added that the reason was that the cost of raw materials like billet and scrapes has recently risen. "It is just a coincidence," he told Al-Ahram Weekly.
Mohamed Hanafi, general manager of the chamber of metal industries at the Industrial Development Authority (IDA), believes that the government should not impose the same rate on all factories because some of them consume more energy than others.
"The chamber has prepared a study for the Ministry of Industry and Foreign Trade with some recommendations to follow before applying the decision to increase energy prices for heavy industries," Hanafi said.
Among the recommendations, Hanafi stated, is to control the growing number of steel imports, which could eventually lead to flooding the market and negatively affect local production.
For Ezzeddin Abu Awad, head of the central association of cement dealers, the decision is not very wise. "About 90 per cent of cement factories in Egypt are owned by non-Egyptians, who perform acts of monopoly," he said. "They can always raise the prices of cement and the government cannot prevent that."
Abu Awad also stated that the actual cost of production of a tonne of cement is LE215, while factories sell it for about LE450. Al-Arish factory, owned by the Egyptian army, is the only plant that sells a tonne of cement for LE350, he said. "As long as energy prices increase, cement factories will raise the prices of their products and eventually not help the economy as the government intended."