Tuesday,25 September, 2018
Current issue | Issue 1288, (24 - 30 March 2016)
Tuesday,25 September, 2018
Issue 1288, (24 - 30 March 2016)

Ahram Weekly

Steel benefits

Egypt’s large steel producers will benefit from price reductions to industrial gas supplies, reports Mona El-Fiqi

Steel benefits
Steel benefits
Al-Ahram Weekly

Minister of Trade and Industry Tarek Kabil announced earlier this month that the government will reduce the price of the natural gas provided to iron and steel factories from $7 per million thermal units to just $4.50.

The decision aims to encourage the steel factories to operate at full capacity, Kabil said, explaining that high gas prices have led factories to operate at only 20 per cent of capacity and that the new price will be provided only to those operating at full capacity.

The decision brings natural gas prices back to their levels before the application of a government plan to cut energy subsidies in July 2014. Since then, the country’s steel factories have had to deal with a reduction in gas supplies and an increase in prices.

Due to shortages of gas over the past two years, the government has prioritised domestic energy supplies and rationed those to energy-intensive industries, particularly during periods of peak consumption. This has resulted in reduced steel production.

The energy cuts have proven damaging not only for the steel industry but also for the economy as a whole. According to a report by Capital Economics, a research group, Egypt’s total manufacturing output was reduced by 30 per cent in the period from June 2014 to June 2015 due to gas shortages and foreign exchange problems.

The two challenges led the overall economy to slow down from 4.3 per cent growth in 2014 to 2.4 per cent in 2015.

This month’s decision was carefully studied by the ministry before being approved by the government’s economics ministerial group, according to Kabil. The reduction in gas prices will be applied for a year, during which prices will be revised every three months.

At a press conference, the minister admitted that the government’s revenues from selling natural gas to steel factories would be cut by LE1.2 billion as a result of the move, but the decision will have advantages, he said.

It is expected to help the factories to operate at full capacity and increase steel exports by $600 million, in addition to adding $170 million to government coffers in the form of taxes.

It will also save billions of dollars annually in imported raw materials, according to Mohamed Sayed Hanafi, director of the Metallurgical Industries Chamber at the Federation of Egyptian Industries.

Hanafi said that before the hikes in natural gas prices in 2014, the steel factories had carried out chemical treatments on scrap-iron, allowing it to be reused as an input in manufacturing steel.

However, these treatments require large supplies of gas and had become very expensive after the hikes in gas prices in July 2014, he said. The result was that the factories stopped the operation and instead imported the raw materials needed for the steel sector at a cost of $2.2 billion annually.

“Total Egyptian imports of steel in 2015 were estimated at $500 million from Turkey, Ukraine and China,” Hanafi said.

The recent dollar crunch has also made securing money for these imports impossible, and Hanafi praised the government decision for its many positive results. 

“It will help factories to stop importing raw materials and save Egypt’s foreign currency reserves,” he said. “It will also encourage factories to operate at full capacity and thus cover local consumption, reduce steel imports, and increase exports to foreign markets.”

Hanafi said the step was a good one, as steel prices are expected to go down in local markets over the coming few months. “Even after reducing the gas prices, the government will still have a good profit margin in selling natural gas to steel factories since it imports gas at $3 to $3.5 per million thermal units,” Hanafi added.

However, the decision has not been welcomed by some owners of small- and medium-sized steel factories. Hanafi said they argue that the new pricing system will benefit the largest three or four steel firms, which use 85 per cent of the natural gas provided to the local steel industry.

He said that small- and medium-sized steel factories have complained that production costs are lower for large factories that produce huge quantities than for medium-scale firms. “This is true, but there is nothing that can be done about it,” Hanafi said.

The decision was also not welcomed by some experts. Mohamed Shoeib, a former chairman of the Egyptian Natural Gas Holding Company, said the decision needed to be more carefully studied before being issued.

“It would have been better if the government had set out a strategy to regulate energy prices for the whole industrial sector. The manufacturers of other products have the right to complain and request that they be treated like the steel factories,” Shoeib said.

The new price structure is a burden on the government budget, according to Shoeib, as it means it will have to provide foreign currency to import natural gas in addition to paying the difference between the price of imports and the new sale price.

“It is not true that the government is making a profit on selling gas at $4.50 per million thermal units,” he said.

“I believe that as long as the government is importing natural gas, prices should be liberalised and decided according to supply and demand. The government should get out of the game. Traders can import natural gas and sell it to factories at the market price. Since the final price of products is left to supply and demand to decide, energy prices should also be determined according to the same rule,” Shoeib said.

Egypt’s falling oil and gas production, coupled with rising consumption, have switched the country from being an energy exporter to a net energy importer in recent years.

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