Sunday,19 August, 2018
Current issue | Issue 1205, (10 - 16 July 2014)
Sunday,19 August, 2018
Issue 1205, (10 - 16 July 2014)

Ahram Weekly

Higher costs, higher price tags

Slashing subsidies on natural gas for industry is bound to result in higher prices, writes Hayat Hussein

Al-Ahram Weekly

As part of a broad government strategy to cut fuel subsidies that account for around a quarter of state spending, Egypt slashed subsidies on natural gas supplies to several industries this week, increasing prices by 30 to 75 per cent. The price of natural gas increased from $4 to $7 per one million British thermal units (mbtu) for the metallurgical industries, for example.

According to Mohamed Hanafi, Head of the Chamber of Metallurgical Industries (CMI), the new price hike will mean an added cost of LE50 per ton for rolling mills and LE200 per ton for direct-reduced iron (DRI), also called sponge iron, “let alone the additional cost of LE80 per ton as a result of the hikes in electricity as well,” he said.

There are currently 20 factories producing rolling mill iron and four more will start production by the end of the year.

There are three DRI plants.

According to Hanafi, these factories were having trouble staying afloat even before the energy price hikes. Existing capacity may be enough to produce up to 10 million tons of all kinds of steel, but the factories in fact only produce 6.5 million tons.

“The weakness of the local market and competition from cheaper imported steel is already straining profits,” he said, adding that the domestic industry faced competition from Turkish and Chinese producers.

Hanafi understood the need to increase the price of energy, but he said the government had broken its promise to implement increases gradually over four years.

Other industries will also be affected. Natural gas delivered to cement factories will increase by 33.3 per cent from $6/mbtu to $8/mbtu. According to a report released this week by Prime Research, a research firm, the increase will have a significant effect on cement producers in terms of higher costs and consequent profit margins.

Mazut delivered to cement factories will also rise in price by 50 per cent from LE1,500/ton to LE2,250/ton.

The Prime Research report said that before the implementation of the subsidy phase-out, energy costs had constituted around 40 per cent of the cost of cement per ton. With the increase in gas prices, costs per ton are expected to increase costs by 10-15 per cent, it said.

However, Hanafi said that the cement companies were not too worried since they could switch to the cheaper alternative of coal. The Prime report said that “producers ready or almost ready to use coal will enjoy a cost advantage once coal production commences compared to sole natural gas production.”

As for the petrochemical and fertiliser industries, natural gas will be delivered to them at an increase of $0.5 to $4.5. The increases, said Prime, are expected to increase the production cost of urea, necessary for fertilisers, by around $37.5/ton, and this will be reflected in prices.  

Producers, including state-owned plants, have announced that they will have to increase their prices of fertilisers.

Natural gas accounts for 60 per cent of the production costs of the fertiliser industry.

The list of the industries affected goes on. Though they may not all be directly affected, price increases are bound to happen, be they in the telecommunications, real estate or food industries.

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