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Wednesday, 02 December 2020

Egypt: Cheaper energy for industry

Falling oil and natural gas prices worldwide due to the spread of the coronavirus have pushed down local prices for industry

Ahmed Kotb , Friday 27 Mar 2020
Cheaper energy for industry
Cheaper energy for industry
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The government adopted a package of measures last week to support local industry and deal with the economic consequences of the Covid-19 outbreak.

Among these was the reduction of natural gas prices for industry from $6 and $5.5 to $4.5 per million British thermal units (MBTU).

Manufacturers had been calling on the government to reduce gas prices for energy-intensive factories to $3 per MBTU to help alleviate their woes.

Prior to last week’s reductions, natural gas was being sold to cement factories, which suffer from heavy losses, at a price of $6 per MBTU, and at a price of $5.5 to steel, aluminum, copper and ceramics factories, which also suffer from financial problems due to losses.

These prices have been in effect since September 2019.

The prices are determined by the Energy Pricing Committee of the cabinet, which works to review energy prices submitted to factories periodically every six months based on the situation of the industries and global gas prices.

Alia Al-Mahdi, a professor of economics and head of the Egyptian Iron and Steel Association, believes last week’s reduction of gas prices is a good step, but it is not enough.

“Natural gas for local industry should be priced at a maximum of $2.5 per MBTU,” she said, adding that the average global and regional price of natural gas provided for industry was about $2.

Gas prices should be close to international and regional levels to encourage local manufacturers to increase production and alleviate their financial problems, Al-Mahdi said.

If natural gas prices are lowered to that level, the result would be evident in reducing production expenses, increasing production volume, and alleviating losses. “Energy-intensive industries like steel, for example, are suffering great losses,” she pointed out.

Reducing these losses to reach a break-even point was necessary, Al-Mahdi explained, and if there were profits, taxes could then be collected to benefit the economy.

Local steel factories were working at only about 55 per cent of their production capacities, she said, but this already covered local needs.

“We have a large local market for steel, with production at about 7.5 million tons per year and consumption at around 6.5 million tons,” she said, adding that Egypt’s production capacity was estimated to be around 14 million tons.

When production expenses are lowered, by reduced gas prices for instance, factories can then start producing more and the excess can go for export, she said.

“We can even win new markets after the current disruption in international markets as a result of the coronavirus pandemic,” Al-Mahdi said. “But we have to extend greater help to local manufacturers.”

“The high price of gas affects production costs, thus raising the prices of Egyptian exports in foreign markets compared to their counterparts abroad,” said Mohamed Hanafi, director of the Chamber of Metallurgical Industries at the Federation of Egyptian Industries.

He said that domestic industry needed support, taking into consideration the problems it faces. The price of natural gas was the first and most important problem in all energy-intensive industries, according to Hanafi.

He pointed out that his chamber had repeatedly called on the Energy Pricing Committee to reconsider gas and electricity prices for factories and reduce the price of gas to $3, especially since many countries were already making gas available at lower rates such as Saudi Arabia and the United Arab Emirates.

Global oil and gas prices are falling fast, driven by the Covid-19 pandemic slowing down demand and a price war between oil producers.

Brent crude oil had gone down from about $65 per barrel before the crisis to below $30. European natural gas prices have reached $1.9 per MBTU due to the pandemic and a decline in liquefied natural gas (LNG) imports, whereas the average price in 2019 was about $2.57 per MBTU, down from $3.15 dollars in the last four years.

“Egypt currently has a chance to increase its exports and to replace the goods of countries that are experiencing a crisis as a result of the outbreak of the coronavirus, especially the African countries,” Hanafi said.

Among the expected results of reducing gas prices for industries, according to Hanafi, would be an increase in production capacity as factories have been operating at relatively low levels in order to maintain specific costs.

If gas were reduced to $3 or $3.5 per MBTU for ceramics and steel factories, for example, their production could increase from 50 to 70 per cent.

According to EFG Hermes Holding, Egypt’s supply of natural gas is currently abundant, and the prices for export are not attractive, making the decision to reduce gas prices locally logical.

Reducing energy prices for industrial use in Egypt is an important step in revitalising this sector to help sustain economic growth rates.

Egypt’s natural gas production exceeds seven billion cubic feet per day, and its domestic consumption is between 6.2 and 6.4 billion cubic feet per day.

*A version of this article appears in print in the  26 March, 2020 edition of Al-Ahram Weekly

 

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