Natural gas price increases: The ripple effect

Safeya Mounir , Thursday 4 Nov 2021

Increases in the price of natural gas will impact Egypt’s industries to varying degrees.

Gas: The ripple effect
Gas: The ripple effect

The government has raised the price of natural gas for the industrial sector by 28 per cent effective 1 November, putting manufacturers before yet another challenge to their businesses.

The decision will result in an increase in the final cost of products in which natural gas is used.

The price of natural gas now stands at $5.75 per million British thermal units (MMBtu) for the industries that heavily consume gas like steel, petrochemicals and fertilisers, and $4.75 per MMBtu for other sectors.  

The government’s decision brings to an end the support it provided to the industrial sector with the spread of the coronavirus pandemic when it had set the price of natural gas at $4.5 per MMBtu in an attempt to increase exports.

Global gas prices have been increasing this year amid the rising demand and a shortage in supply. Gas prices in Europe, including in the UK, reached record highs in the past months, while the New York Mercantile Exchange (Nymex) future contracts have doubled, reaching their highest levels since late 2008.

Ahmed Khalifa, deputy chairman of Evergrow, a leading company in the production of potassium fertilisers in the Middle East, said that the majority of the company’s production will see price increases ranging from $6 to $10 due to the decision.

Gas price hikes will also add more chips on the shoulders of companies that want to venture into new foreign markets, Khalifa said, explaining that freight costs have also doubled. This will directly result in a drastic drop in the profits of exporters who had signed contracts with the importing parties before the increase in shipping and gas costs.

Khalifa noted that electricity prices may also increase, which means that production cost will hike further.

Khaled Abul-Makarem, chairman of the Chemical Industries Export Council, said that petrochemicals and fertilisers are among the most affected sectors by natural gas price rises. Gas is a main component in some fertilisers, essentially making up to 80 per cent of the product. The scarcity of natural gas globally will increase demand on Egyptian products, but since exporters had already signed contracts based on cheaper prices, they will either have to cancel the old contracts, and hence lose their customers, or export their products and shoulder the losses, he added.

The margin of losses depends on how much gas is used in the manufacturing of the product, Abul-Makarem said, pointing out that it is a right decision at the wrong time. The increase in the price of natural gas should have happened later to factor it in the exporters’ contracts.

Some countries have the leverage to compete against Egyptian products, he stated. Petroleum-producing Arab countries can provide natural gas at cheaper prices, therefore their products will cost less than Egyptians’, especially in the petrochemicals field. Moroccan fertilisers can also compete with Egypt’s, he added.

A number of companies in the building materials sector that are listed on the Egyptian Stock Exchange reported the effect of natural gas price rise on several industries.  

Alexandria’s Ezz Dekheila Steel said that natural gas is one of the main elements in the production of iron as a raw material. Its price increase will indeed affect the cost of manufacturing, the company said, adding that it is flexible enough to change the amount of raw materials used in the production process.

The South Valley Cement Company expects the cost of production to rise from between 30 per cent to 50 per cent as a result of the recent increase in gas prices, while Qena’s Misr Cement Company said it relies on coal as the main source of energy.

Mohamed Hanafi, head of the Metal Industries Chamber at the Federation of Egyptian Industries, anticipates the heaviest toll will fall on glass, fertilisers, and petrochemicals.  

Hanafi stressed that the effect of the increase in the price of natural gas on metal industries will be limited and that factory owners can cope with the increase without raising the price of the final product.

The bigger problem, however, will be the effect of the rising price of natural gas on power stations.

Tamer Abu Bakr, head of the Energy Committee at the federation, said that the industries that heavily use natural gas will raise their prices, but their products will remain cheaper than those imported because gas prices increased abroad at higher rates than in Egypt.

Industries with heavy gas consumption will raise the price of the final product by between 15 per cent and 20 per cent, whereas the sectors that use natural gas only as a source of energy will increase their prices by five per cent or 10 per cent, Abu Bakr noted.

*A version of this article appears in print in the 4 November, 2021 edition of Al-Ahram Weekly

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