Mixed reactions to new energy pricing strategy

Reem Nafie
4 Min Read

CAIRO: Key industry players and analysts had mixed reactions to the Ministry of Trade’s plans to reduce energy subsidies by gradually increasing the price of natural gas and electricity over the next three years.

Since Minister of Trade Rachid Mohamed Rachid’s August 14 announcement, speculations have been rife that El-Ezz Holding – owned by steel tycoon and Member of Parliament Ahmed Ezz – will be most affected by the new pricing scheme. Estimates indicated that the largest independent steel producer would lose around LE 1 billion in profits over the three-year transition period.

Under the new system, the price of natural gas for industry will increase gradually over the next three years, from $1.25 to $2.65 per BTU, with an average rise of 7.5 piasters per cubic meter. The price of electricity will also go from 18.3 to 29.5 piasters per kilowatt for medium power consumers.

The new pricing mechanism will be applied to 40 companies operating in industries that consume large volumes of energy – more than 66 million cubic meters of natural gas per year and more than 50 kilowatts per hour.

According to reports in Al-Masry Al-Youm newspaper, 10 of these 40 companies account for 25 percent of the industry’s total electricity consumption. El-Ezz El-Dekheila Steel Alexandria, El-Ezz Flat Steel and El-Ezz Steel Rebars – all subsidiaries of El-Ezz Holding – as well as Egyptian-American Steel Rolling Company (Beshay) are among the 10 companies.

“The increase in energy prices is reasonable, as long as the ministry revises the export duty on steel to compensate for the increase in costs, a source at El-Ezz Holding told Daily News Egypt.

Rachid had announced that the export duty on cement will be raised to LE 85 per ton in an effort to stabilize local market prices, while a decrease in the export duty on steel will be studied.

Over the next three years, prices will gradually increase until they reach cost recovery. The result will be an energy price free of any subsidies, minimizing the fiscal burden on the government.

“Three years is definitely not enough time for companies to adjust their spending budgets and apply new payment systems. A gradual rise in costs over five years seems more reasonable, Medhat Selim, an associate at HC Securities and Investment said. New entrants in this field will suffer the most, since it takes a minimum of two years for a company to make a profit in the cement business.

At the same time, Selim said that in the long run, when the government is free of this cost burden, the surplus will be allocated to training personnel in the industry, which is something that needs attention.

It is unclear whether the increase in costs will lead to a surge in the price of the product itself. According to El-Ezz Holding, energy costs constitute only between three to four percent of the total cost of the product, which may not greatly affect the selling price.

However, Selim said it is unlikely that companies will not raise their prices to compensate for their costs, even if it is a small margin.

Rachid promised that consumers will not be affected by the increased prices in any way.

The new mechanism, which has been developed in coordination with the Ministries of Petroleum, Electricity and Energy will be implemented once it has been approved by Egypt’s Supreme Energy Council. The companies subject to the new pricing strategy will then be announced by the Ministry of Trade.

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