Proceedings of Paris Economics, Finance and Business Conference
13 - 15 April 2015, Crowne Plaza Hotel Republique, Paris, France, ISBN: 978-1-922069-73-3
Energy Prices and the Competitiveness of Energy Intensive
Industries in Egypt
Noha Elboghdadly1, El Sayeda Ibrahim2 and Ramadan Maklad3
Egypt has been facing a number of challenges concerning supplying affordable
energy needed for sustainable development. One of the main challenges is the
energy subsidy system. As a result, the Egyptian government has started a plan to
phase out those energy subsidies at the end of 2007. The first steps were directed
towards energy intensive industries through a gradual increase in natural gas and
electricity prices. Five energy intensive industries namely; aluminium, cement,
ceramic, iron &steel and fertilizer industries are selected to be studied in this
research.
The research follows a "Before and After" approach to first study the impact of
higher natural gas and electricity prices on the competitiveness of the selected
energy intensive industries during the period (2007-2013). Higher energy prices has
its largest effect on raising the cost of producing nitrogen fertilizer (urea) industry by
84%, while the smallest increase in costs has been shown in ceramic industry by
13%.
The research then investigates the estimated impact of two expected scenarios;
importing natural gas and importing coal, on the selected energy intensive
industries. The study found out that the selected industries are expected to
experience a large increase in their cost of production when importing natural gas,
while a decrease in their production costs when importing coal. However, after
internalization of social costs of both natural gas and coal in cement industry, as a
case study, the study found out that the highest energy cost and the lowest profit is
expected to be when importing coal.
Keywords: Energy subsidy, Energy Intensive Industries, Natural gas, social
costs, Egypt.
1. Introduction:
Energy subsidies in Egypt have recently become one of the most debatable issues for
being inefficient and for its heavy burden on the public budget. They capture the largest
share of total subsidies in Egypt. In the fiscal year 2012/13, the share of energy subsidies
was 70% of total subsidies and around 20% of total government expenditure in Egypt,
(MOF, 2014)
Energy intensive industries capture a large share of energy subsidies for being the largest
energy consumers in the industrial sector. The following two figures show the share of the
natural gas and electricity subsidies allocated to five energy intensive industries in Egypt in
2006/2007. The amount of natural gas subsidy given to these industries was about L.E 3.4
billion at that year, which was around 51% of total natural gas subsidy. While the amount
of electricity subsidy allocated to energy intensive industries was around L.E1.1 billion that
represents 36 % of total electricity subsidy at that year.
1
Teaching assistant of Economics, Department of Economics. Alexandria University, Egypt.
noha.nagy@alexu.edu.eg
2
Professor of Economics, Department of Economics. Alexandria University, Egypt.
elsamoustafa@yahoo.com
3
Associate Professor of Economics, Department of Economics. Alexandria University, Egypt.
ramadanmaklad@yahoo.com
Proceedings of Paris Economics, Finance and Business Conference
13 - 15 April 2015, Crowne Plaza Hotel Republique, Paris, France, ISBN: 978-1-922069-73-3
Figure (1): Allocation of natural gas
Subsidy in 2006/07
Figure (2): Allocation of electricity
subsidy in 2006/07
Cement
10 %
Fertilizer
28 %
Others
49%
Cement
13.7 %
Ceramic
1%
Iron &
steel 8
%
Others
64 %
Iron
&Steel
12%
Aluminm
10 % Fertilizers
3 %
Ceramic
1.3 %
Source: Calculate by the author based on data from (Egyptera, 2011/12, CAPMAS, 2013).
Due to both its inefficiency and its huge strain on the budget, the government recently has
started to phase out energy subsidies. As a result, the government has taken steps toward
eliminating energy subsidies as an unsustainable policy tool of energy pricing.
The government issued some decrees since 2008 to gradually remove energy subsidies to
those industries. These steps have been questioned with fears concerning the competitive
position of energy intensive industries after raising energy prices. This study concentrates
only on both natural gas and electricity subsidies; however those industries still benefit
from subsidies on other petroleum products like mazut and indirect subsidy of gasoline
used in transportation.
2. Literature Review:
There are many studies that show the effect of an increase in energy prices on the cost of
production and the competitiveness of industries. Most of the studies focus on the energy
intensive industries as energy accounts for large proportion of their cost of production.
Some of these studies deal with increase in energy prices in developing and emerging
countries, mainly as a result of eliminating or reforming energy subsidies. Other studies
focus on developed countries that experienced energy price increases; either due to
increase in the global energy prices or as a consequence of environmental regulations and
the EU Emissions Trading Scheme (EU ETS).
In the following part we will present some of these studies that give insight into the
relationship between energy cost and the competitiveness of industries.
2.1.
Competitiveness Impact of Energy Price Increase in Developing Countries:
A study by (Hope and Singh, 1995) examined the experience of six developing countries1
that have implemented domestic energy price reform during the 1980s. The study
investigated the effect of energy price increase on inflation, growth, public revenue and
industrial competitiveness. With respect to the effect on industrial competitiveness, energy
cost shares and industrial output changes were presented. In Ghana, most industries
showed an expansion of output during the period of energy price increase except for
diamond and iron rods which accounted for the highest energy cost share. The increase in
energy prices might have been absorbed through reduction in profit margin. In Zimbabwe
the decline in the output of metals (mainly steel) was significant, and the competitive
nature of the international metal market limited the possibility for passing through increase
in costs to final consumers.
Proceedings of Paris Economics, Finance and Business Conference
13 - 15 April 2015, Crowne Plaza Hotel Republique, Paris, France, ISBN: 978-1-922069-73-3
A simulation made by (Saunders and Schneider, 2000) assumes that subsides on coal,
natural gas and petroleum products are removed progressively in some developing and
transition economies over the period from 2001 to 2005 and the impacts are projected to
2010. The simulation in that study is based on the application of ABARES'2 Global Trade
and Environmental Model (GTEM)3. They examined the effect of removing energy
subsidies on 17 regions and 15 industries. The commodity aggregation has been chosen
to include three fossil fuel petroleum products and major energy intensive products. GTEM
requires a reference case which represents the likely outlook of 2010 in absence of any
policy to reduce or remove energy consumption subsidies. The results of the simulation
showed that there are significant declines in energy intensive output at 2010 relative to the
reference case. These declines occurred because the increase in the price of energy
inputs that increase the production costs of these industries and reduce their
competitiveness. Similarly, in assessing the impact of raising energy cost by 100%, a
study by the (ESCWA, 2005b) found out that this could have a large impact on the
competitiveness of some industries in selected Arab countries. The study measures the
loss of competitiveness by the decrease in production and exports of these industries. The
study found that the loss of price competitiveness associated with the higher production
costs could generate a 5-15 % loss in exports. The most significant loss in exports was
found in cement industry in Jordan by 60% followed by Lebanese food & beverage
industry by 25%. Also the Egyptian raw cotton exports could fall by 14% as result of raising
energy costs.
In Egypt, (Khattab, 2007) investigated in his paper the potential impact of reducing energy
subsidies in Egypt on the profitability of energy-intensive industries. A partial equilibrium
approach was applied to assess such policy. Results about profitability ratios under
various subsidy reduction scenarios indicated that energy-intensive industries would not
be severely affected. On average profitability ratios were relatively high; the highest profit
ratios appeared in the cement industry where for some companies profit ratios exceeded
40%, while the lowest ratios appeared in the steel industry. As a conclusion, the study
argued that subsidy reduction would not severely affect the profitability of energy-intensive
industries. However, a gradual approach would be advisable if the government was to
consider a complete elimination of energy subsidies. This will give the energy-intensive
sector time to adjust to free market pricing of energy products. This results came to assert
the studies made by (IDSC, 2004, IDSC, 2005b); where the first study concluded that
removing subsidy of natural gas and electricity, which raise the cost of producing
fertilizers by 27%, wouldn’t affect the competitiveness of this industry negatively since it
enjoys high profit margins. Also the second study revealed that raising the prices of natural
gas and mazut could raise the cost of producing cement by 33.6%. However, the nature of
oligopoly in the cement industry in Egypt enables the producers to pass the increase in the
cost to the consumers, as result their profit margin wouldn't affect dramatically.
2.2.
Competitiveness impact of energy price increase in developed
countries:
To have a closer look at the developed countries, they experienced energy price increase
at different period of time due to the increase in the global energy prices. Furthermore, the
effect of environmental regulations that was imposed on these countries also leads to an
increase in industrial energy prices.
Proceedings of Paris Economics, Finance and Business Conference
13 - 15 April 2015, Crowne Plaza Hotel Republique, Paris, France, ISBN: 978-1-922069-73-3
The global energy prices showed an increase during the period (2000-2006) mainly natural
gas, fuel oil and LPG due to the surge in the demand for energy especially from US and
Asian countries. The European Commission (EC) was concerned about the impact of
increased energy prices on the competitiveness of energy-intensive industries. As a result,
a study was presented by ICF International (2007) to The European Commission to
investigate the impact of the increase in global fuel prices on the EU energy sector as well
as on those manufacturing sectors that are high energy users. Using the information on
the share of each energy product in the industry’s total fuel use and the percent increase
in the price of each energy product, they found that the energy costs of the EU iron and
steel industry increased by 73% from (2000-2006), while the energy costs of the US
industry increased by 75% over the same period. This increase in the energy costs lead to
an increase of 15% in the total manufacturing costs of the EU industry and an 11%
increase in the total manufacturing costs of the US industry.
The energy costs of the EU and the US primary aluminium producers increased by 55%
and 52%, respectively. This increase in the energy costs lead to an increase of 20 % in the
total manufacturing costs of the EU industry and a 17 to 18% increase in the total
manufacturing costs of the US industry. Energy costs of the EU and the US producers
increased by 56% and 25%, respectively in the paper and pulp industry. As a result, total
manufacturing costs of the EU pulp and paper industry increased by close to 11% in the
2000-2006 period, while the US industry’s total manufacturing costs increased by slightly
over 4%. Despite raising energy costs, the EU-25 position in external trade has improved
since 2000, with Europe currently having comparative advantage in the pulp and paper
production. The total energy costs of the EU producers increased by about 91% while the
energy costs of the US producers increased by 47% in the glass industry where both the
EU & US position in external trade has deteriorated over these five years.
Recently, many studies link the increase in energy prices and industrial competitiveness
through the environmental regulations.
More than three decades ago, the first Earth Day in 1970 marked the beginning of the
modern environmental movement. Since then, an increasing number of industrialized
countries have adopted environmental regulations measures on their energy and pollution
intensive industries. This has led many to suspect that environmental regulation may be
playing a major causal role in impairing the competitiveness of these firms. The
conventional wisdom is that environmental regulations impose significant costs, slow
productivity growth, and thereby hinder the ability of the firms to compete in international
markets. This loss of competitiveness is believed to be reflected in declining exports and
increasing imports, (Jaffe et al., 1995).
Concerns over the international competitiveness of industrial sectors, mainly the energy
intensive industries, have even increased after the launch of the European Union Emission
Trading Scheme (EU ETS)4 in 2005. Most of the literatures in the above context are
concerned with EU and U.S energy intensive industries. Many authors examined the
impacts of energy price changes resulting from different carbon-pricing policies on the
competitiveness of selected US energy-intensive industries. For example, (Morgenstern et
al., 2007) studied the impact of a $10 per ton CO2, which implies higher energy prices
(including electricity), on total production cost of energy intensive industries in U.S. The
most adverse effect was found in the petroleum sector followed by primary metals (e.g.
Proceedings of Paris Economics, Finance and Business Conference
13 - 15 April 2015, Crowne Plaza Hotel Republique, Paris, France, ISBN: 978-1-922069-73-3
iron & steel and aluminium), paper and printing and non- metallic minerals (cement). With
pass through of cost increase into prices, the study shows that the above industries
experienced a loss of demand under 1% with exception of primary metal of 1.5% reduction
in demand. Similarly, (Aldy and Pizer, 2011) forecast the impact of carbon price of $15per
ton CO2 on the competitiveness of energy intensive industries. Their study based on
econometric analysis of historic relationship between electricity prices (as proxy for energy
prices) and employment, output and trade. They found out the competitiveness (which is
measured by production- consumption) of both industrial chemicals and papers decreased
by 0.9%, followed by iron & steel by 0.8% and aluminium and cement each by 0.7%.
Also some studies examined the impact of ETS on the competitiveness of industrial sector
in Europe. Both (Reinaud, 2005) and (McKinsey & Ecofy, 2006) studied the impact on iron
& steel, cement, paper& pulps, refineries and primary aluminium sectors. The two studies
showed that cement bear the largest increase in cost of production followed by refinery
sector. The effect of increase in electricity prices, as an indirect effect of ETS, has its
largest impact on cost of production of aluminium.
3. Methodology:
This research uses "Before and After approach" to show the effect of raising energy prices
since 2008 on the cost of production, prices and profit margins of five selected energy
intensive industries in Egypt ( Cement – Iron& steel – Nitrogen Fertilizers – Aluminium Ceramic) .
Assumption of the approach:
1- There is an increase only in the prices of natural gas and electricity.
2- The price of natural gas to the electricity sector is constant.
3- Change in the cost of production is due to change in energy cost only, other things
being equal.
4- No change in energy intensity of the selected industries, so they use the same
amount of energy to produce one unit of output.
5- Exchange rate used is the official exchange rate of each year based on the average
monthly exchange rate.
Steps of the approach:
For each of the selected industry, both natural gas and electricity cost per ton was
calculated before and after the laws of raising energy prices as follows:
1) Natural gas cost is calculated by multiplying average thermal energy
requirement by the natural gas prices.
MBTU/ton * L.E/ MBTU = Natural gas cost (L.E/ ton).............. (1)
2) Electricity cost per ton is calculated by multiplying average electricity
requirement per ton by the electricity prices.
KWH/ton * L.E/ KWH = Electricity cost (L.E/ ton).................. (2)
3)
Total energy cost (L.E/ton) = natural gas cost + electricity cost ...............(3)
4) Change in average cost of production is the original cost of production plus the
change in the energy cost
New average cost production (L.E/ton) = Original cost of production
(L.E/ton) change in energy cost (L.E/ton).......................................................... (4)
Proceedings of Paris Economics, Finance and Business Conference
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5) Gross profit margin is calculated in percentage with respect to the final product
prices per ton
Profit margin (%) = [{Domestic price (L.E/ton) – Average cost of production
(L.E/ton)} / Domestic price (L.E/ton)] *100....................... (5)
4.
Findings:
4.1. The effect of raising energy prices on the energy intensive industries in
Egypt:
Phasing out energy subsidies has the largest impact on the cost of production of nitrogen
fertilizers (Urea) as shown in the two figures below (3, 4). Raising both natural gas and
electricity prices during period (2007-2013) led to an increase in energy cost by L.E 443 /
ton. This has raised the cost of producing one ton of urea by 84%
Raising natural gas prices gradually by 380%, from $1.25/MBTU to $6/MBTU, leads to
raising the cost of producing one ton of cement by 55.6% during the period (2007-2013).
While raising electricity prices by 124%, from L.E 0.134 /KWH to L.E 0.3 /KWH, leads to
raising the production cost by only 9%.
Iron and steel follows, where raising natural gas prices gradually by 220%, from $1.25/
MBTU to $4/MBTU, leads to an increase in the cost of production by 12% during the
period (2007 – 2013). On the other hand, raising electricity prices by 124%, from L.E0.134/
KWH to L.E0.3/ KWH, has the effect of raising the cost of production by 6.6%. Therefore,
the total effect will be an increase in cost of producing one ton of steel by 18%.
Aluminium uses only electricity, so the increase in cost of production is due to the increase
in electricity prices only. Raising electricity prices by 124%, from L.E0.134/ KWH to L.E0.3/
KWH, has raised the electricity cost by L.E 2407/ton during (2007-2013). As a result, the
production cost has been increased by 29%.
The least effect was seen in ceramic industry; where raising natural gas prices by 76%,
from $1.25 to $2.2 /MBTU, has raised production cost by 8.6%. On the other hand, raising
electricity prices by 113%, from L.E0.134 to L.E 0.286/ KWH, have raised the production
cost by only 4.5%. As result, the production cost has been increased by around 13%
during (2007-2013).
Proceedings of Paris Economics, Finance and Business Conference
13 - 15 April 2015, Crowne Plaza Hotel Republique, Paris, France, ISBN: 978-1-922069-73-3
Figure (3): The effect of raising natural gas prices on the production cost of energy
intensive industries in Egypt
90%
Natural Gas Cost Effect
82%
80%
70%
55.6%
60%
50%
40%
30%
20%
11.7%
8.6%
Steel
Ceramic
10%
0%
N.Fertilizers
Cement
Source: Prepared by the author based on table (1) in the appendix.
Figure (4): The effect of raising electricity prices on the production cost of energy
intensive industries in Egypt
Electricty Cost Effect
35%
30%
29%
25%
20%
15%
9%
10%
6.6%
5%
4.5%
2%
0%
Aluminum
Cement
Steel
Ceramic
N.Fertilizers
Source: Prepared by the author based on table (1) in the appendix.
Comparing the increase in the cost of production of the selected industries with the
increase in their prices during the same period, figure (5) shows that in most cases prices
increase more than energy cost increase.
As mentioned above, fertilizers had the largest increase in the production cost, while
prices have been increased by only 26%. As a result, profit margin has been reduced to be
31% during the same period. Increasing energy prices would adversely affect producers
who are directing all their production to the domestic market, such as Abu Qir Company.
However, free zone companies that are allowed to export are still having large profit
margin since the export prices are far above the domestic ones.
Proceedings of Paris Economics, Finance and Business Conference
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On the other hand, both cement and steel experienced high prices which are far above
increase in energy costs. Cement prices have increased by 36% more than the energy
cost increase, while for steel, the average price of the product has risen by 23% more than
the increase in energy costs. As a result, profit margin has increased for cement and steel
by 10% and 8%, respectively. If cement producers passed all the increase in the energy
cost to the consumers, prices would be 22% less than actual price while keeping the same
profit margin in 2007. However, if cement producers borne all the increase in the energy
cost and prices remained at their level L.E 358/ton, their profit margin would drop to be
10%. Although the profit margin decreases significantly, this price is still making the
industry relatively more competitive. In a similar way, if the steel producers absorbed all
the increase in the energy cost and prices remained at their level L.E 3530/ton their profit
margin would decrease to 22%, however the price would be more competitive. Similarly
aluminium prices have been raised by around 40%; i.e. by 9% more than the increase in
the electricity cost. This has raised its profit by around 5% during the same period. Also
ceramic prices have been raised by 18.5% more than energy cost effect.
Figure (5): The change in energy intensive industries' cost of production and prices
in Egypt during the period (2007-2013)
120
Percentage
100
80
60
40
20
0
N.Fertilizers
Cement
Aluminum
Steel
Ceramic
Production cost
Actual prices
Source: Prepared by the author based on table (1) in the appendix.
4.2. The effect of expected scenarios on energy intensive industries:
The natural gas shortage in Egypt has its effect on the industrial sector and mainly the
energy intensive industries. As a result, a number of policy options should be considered
to take place in the energy sector in the near future to augment supply and satisfy the
increasing demand for energy. This would change the energy mix in Egypt.
Two of the expected scenarios are presented below: importing natural gas and importing
coal. These scenarios are compared to the reference (baseline) scenario of $6/MBTU that
is assumed to be currently paid by all the selected industries to show their effects on
energy intensive industries, assuming constant output prices and the exchange rate of
20135.
Proceedings of Paris Economics, Finance and Business Conference
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4.2.1. Scenario I: Importing natural gas:
The anticipated shortage of natural gas has encouraged the government to suggest that
industrial private companies to import their need of natural gas. According to the Egyptian
Electricity Holding Company (EEHC), the import price of natural gas ranges between $12
and $14 per MBTU based on 2012/13 prices, (EEHC, 2013).
Assumptions:
1) The import price is expected to be $12/ MBTU.
2) The price of electricity supply is assumed to be constant (not affected by the
increase in natural gas prices).
3) The change in the cost of production is assumed to arise from change in natural
gas price, other cost items being equal.
As shown below in figure (6), the fertilizer industry is expected to be the most affected
of the selected industries, where its cost increases by 69%. Cement and ceramic
industries are to experience an increase in the production cost by 41% and 32%,
respectively. The least effect is expected to be in the steel industry, where the cost of
producing one ton rises by only 19%.
Figure (6): The effect of importing natural gas scenario on the production cost of
energy intensive industries in Egypt.
80
Percentage %
70
60
50
40
30
20
10
0
N.Fertilizers
Cement
Ceramic
Iron &steel
Source: Prepared by the author based on data in table (2) in the appendix.
On the profitability side, doubling natural gas prices have the greatest negative effect on
the fertilizers industry that reduces its profit margin to (-50%). The second industry being
affected is cement, where profit margin drops to 37%, by around 33%. The extent of the
negative effect is smaller in both of the steel and ceramic industries, where their profit
margins are expected to decrease to 31% and 58.6%, respectively.
Proceedings of Paris Economics, Finance and Business Conference
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Figure (7): The effect of importing natural gas scenario on profit margin of energy
intensive industries in Egypt.
80
Percentage
60
40
20
0
-20
-40
-60
cement
Iron &steel
Baseline Scenario
N.Fertilizers
Ceramic
Imported NG scenario
Source: Prepared by the author based on table (2) in the appendix.
4.2.2. Scenario II: Importing coal:
According to the Egyptian Electricity Holding Company (EEHC), the import price of coal
ranges between $4 and $5 per MBTU , and this is considered cheaper than both domestic
natural gas price and import price of natural gas, (EEHC, 2013).
To analyse the effect of importing coal scenario on energy intensive industries, we will
focus only on cement, iron& steel and ceramic industries.
Assumptions:
1) The import price is expected to be $5/MBTU.
2) Costs don't include the cost of fuel switching, neither coal infrastructure nor
transportation costs.
3) The change in the cost of production is assumed to result from change in thermal
energy cost, other cost items being equal.
Comparing this scenario, the baseline scenario (domestic natural gas prices at
$6/MBTU), or the first scenario (imported natural gas price at $12 /MBTU), using coal is
cheaper, as source of energy, relative to natural gas. The table below shows that the
cost of production is the lowest for importing coal. Compared to the baseline scenario,
the cost of production of cement, ceramic and steel, in the first scenario will increase by
41%, 32%, 19%, respectively. However in the second scenario, the cost of production
will decrease by 7%, 6% and 3%, respectively. If the producers reduced their product
prices by the same decrease of the production cost in the importing coal scenario, the
product prices would be relatively competitive compared to the other two scenarios.
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Table (1): The comparison of the production cost of selected energy intensive
industries in the three scenarios
Values: L.E/ton
Baseline
Imported NG Percentage
Imported coal Percentage
(reference)
Scenario
change in
Scenario
change in
Scenario
production
production
cost (1)
cost
(2)
Cement
323
455
41%
301
-7%
Steel
2948
3501
19%
2856
-3%
Ceramic 6
15.7
20.7
32%
14.7
-6%
Source: Prepared by the researcher.
(1) and (2) are calculated with respect to the baseline scenario
On the profitability side, the imported coal scenario shows the highest profit margin for the
three industries, while the imported natural gas scenario shows the lowest profits as
shown below.
Figure (8): The profit margin of selected energy intensive industries under the three
scenarios.
80
70
60
50
40
30
20
10
0
Baseline
Scenario
Imported Imported
NG
Coal
Scenario Scenario
Cement
Baseline
Scenario
Imported Imported
NG
Coal
Scenario Scenario
Steel
Baseline
Scenario
Imported Imported
NG
Coal
Scenario Scenario
Ceramic
Source: Prepared by the researcher based on table (1) and table (2) in the appendix.
4.3. The effect of including social costs on energy intensive
industries (Case study: cement industry):
The expected scenario of importing coal and using it in Egypt's energy has raised many
fears concerning its environmental impacts and social costs7.
A study by the World Bank (WB, 2002) points out that the damage cost of environmental
degradation8 in Egypt in 1999 was estimated at L.E10-19 billion per year, or 3.2-6.4 % of
GDP, with a mean estimate of L.E14.5 billion or 4.8% of GDP. In 2011, the environmental
Proceedings of Paris Economics, Finance and Business Conference
13 - 15 April 2015, Crowne Plaza Hotel Republique, Paris, France, ISBN: 978-1-922069-73-3
costs of CO2 emissions reached L.E899 billion that accounted for 6.4%10 of GDP,
(CAPMAS, 2014);WB database).
Table (2): Social costs of natural gas Vs coal used in cement industry in Egypt
Social cost items
Coal
Natural gas
Health and Environment ($/MBTU)
9.6
0.3
Carbon emissions ($/MBTU)
8.1
4.7
Total ($/MBTU)
17.7
5.1
Source: (Mowafy, 2014).
The above costs are to be added to the market price of either natural gas or coal to reflect
the true cost of using it. As shown in the figure (9) below, the price of coal after adding the
social costs is $22.7 /MBTU compared to its import price of $5/MBTU only. On the other
hand, even though the market price of natural gas in either the baseline scenario or the
imported scenario is relatively higher than coal, its price becomes lower after adding the
social costs in both scenarios.
Figure (9): Total costs of coal and natural gas in cement industry in Egypt.
25
$ / MBTU
20
15
10
5
0
Baseline Scenario
Imported NG Scenario
Imported Coal Scenario
Market prices
Health & Environment costs
Carbon emissions costs
Source: Prepared by the author based on data from (Mowafy, 2014).
Based on the above estimates of social costs, the author re-estimates the effect of using
either natural gas or coal by adding their social costs on the profitability of cement industry.
The following figure shows that cement industry achieve the highest profit margin and the
lowest energy cost by using coal than natural gas. However, taking social costs into
consideration, coal leads to the highest energy cost and the lowest profit margin compared
to natural gas either at domestic price or imported one. Therefore, from financial point of
view, coal is considered the cheapest source of energy to be used by energy intensive
industries. However, taking into consideration the economic or social costs, we found that
coal would be the most expensive source of energy as applied on cement industry
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Figure (10): The effect of different energy scenarios on cement industry in Egypt
600
60
47
400
L.E /ton
58
55
50
39
40
300
30
21
200
20
100
4
0
10
0
Baseline
Scenario
Baseline
Imported NG
Scenario with
Scenario
Social Costs
Energy cost
Imported NG Importes Coal Imported Coal
with Social
Scenario
with Social
Costs
Costs
Profit margin
Source: Prepared by the author based on table (3) in the appendix.
5. Summary and Conclusions:

One of the main critiques of the energy sector in Egypt is its high level of subsidies.
As a result, the Egyptian government has started a plan to phase out energy
subsidies gradually. According to the ministerial decrees issued by the government,
natural gas prices have increased from $1.25/MBTU to $4/MBTU for steel and
fertilizer industries, and to $6/MBTU for cement industry. Also electricity prices have
increased from L.E0.134 /KWH to L.E0.3 /KWH. These decrees don’t have a
significant effect on the selected industries cost of production and their profit
margins. Generally, the findings of the study came in consistence with finding of
other previous studies, (IDSC, 2005b, Khattab, 2007); that raising energy prices
(mainly natural gas and electricity) can be absorbed by most of the energy intensive
industries in Egypt without raising the prices of their products by the same
percentage increase. High profit margins of these industries enable them to tolerate
more increase in energy prices.

Raising energy prices has relatively large impact on the fertilizer industry, mainly
due to the fact that natural gas constitutes large proportion of its cost of production
(30 % - 40%). Nitrogen fertilizers' domestic prices are far below the international
prices, which conserve their competitive position. However, high natural gas prices
might harm the domestic companies that direct all their production to satisfy the
domestic demand. These companies are restricted in setting their prices by limits
imposed by the agriculture development bank in Egypt, (IDSC, 2004). However,
free zone companies, that export most of their production, are able to tolerate the
increase in natural gas prices due to the gap between both local and international
prices, and therefore can keep reasonable profit margin.

Most of the energy intensive industries in Egypt are having an oligopoly market; the
fact that allow to raise their product prices more than the increase in energy inputs,
to keep high profit margins. The main two industries that have witnessed large
Percentage %
500
70
Proceedings of Paris Economics, Finance and Business Conference
13 - 15 April 2015, Crowne Plaza Hotel Republique, Paris, France, ISBN: 978-1-922069-73-3
increase in their prices during the period (2007-2013) were cement and steel
industries. Higher cement, steel and ceramic prices will trigger higher costs for the
construction sector that could affect the household negatively.

The high carbon emissions associated with using coal will reduce the Egyptian
national competitiveness, where the significant health impacts of using coal would
affect the productivity of labour that affect nations' competitiveness. Also using coal
will affect export opportunities negatively, where the world is currently in a trend of
using carbon footprint as a measure for evaluating goods and services. Comparing
natural gas and coal, as sources of energy, should not be done from financial
perspective only; as this would lead to irrational decisions concerning the energy
future map in Egypt. Ignoring the social costs of using fossil fuels will accelerate
their depletion and distort decisions to invest in renewable energy.
End-notes:
1
Malaysia- Indonesia – Ghana – Zimbabwe - Colombia and Turkey.
2
ABARES stands for Australian Bureau of Agricultural and Resource Economics and
Sciences.
3
GTEM is a multiregional, multisector, dynamic general equilibrium model of the world
economy developed to address global change policy issues.
4
One of the important elements of the EU climate strategy is the European Union
Emission Trading Scheme (ETS). The ETS scheme is a market-based mechanism that
creates an incentive for energy-intensive industries to reduce their emission of greenhouse
gasses such as CO2.
5
$ 1 = L.E 6.87 (World Bank Database).
6
Ceramic cost of production is L.E/m2
7
Social costs are those costs borne by the society and not reflected in the market price.
Damages to human health caused by air pollution and damages from climate change,
associated with the high emissions of greenhouse gases from fossil fuels are examples of
social costs.
8
The environmental degradation include: water, land (that include damages to both
agricultural land and forests), air, waste and coast.
9
CO2 emissions in 2011 (188 m tons) * $80 * ER of year 2011(5.93) =89 billion L.E.
10
Calculated as: [CO2 emissions costs / GDP] in 2011.
References:
1.
ALDY, J. E. & PIZER, W. A. 2011. The competitiveness impacts of climate change
mitigation policies. National Bureau of Economic Research.
Proceedings of Paris Economics, Finance and Business Conference
13 - 15 April 2015, Crowne Plaza Hotel Republique, Paris, France, ISBN: 978-1-922069-73-3
2.
CAPMAS 2013. The subsidy system in Egypt.
3.
CAPMAS 2014. Egypt in figures.
4.
CBE different issues. Monthly statistical bulletin. Central Bank of Egypt.
5.
EEHC 2013. The electricty sector vision of using coal . Ministry of Electricty and
Energy , Egypt The Egyptian Electricty Holding Company.
6.
EEHC different issues annual report. Egyptian Electricity Holding Company.
7.
EGYPTERA 2011/12. The cost of producing, transporting and distributing electricity
Egyptian Electric Utility and Consumer Protection Regulatory Agency.
8.
ESCWA 2005b. Improved energy efficiency and the uses of cleaner fossil fuels in
selected sectors in certain ESCWA member countries, Part I: Improved energy
efficiency in energy-intensive industries (In Arabic), UN.
9.
HOPE, E. & SINGH, B. 1995. Energy price increases in developing countries.
Policy Research Paper, 1442.
10. ICF international 2007. Analysis of the economic impact of energy product prices on
competitiveness of the energy and manufacturing sectors in the EU: Comparison
between EU & US.
11. IDA 2012 Industrial sectors technical database.
12. IDSC 2004. The economics of price liberalization for the nitrogen fertilizer industry
(in Arabic). . Cairo, Egypt: Information and Decision Support Center (IDSC).
13. IDSC 2005b. The impact of price liberalization of the cement industry inputs on the
industry and final consumer (in Arabic). Cairo, Egypt Information and Decision
Suppor Center (IDSC).
14. JAFFE, A. B., PETERSON, S. R., PORTNEY, P. R. & STAVINS, R. N. 1995.
Environmental regulation and the competitiveness of US manufacturing: what does
the evidence tell us? Journal of Economic literature, 132-163.
15. KHATTAB, A. S. 2007. The impact of reducing energy subsidies on energy
intensive industries in Egypt.
16. MCKINSEY & ECOFYS. 2006. Report on International Competitiveness. EU-ETS
Review, Report for the European Commission.
17. MOF 2014. Monthly Publications Ministry of Finance, Egypt.
18. MORGENSTERN, R., ALDY, J. E., HERRNSTADT, E. M., HO, M. & PIZER, W. A.
2007. Competitiveness impacts of carbon dioxide pricing policies on manufacturing.
Assessing US Climate Policy Options”. Resources for the Future, Washington DC
(USA).
Proceedings of Paris Economics, Finance and Business Conference
13 - 15 April 2015, Crowne Plaza Hotel Republique, Paris, France, ISBN: 978-1-922069-73-3
19. MOWAFY, S. A. 2014. Environmetal and health effect of using fossil fuel energy in
Egypt :" Social costs of both fossil fuels and renewable energy". . Ministry of State
for Environmental Affairs Egyptian Environmental Affairs Agency.
20. REINAUD, J. 2005. Industrial competitiveness under the European Union emissions
trading scheme, International Energy Agency Paris.
21. SAUNDERS, M. & SCHNEIDER, K. 2000. Removing energy subsidies in
developing and transition economies, ABARE.
22. WB 2002. Arab Republic of Egypt Cost Assessment of Environmetal Degradation.
Appendix
Table (1): The effect of raising energy prices on energy intensive industries in Egypt
Cement
Average thermal energy
(MBTU/ ton )
Prices of NG ($/MBTU)
Cost of NG ($/ton)
Cost of NG (L.E/ton)
Annual increase in NG cost
(L.E /ton)
Average consumption of
electricity (KWH/ton)
Electricity prices (L.E/KWH)
Iron & Steel
N. Fertilizers (Urea)
Aluminium
Before
increase
2007
3.2
After
increase
2013
3.2
Before
increase
2007
13.4
After
increase
2013
13.4
Before
increase
2007
21.2
After
increase
2013
21.2
Before
After
increase increase
2007
2013
-
1.25
4
23
-
6
19
132
56
1.25
16.75
94
-
4
54
368
130
1.25
26.5
149
-
4
85
583
206
-
110.5
110.5
929
929
55
55
0.134
0.30
0.134
0.30
0.134
0.3
Ceramic
Before
increase
2007
0.12
After
increase
2013
0.12
-
1.25
0.15
0.846
-
2.2
0.264
1.8
0.3
14500
14500
3.3
3.3
0.134
0.30
0.134
0.286
0.44
-
0.94
0.31
1.3
2.7
-
0.7
11
12.4
38
71
50
75
Electricity cost (L.E/ton)
15
33
124.5
279
7
17
1943
4350
Annual increase in
0
35
3
536
electricity cost (L.E/ton)
Total energy cost
38
165
219
647
156
600
1943
2479
(L.E/ton)
Annual increase in energy
56
165
209
536
cost (L.E/ton)
Average cost of production
196
323
2336
2764
528
972
8247
10654
(L.E/ton)
Domestic price (L.E/ton )
358
718
3530
5108
1108
1400
13500
18940
Profit margin (%)
45
55
34
46
52
39
44
Source : Prepared by the author based on data from (CBE, different issues, IDA, 2012 , EEHC, different issues )
17
Proceedings of Paris Economics, Finance and Business Conference
13 - 15 April 2015, Crowne Plaza Hotel Republique, Paris, France, ISBN: 978-1-922069-73-3
Table (2): The effect of importing natural gas on energy intensive industries in Egypt
Industry
Cement
Iron & Steel
N -Fertilizers
Ceramic
Before
import
3.2
After import
Before import
After import
Before import
After import
Before import
After import
3.2
13.4
13.4
21.2
21.2
0.12
0.12
6
12
6
12
6
12
6
12
19
38
80
160
127
254
0.72
1.44
Cost of NG
(L.E/ton)
Increase in NG cost
(L.E/ton)
Electricity cost
(L.E/ton)
Total energy cost
(L.E/ton)
Average cost of
production (L.E/ton)
132
264
552
1105
874
1748
5
10
-
132
-
553
-
874
-
5
33
33
279
279
17
17
1
1
165
297
831
1384
891
1765
6
11
323
455
2948
3501
1263
2137
15.7
20.7
Domestic price
(L.E/ton)
Profit margin %
718
718
5108
5108
1400
1400
50
50
55
37
42
31
10
(52)
68.6
58.6
Average thermal
energy (MBTU/ton)
Prices of NG ($/
MBTU)
Cost of NG ($/ton)
Source: Prepared by the author based on table (1) in the appendix and (EEHC, 2013).
Table (3): The effect of including social costs on the cement industry in Egypt
Baseline
Scenario
3.2
Imported NG
Scenario
3.2
Imported Coal
Scenario
3.2
6
12
5
5.1
5.1
17.7
Without Social Costs
19.2
38
16
With Social Costs
35.5
54.7
72.6
Without Social Costs
132
264
110
With Social Costs
244
376
499
33
33
33
Without Social Costs
165
297
143
With Social Costs
277
409
532
Without Social Costs
323
455
301
With Social Costs
435
567
690
718
718
718
Without Social Costs
55
47
58
With Social Costs
39
21
4
Average thermal energy (MBTU /ton)
Market Price of NG/Coal ($/MBTU)
Social costs ($/MBTU)
Thermal energy cost ($/MBTU)
Thermal energy cost (L.E/ton)
Electricity cost (L.E/ton)
Total energy cost (L.E/ton)
Average cost of production
(L.E/ton)
Domestic price of cement (L.E/ton)
Profit margin (%)
Source: Prepared by the author based on table (9) and table (1) in the appendix.
19