Egypt's steel industry flounders under weight of new export duties and fixed prices

It has been two weeks since the Egyptian government, worried by increasing steel exports and rising steel prices in the domestic market, imposed an export duty on all steel products to the tune of EGP 160/mt (approx.$28/mt). In addition, in an attempt to regulate domestic prices the Egyptian Ministry of Trade and Industry decided to impose certain regulations on the domestic steel trade. Although, such actions may have some justification, a glance at the last two weeks clearly shows that the consequences for the Egyptian steel industry have been disastrous. Let's first of all look at the reasons behind the Egyptian government's decisions. The principal reason is to be found within the character of the Egyptian steel industry - i.e., in its heavy subsidization by the government. The Egyptian steel industry specializes mainly in the production of billets and long products. However, it lacks good domestic supplies of raw materials (mainly scrap), and therefore is obliged to rely on imports. Since the beginning of this year, the prices of scrap as well as of billets and longs (especially rebar) are showing strong growth in the global market. Consequently, in order to increase their profits many Egyptian producers preferred to sell their products abroad rather than at home. Although the increase in exports did a lot of good for the Egyptian trade balance, it also raised domestic prices and the cost of industry subsidies in the country's budget. As the Egyptian Ministry of Trade and Industry stated on February 27, ’The increase in exports means that the subsidies were going to the international market, which completely contradicts the government's subsidy policy aimed at supporting the Egyptian consumer'. As a result, without consulting any of the interested parties, the Egyptian government issued its regulations on both steel exports and domestic sales. According to the domestic sales regulations, all steel dealers, producers and traders are required to inform the ministry's internal trade department on a weekly basis about their production rates, stocks, export volumes and prices. In addition, a new fine will penalize noncompliance with these requirements. Although the government was able to achieve its immediate target of reducing the internal prices of steel - for the two-week period following the introduction of the measures in question steel prices decreased by $50-60/mt depending on product type - the new measures brought far more disastrous consequences to Egypt's steel market. Many export-oriented steel producers are currently not able to sell their products in the export market due to their increased cost after the new duty has been added. In addition, the local prices are set at too a low level for the producers to be able to make profitable sales. On the other hand, since Egypt heavily depends on raw material imports, domestic steelmakers have to continue to buy scrap at world market price levels, which have not stopped rising since the beginning of the year. This combination of low sales prices and high raw material costs has thrown the Egyptian steel industry into crisis. Local steel traders report that many steel producers have decided to stop production for the time being, while others are re-rolling billets and longs products into scrap for production. In addition, the government's decree has brought some trust issues to the surface. The market is currently paralyzed as traders are in shock and do not know what to expect from the government next. Some producers have stopped production in the hope of persuading the government to cancel its regulations. Some expect even more severe official action. Meanwhile, instead of waiting for the Egyptian steel industry to solve its problems, many consumers in the external markets have already switched to other supplier countries.