Interview: Adham El Khalil
How can the energy costs and supply of raw materials for steel producers be better managed?
ADHAM EL KHALIL: The cost of energy remains one of the greatest challenges for steel mills. Compared to other steel producing countries like China, India or Turkey, the cost of electricity is substantially higher in Côte d’Ivoire. Steel producers in those countries benefit from low energy costs and are therefore more competitive than Ivorian companies. Energy prices in Côte d’Ivoire increased by 10% in 2013 – which is enormous – and it seems they are going to increase again this year. At this stage, higher electricity costs would likely slow down the local production of steel products. Not many alternatives are offered to producers, except to generate their own energy. The limited supply of natural gas also becomes a problem that can inflate prices. Currently, natural gas is supplied to thermal power plants, but there is a lack of supply for industry. Therefore, some industrial companies need to use either fuel or butane gas, which are more costly than natural gas.
Another challenge was the supply of local scrap. However, industry players managed to find a solution with the government to ensure local scrap stays in-country so that steel producers could buy it. Hence, exports of local scrap are banned for five years, allowing time for the local industry to develop. Scrap is for steel producers what cocoa beans are to chocolate producers.
What impact has Chinese steel production had on West African producers?
EL KHALIL: World steel production capacity exceeds global demand by an average of 450m tonnes per year, partly due to Chinese overproduction. Indeed, China overproduces steel products by about 25%. Hence, Chinese producers are dumping their products on the international market. Between 2013 and 2014, Chinese rebar prices decreased from $800 per tonne to $580. Consequently, prices also went down in West Africa, decreasing by more than $150 in about a year. In the production of welded tubes, Chinese producers sell tubes in West Africa at a cost, insurance and freight price equivalent to the import cost of the steel coil to produce them. In the past 20 years, much investment was made into the Chinese industry, but current growth cannot absorb the existing production.
How do you expect the brewing industry to grow, and what policies could lead to new opportunities?
EL KHALIL: In 2013 the brewing industry grew by at least 13% (for beers). For many years, the Brasseries et Glacières Internationales (owned by Groupe Castel through Solibra) had a monopoly in the brewing industry. Hence, there was room for investors to come in and claim some market share. Despite an investment of CFA21bn (€31.5m), the newly established Les Brasseries Ivoriennes has much less capacity than Solibra, but it still expects to gain roughly 15% of the market. When there is more competition, the quality of products improves as well as services – it is beneficial to consumers, and also to advertising agencies which have more business to deal with. Thanks to strong demographic growth and a growing middle-class, volumes in the brewing industry are set to increase, and local brewers are expected to grow accordingly.
In terms of fiscal policy, however, it becomes more and more of a burden for the private sector. Regarding the brewing industry, and more specifically beer, until end-2013, the excise duty was 13% of the cost price. In the tax schedule for 2014, this tax was reviewed and industrials to 15% on turnover, three times more than brewers used to pay. Discussions between market players and the government occurred, but in vain.
The government recommended brewers increase their sale prices, but that means inflation and people are not necessarily willing to pay more for beer (or have the financial means to do so). The tax should have been implemented gradually; a 15% tax on turnover is quite a hit for the industry. The investment policy needs to be made clearer for investors, as such changes to the tax system are a deterrent to prospective investors.
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