Energy price hike should not be abrupt and unusually high. Industries should be given the time to adjust to the changes
Industries have been on the backfoot for a while now due to foreign currency and energy shortages. There have not been any significant improvements regarding these between April and December of last year, though electricity and gas situations look somewhat stable because of winter.
Over the years, there were no efforts to explore gas, leading to growing dependence on imports. The price quoted for importing electricity from India would further hike local power cost. So far our industries — be it garments, ceramics or others — have banked on cheap energy and labour. Now they are losing one of the two, i.e., cheap energy.
One good thing about ceramic is we have a robust domestic demand for products like sanitary wares and tiles from a surge in both public and private sector construction activities. Six to seven years ago, we had to import 60-80% of the local demand. Now, import has dropped to the range of 5-10%, which is normal because demand for some high-end foreign brand luxuries will always be there.
At a moment when local sanitary wares and tiles were set to penetrate the global market after meeting local demand, and a fresh flow of investment was pouring into the sector, the twin problems of energy and dollar shortages emerged. These are the big setbacks for the ceramic industry that focused on export potentials for sanitary and tile products. Ceramic tablewares have long been in the export basket and they have a strong local market too.
The ceramics industry was heading for good fortune amid some limitations for two of the largest players — China and India. After catering to its huge local market, India also exports ceramic items, while China continues to be a major exporter. But China has been in a move to scale down ceramic production because of pollution concerns and the Asian giant also faced an energy crisis. That has opened a window of hope for us to explore the export market further.
But the energy crisis has come as a blow. Raw material prices also rose, but that could have somehow been adjusted to prices of end products. But the energy crisis could not be offset since we had to stop production. How will we produce goods if there is no electricity, no gas? Even though global fuel prices started falling from their highs in 2021 and 2022, we are facing an energy crisis because of the dollar crisis.
Another problem, which also stemmed from the dollar crisis, is that industries cannot open letters of credit for importing raw materials. When you do not have gas, do not even get raw materials, and you have to sit idle and support operating costs from your pocket for three to four months, then you will trail behind others in the global race. Your industry will risk defaulting on loans or going out of business.
These are negatives, but there are some positives, too.
If we could have better internal management, our government and industries could have taken steps like rationing of foreign currency reserves. Then things would have turned out to be better for us. The government restricted luxury imports. That was the right decision.
At the same time, there could have been some sort of rationing in foreign currency spending, say, 20% for food import, 20% for government purchase for project works, 20% for medicine or other emergencies, and 40% for private sector imports of basic raw materials. This could have export industries running and in return, replenishing the foreign reserve by export proceeds.
Remittance is a reliable source of forex earnings. But counting it as the only source of forex is risky as most countries where our expatriates work are facing inflation and fear of recession. So, export industries should be given all possible support not only for more foreign currency earnings, but also protecting local employment.
Once an industry goes for layoffs, it is very tough for it to make a comeback. Because of the pragmatic decision of the government and courageous response of entrepreneurs, our industries kept operating during the Covid-19 pandemic, when most of the world was shut. That helped our export growth and economic recovery faster than that of many peers. It also demonstrated the resilience of our industries in difficult times with the support from our workforce. That is our strength which kept us ahead of many others. Even Vietnam, one of our key competitors in the global market, kept its factories shut.
We have been in trouble from April-May last year, mainly because of the forex crisis, then electricity and gas shortage. Our prime minister has repeatedly said businesses have to pay higher for gas. We also agree as in countries all over the world people pay as much as they consume.
But the hike in price should be in phases so that industries get the time to adjust to it. If gas prices double all of a sudden, the cost of production will go up for industries and consumers will face price pressure on end products. Exporters will also lose competitiveness in the global market since they will not be able to charge $15 overnight for a product priced $10 the other day.
Amid severe energy crisis, gas price was hiked up to 300% in Europe, even 600% for Italy. But they started to revise the price downward as the cost of living and rate of unemployment were rising.
Varying exchange rates for export, imports and remittance also remain a disincentive for industries. You will get Tk102 for dollar when you export, but pay Tk107 when you import, while a remitter will get Tk107 plus 2.5% cash incentive. Incentivising expatriate workers to send foreign currency through formal channels can be justified.
But keeping a wide gap between dollar rates for export and import is unjust, distorting. How will a business cover the 5-6% gap in dollar rates between import and export? Whom will they pass it on? The exchange rate should be left to the market.
Despite a fresh Covid-19 surge, China is reopening fully, which will smoothen our raw material supplies, as our industries largely depend on China for raw materials, be it apparels or ceramics or most others.
There are some additional prospects for us as well. Though China is reopening in full swing, USA and Europe are diverting as much orders as they can from China for global geo-political reasons, and looking to source more from countries like Vietnam and Bangladesh.
So, there is a glimmer of hope for us even amid many challenges. What we need the most right now is prudent internal management. We were surviving well through the global crisis for more than the last two years, which has made us mentally strong and resilient. Here we are ahead of many of our peers. We are still in a position to move forward. Whatever natural gas we had in store, we allowed it to be wasted for years of unplanned use. Cheap gas, along with cheap labour, has long been our key campaigns for investors in many sectors including ceramics.
Ceramic is a 100% energy-intensive, also labour-intensive industry. Crisis comes with some benefits as well. Industries are now feeling the need to reduce wastage; they are concentrating on energy-efficient technology in ceramic plants. As a leading supplier of ceramic accessories, chemicals and technology, our company is getting more queries for energy-efficient burners from ceramic factories than ever before. Factories are now investing more in heat-regenerating technologies.
These good senses would not have prevailed if there were no energy crisis and no price pressure. We should have started this 10 or 15 years ago. Now we are forced to go for modernization to become efficient and cut energy costs. The thoughts of efficiency and austerity come only when utilities become dearer and pricier.
We also need to build local skills. Built with Japanese assistance decades ago, the government’s ceramic institute is equipped with sophisticated machines and labs, but has failed to generate the skilled human resources required for the booming ceramic sector, which still requires skilled ceramic engineers from Sri Lanka, India etc. Many such steps to raise efficiency and productivity were long overdue. Industries were least bothered. Now they have woken to the shocks. And ceramic is no exception.
Nazmul Karim, a ceramic sector entrepreneur, is the managing director of Bridge Chemie, a major supplier of ceramic raw materials, accessories and technology solutions
Interview & Published by: The Business Standard
Published Date: 30/01/2023