Ecuadorean industries have started preparing for higher production costs following a recent decision by the government to eliminate subsidies for industrial use of diesel.
“The impact is variable, and will depend on each company and the productive processes that it uses,” Guillermo Pavon, general director of the Ecuadorean Federation of Metal Industries, told Latin Business Daily.
Pavon’s remarks came after the Ecuadorean government announced the elimination of subsidies to diesel used for industrial purposes involved in manufacturing facilities or equipment. Subsidies, though, will remain for transportation purposes.
Since the Ecuadorean government, which depends on oil-export revenues, has been impacted by weaker commodities prices, it is struggling to cover the shortfall in revenue and balance its spending. As a result, in addition to eliminating the diesel subsidies, the Ecuadorean government also announced the gradual elimination of subsidies to gasoline.
“Those most affected will be the companies that use diesel as fuel for the smelting of iron as that process can represent up to 2 percent of the final product cost,” Pavon said.
Besides companies transforming metal, which is an energy intensive process, other industries that could be impacted are textiles and chemical companies that consume heat and energy.
“We understand that this situation will force our companies to try to be more efficient,” Pavon said.
Ecuadorean companies also face other challenges as export products of neighboring countries, such as Colombia, have become less expensive due to the depreciation of their currencies. Ecuador uses the U.S. dollar as currency, so it has not been able to depreciate.
While most of the industry understands the government´s pressing need to control spending because of the sharply lower revenue, Pavon says cooperation is key.
“The ideal thing would have been to take decisions working together (with government),” Pavon said, rather than having to react fast to the subsidy elimination.
The government of Ecuador also eliminated the subsidies for marine transportation consumption; however, marine fuel used for transportation purposes by fisheries and shrimp farmers, like the diesel for road transportation, will not be affected.
For this year, Ecuador has set aside a projected investment of $3 billion for subsidies. With these changes announced in mid-October, it will save $300 million, Ecuadorian President Rafael Correa recently said.
An official from the Chamber of Production Industries and Employment of Cuenca told Latin Business Daily that they are still analyzing the potential consequences of the change on production costs and employment.
