Domestic steelmakers have been confronted with a severe crisis driven by escalating scrap metal prices and acute shortages that threaten to undercut their ability to compete. The soaring costs, they argue, are eroding their production capacity, pushing up final product prices, and making imports more appealing to buyers. Many in the industry believe that current policies favour importers over domestic producers, allowing duty-free from abroad to crowd out domestically manufactured steel.

The industry has the capacity to produce six million tonnes of steel annually, but it is unable to reach that output, operating under 20pc. Industry operators blame policies that, in their view, do not adequately support domestic manufacturing. Producers assert that, while seeking to stabilise the market, existing policies have effectively opened the door for low-cost imported steel, depressing demand for locally produced metal and narrowing margins for companies already wrestling with high input costs.

In response, the Ministry of Finance recently announced a new minimum price for scrap metal bought through official channels. State Minister for Finance Eyob Tekalign (PhD) signed an amendment setting a baseline of 74 Br for a kilogram of steel scrap. According to the Ministry, the measure protects domestic companies from further volatility by establishing a clearer valuation for one of the industry's main inputs.

Yet, the Association of Basic Metal & Engineering Industries (ABMEI), representing 74 steel and metal companies, warns that the measure alone will not resolve deeper systemic problems in the scrap metal market. The Association's leaders contend that unregulated suppliers sell scrap metal below the officially determined rate, sometimes as low as 60 Br for a kilogram, creating a gray market that disrupts pricing and availability. They have appealed to the ministries of Finance, Mines, and the Prime Minister’s Office to address what they described as a "fundamental failure of market regulation," which leaves manufacturers battling contraband steel and shortages of essential inputs.

Solomon Mulugeta, the Association's general manager, observed that scrap metal is difficult to find in sufficient quantities. Demand for construction materials, such as reinforcement bars (Rebar), remains high, yet domestic producers struggle to secure the inputs. Solomon believes imports should supplement local output, not replace it. He fears that as raw material costs climb, the price of domestically produced steel will continue to rise, weakening its competitiveness against lower-cost alternatives.

“The industry is struggling to stay afloat,” Solomon told Fortune.

According to Solomon, the gap between the official price and what is happening on the ground is widening. Suppliers are selling scrap metal at rates that fluctuate daily. As a result, manufacturers say they have no choice but to pass higher costs along to consumers, making locally produced steel more expensive and less competitive.

The Association blamed supply constraints, rising input prices, a surge in contraband steel entering the market, and growing foreign competition for falling sales. No less than 28 galvanised sheet manufacturers have been forced to shut down, while 15 rebar producers are nearing closure. Industry insiders attributed the turmoil partly to an influx of steel from Turkey, which they say pushes market prices down and erodes the financial stability of domestic firms.

In 2023, the country brought in over 1.25 million tonnes of steel, valued at around 600 million dollars, primarily from China. This was a substantial increase from the previous year’s 201,000tns. Imports from Turkey also rose, with 263,000tns recorded three years ago swelling to five times this figure more recently. Government officials conceded that some of this inflow is disguised as legal imports, while in fact, it is contraband steel that undercuts domestic producers on price. State Minister for Industry, Hassen Ahmed, warned that such illicit activities harm the economy by reducing tax revenues and undermining an already burdened domestic sector.

A committee from the federal government has been formed to investigate this issue.

In 2022, authorities introduced a direct procurement system for scrap metal to help federal agencies and state-owned enterprises buy directly from suppliers and boost domestic manufacturing. However, the initiative did not address shortages. The Finance Ministry recently revisited the policy and announced a new scrap distribution system. Previously, government vehicles, machinery, and spare parts designated for disposal were sold to domestic manufacturers at fixed prices. Persistent constraints with supply and distribution led to the current competitive bidding process.

Under the overhauled system, the government will set starting prices for scrap metals, ranging from 199 Br a kilogram for aluminium scrap to 74 Br for steel scrap, 65 Br for cast iron, and 67 Br for scrapped vehicles and machinery. If domestic manufacturers do not participate in the bidding, the scrap can be sold to any buyer through a public tender, in compliance with procurement regulations. State Minister Eyob has urged regional and city administrations to consider adopting a similar system, subject to their particular circumstances.

Last year, the Public Procurement & Property Disposal Service (PPPDS) was charged with identifying used government vehicles earmarked for scrap disposal. The initiative aligns with an import substitution strategy, reducing the foreign currency drain as total imports have surged to around 18 billion dollars, five times export earnings. According to procurement specialist Zebene Gezahegn, working for Procurement Services, the new pricing system was instituted after an in-depth market analysis and a thorough verification of the profiles of companies involved in the process.

“The final decision was made through a broad-based bidding process to support local manufacturers,” Zebene said.