The supply glut was exacerbated by the inauguration of the cement plant in Beni Suef in 2018, with a production of 13 million tons per year. Once operating at full capacity, the plant would hold a 26% market share.
In 2017, annual production stood at 68.5 million tons compared to a demand of 53.8 million, according to data released by the Cement Industry Division.
The supply glut trend seemed to remain in 2018 and 2019 which saw a production of 81.2 and 83 million tons, against a demand of 51 and 49 million, respectively.
While official annual divs for 2020 are yet to be available, Solomon Baumgartner Aviles, CEO of Lafarge Egypt, told local press in a recent interview that the cement demand fell by 6.5% Year on Year (YoY) in the first half of 2020.
Profitability impacted
As a result, the waning demand gap has translated into declining sales. In 2017, cement sales reached 53.5 million tons, before falling to 51 million tons in 2018, Noha Bakr, head of the Cement Division at the Federation of Egyptian Industries, told local press in 2019.
Based on Pharos Holding’s “Cement Sector Wrap Up” 2019 report, total sales volume -both for the local market and exports- slightly declined further to 49.8 million, down 0.8% YoY.
In 2020, the pandemic coupled with the six-month ban on issuance of construction licenses in main cities have caused an additional downturn to the market, leading cement sales to plummet by almost 80%, Xinhua News Agency quoted several factory owners and retailers as saying in late September.
However, the sector started 2020 on a positive note before falling in the second quarter of 2020. Total cement sales stood at 13.2 million tons in the first quarter (Q1), up 4.9% YoY yet down 1.8% Quarter on Quarter (QoQ), according to Pharos’ “Cement Wrap Up” research note for Q1.
The research firm attributed the annual increase to a recovery in purchasing power in early 2020 coupled with accelerating informal construction activity towards the end of March.
The sector soon entered a challenging Q2. The quarter included “the peak of the pandemic lockdowns, the narrow window for construction between Iftar and the curfew during Ramadan, and the decision to cease new building permits in capital cities of governorates for six months,” Pharos added in their Q2 research note.
Cement sales -local and exports- stood at 10.1 million tons in Q2, down 12% YoY and 61.4% QoQ, the note highlighted.
On top of that, indicators showed cement net prices, calculated have been falling since 2018, pressured by the oversupply, and in tandem with the adverse impact of the pandemic and the six-month halt of building activities, the research firm highlighted.
Net prices dropped by 4.6% QoQ and 12.2% YoY to reach EGP 729 per ton in Q3, compared to EGP 830 in Q3 2019.
Domino effect
As demand took another hit in an already bloated market, producers’ response has varied across the spectrum, some suspend their operations permanently, others temporarily, while a few further increased their supply. One particular example is Egyptian Cement. The company announced in September 2020 its plan to inaugurate an EGP-4.5-billion cement factory in Sohag next year, CEO Ahmed Abou Hashima told a local press.
On the other side of the coin, the National Cement Company, which had been in the market for 62 years, announcing its liquidation in October 2018 due to an operational and financial failure.
Other companies such as Tourah Cement and El Nahda Cement temporarily suspending their operations in 2019 due to the supply glut.
Tourah attributed its decision to “financial distress caused by oversupply in the Egyptian market,” revealing its possible liquidation plan, Reuters reported in June 2019.
Cement makers have been eyeing Libya and Sudan as potential export markets that could absorb some of the excess capacity, but instability in both countries has dampened demand, the news agency added.
One month later, El Nahda Cement decided to partially suspend the main production line at its Qena factory for six months after sales fell due to oversupply, sources told Al Mal back then.
Pharos’ Q2 note showed that the margins of key cement players were affected by the weak pricing environment. However, the research firm noted that the EGP 0.10 enacted electricity cut imposed during the quarter cushioned the impact.
Cautious optimism
Looking ahead, demand is likely to come in at around 43 million tons this year, compared to 83 million tons of supply, Medhat Stephanos, head of the cement division of the Federation of Egyptian Industries, told local press.
The prospects are higher than these of Arabian Cement CEO Sergio Alcantarilla who expected demand to fall to 45 million tons.
On a brighter side, Pharos expects sales volume is expected to gradually improve in the last quarter of 2020 as private demand for building materials is projected to recover sequentially, especially with the resumption of issuing building permits, according to a Q2 research note.
The government relaxed the construction restrictions in September, yet allowing contractors and real estate developers only to resume construction on buildings that are no higher than four stories.
Pharos also forecast in its Q3 report prices to slightly recover starting from 4Q20 after the resumption of construction activity.
The Building Material Division initially expects a boost in steel and cement sales by 10%, backed by the government’s decision to relax the construction limitations on new buildings, according to a local press.
The research firm noted that the sector might reverse its overall weak performance only if the government intervenes by setting a price floor for cement, and inefficient players exit.
"Urgent decisions are required from the government, because unfortunately if action is not done quickly, a number of companies may not be able to continue and bear more losses and are forced to close," a local press quoted Lafarge Egypt's CEO Solomon Baumgartner Aviles as saying in September.
As many as six cement producers could be forced to exit the Egyptian market by 2021 if the ongoing oversupply crisis continues, Aviles added.
Some experts see that increasing cement exports is a key way out. Ahmed El Zinny, head of the construction materials division of the Federation of Egyptian Chambers of Commerce, told a local news portal that the solution is imposing a minimum export quota of 5% of total production to funnel out some of the excess supply.
However, Egyptian cement makers have been eyeing Libya and Sudan as potential export markets, but instability in both countries has dampened demand, Reuters highlighted in June.
In addition, Medhat Istafanos, head of the Cement Division at the Federation of Egyptian Industries, said in a note to a local news website in 2019 that Egypt does not have a competitive edge in cement, so either the domestic market must increase its demand, or some factories must cease production.
