Global Investment House – Egypt Economic & Strategic Outlook – Cement Sector –April2008-
In 2007, the cement sector in Egypt witnessed major changes in its structure and future capacities. Demand for cement has been growing at high pace, both locally and for export markets, on the back of a regional construction boom with total investments amounting to US$1.5trn. Though the cement sector produces beyond the local consumption figures, the local market faces tremendous increases in the price. This was due to the lucrative export prices in comparison to the local market, which forced many cement traders and agents to orient their inventories towards export market.
As the exports increased, the available quantities for the local market squeezed, causing a hike in the local cement prices from an average of LE240 per ton in 2005 to LE360 per ton in 2006, to reach LE415 in 2007. The government of Egypt, trying to ensure the local supply of cement to cover the increasing demand locally, has put a price cap of LE290 per ton on the ex-factory prices and the maximum consumer price will be LE330 per ton. In addition, it has decided to limit exporting activity to the factories only and banning agents and distributors from selling abroad.
In another attempt from the Egyptian government to ensure local supply of cement at reasonable prices, a decision was taken on the 28th of February 2007 to impose a duty of LE65 (US$12) per ton of exported cement. The government’s decision was a reaction of the fictitious shortage of cement for the local market, while the local production exceeds the current country’s demand. Apparently, the export duty was not severe enough to slow down the cement agents exportation activities, so that the government further increased it to LE85 (US$15.5) per ton of exported cement in August 2007. The problem is that the agents and distributors began passing the new duty on the consumers, depriving the local market with its soaring demand on building materials.
Currently, the Egyptian cement sector consists of 12 players; most of them are ruled by Multinationals, who showed interest in the Egyptian cement market at the end of the 1990s. Only one company among the twelve is owned by the Egyptian government that is National Cement Company, while three firms are owned by the Egyptian private sector, these are Misr Beni Suef Cement, Misr Cement Qena and Sinai Cement.
In 2007, the total production capacity of the Egyptian cement sector reached 41.3mn tons, while the actual production hit 38.4mn tons, an increase of 6% over 2006 production levels. The country’s average utilization rate is 93%, with some companies operating over 100% of their installed capacities. The local and regional demand has pushed cement manufacturers to operate near their maximum capacities. The Italcimenti Group, consisting of Suez Cement, Torah Cement and ASEC Cement (Helwan), controls over 29% of the Egyptian cement production capacity, followed by Orascom Construction Industries’ cement arm, Egyptian Cement Company with 24% of the total country’s capacities.
In 2007, cement demand attained about 34.5mn tons, with a rise of 14% over the previous year, on the back of the construction boom, which is taking place in Egypt since 2004. It is reported that the three Egyptian private sector cement producers are the ones with high exportation levels, even after the government has set an export duty of LE85 per exported ton of cement.
The Italcimenti Group controls the highest market share in Egypt, through its subsidiaries, with 31% of the total tonnage sold in Egypt in 2007, followed by Egyptian Cement Company (ECC) with 21% market share. It is worth noting that ECC is the single biggest cement plant in Egypt, with an installed capacity of 10mn tons per annum, after raising capacity in 2007 from 8.5mn tons/year.
Egypt’s total cement exports declined by around 30% between 2006 and 2007. During 2007, the total cement exports reached 4.2mn tons as opposed to 5.8mn tons the year before. The government export duty has proved its effectiveness in decreasing the exported volume but failed in maintaining local prices at reasonable levels. After an average price per ton of cement of LE326 in 2006, prices soared to LE415/ton in 2007, a surge of 27%. By the end of October 2007, the Egyptian government opened bids for licenses of new cement capacities, either for new entrants or existing players who wish to increase their production capacities. The bid resulted in 8 out of 10 new licenses, worth LE1bn and an estimated total investment cost of LE17bn.
Most of the licenses were oriented towards Upper Egypt, where the country is far less developed and the government has announced developmental plans worth LE3.2bn in the period between 2007 and 2012. The 13.5mn tons of new capacities are to drastically change the Egyptian cement sector. It is forecasted that by 2010, the total production capacity of cement would be over 60mn tons per annum, while the consumption is projected to grow to approximately 50mn tons.
It is worth noting that the capacities additions will synchronize with regional cement expansions, especially in the Kingdom of Saudi Arabia, where the cement production capacities would reach 54.4mn tons by 2010 compared to the estimated 2007 production at 32.5mn tons. Also, the UAE is to double cement capacities from 13mn tons in 2006 to 26mn tons in 2010. In turn, the added capacities will create an over supply in the region, leading to price wars. Only those who can produce at a competitive price will be able to survive.
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