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Sunday, 18 August 2019

Egypt: Cement market slides

Sales have been dropping for cement in Egypt, leading to fears for the future of the sector

Safeya Mounir , Friday 2 Aug 2019
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Egypt’s cement market is officially suffering from a recession, with demand decreasing and production remaining high.

The market is now absorbing only 40 per cent of cement production, said Medhat Istafanos, head of the Cement Division at the Federation of Egyptian Industries. There are 24 cement factories across Egypt that together produce 85 million tons of cement, with only 48 million tons now being sold.

Istafanos said the decreasing demand for cement was being caused by a slowdown in building activity that had earlier consumed half the production. Demand for cement by the government’s mega-projects had not made up for decreasing private-sector demand, he said.

Noha Bakr, manager of the division, concurred, saying that the law banning construction on agricultural land had led to a recession in the cement market. This had led to fewer private construction projects, with a predictable impact on the demand for cement, she added. 

In 2017, 53.5 million tons of cement were sold in Egypt, more than the 51 million tons in 2018. Cement sales dropped by nine per cent in the first half of 2019 compared to the same period in 2018, Bakr said, expecting demand to reach 49 million tons this year.

For some experts, the solution could be to increase exports, and some producers have called for increasing export-support funds for the cement sector that help exporters by refunding some of the costs of exporting. 

Walid Gamaleddin, president of the Export Council for Building Materials and the Metallurgical Industries, said export support for cement companies should reach 20 per cent of the total bill. He also called for a tailored programme for cement separate from the general one.

The minister of trade and industry discussed a programme for cement-export subsidies with officials from the industry last week that would include encouraging agreements to export cement to the African countries.

The Central Bank of Egypt (CBE) has also instructed the banking sector to support the cement companies in restructuring their debts. The merger of smaller companies to form larger conglomerates has been encouraged.

One of the problems facing the sector is the price of Egyptian cement, Istafanos said, with there being a $12 gap in the price of a ton of cement sold in Egypt and in neighbouring countries.

Egypt did not have a competitive edge in cement, he said, meaning that either the domestic market must increase its demand, or some factories must cease production. The latter scenario was more likely to occur, he said.

Cement prices had risen as a result of the cuts in energy subsidies, Bakr said, adding that energy constituted 60 per cent of production costs. Taxes on raw materials had also increased by 35 per cent, and road tolls had also increased. 

The floatation of the pound in November 2016, which had doubled the price of imported coal and increased maintenance costs, had also impacted prices, she said.

According to a recent report by Shuaa, an investment bank, Egypt’s cement producers have little option other than to increase exports if current production is to be maintained.

Failing this, more cement companies will withdraw from the market, including the Tourah Portland Cement Company, the National Cement Company, and Al-Nahda Cement, said May Abdel-Aziz, a financial analyst.

During the first quarter of 2019, cement exports constituted 1.2 per cent of the total produced.

The Shuaa report said that high production costs and current prices in the local market had stripped Egyptian cement of the competitive edge enjoyed by Turkey, Iran and Saudi Arabia in markets such as Yemen, Syria and Iraq.

It said Turkey had managed to sell cement at lower prices, particularly to Syria due to the geographical proximity between the two countries. Iran is one of the world’s largest producers of cement. 

The report suggested that exporting to Africa could be the solution, with the Common Market for East and South Africa (COMESA) agreement providing the edge Egypt needs to compete in the continent’s cement market. Exports within the framework of the agreement are exempt from customs.

Until recently, Egyptian companies exporting to Africa paid only 50 per cent of the shipping price. But now that the state has lifted subsidies on the transport of exported cement, Egyptian exporters cannot sell their cement at competitive prices. 

Saudi Arabia, the UAE and Turkey have a surplus of cement that they can offer on foreign markets at lower prices.

Shuaa said that export incentives and lowering production costs were crucial for the survival of Egypt’s cement companies. Export incentives include reductions in the cost of transport, raw materials, and imported coal, as well as in taxes. These could help Egyptian cement producers create the edge they need to compete abroad, the bank said.

Meanwhile, sales in the local market decreased by nine per cent in the first quarter of 2019, recording 12.3 million tons. The cement companies listed on the Cairo Stock Exchange reported losses or decreased profits. The National Cement Company has resorted to clearances, while the Tourah Portland Cement factory lost LE37 million in 2018 and LE72 million in the first quarter of 2019.

Earlier this month, the Al-Nahda Cement Company carried out a partial stoppage of its main production line at its Qena factory for six months, the reason being low sales affecting the company’s liquidity and financial performance.

Many cement companies reported losses in the first quarter of this year. Suez Cement lost LE95.16 million, while Alexandria Portland Cement saw its losses rise by 123 per cent on an annual basis. 

Ganoub Al-Wadi Cement saw LE38 million in losses during the first quarter of this year, as opposed to LE6 million in profits in the first quarter of 2018. An official at the company told the media that some companies had resorted to selling at much lower prices to curb their losses and reduce inventories. 

According to Pharos, an investment bank, overall sales of cement in Egypt retreated by 5.3 per cent in the first quarter of the year. Shuaa has advised its clients to avoid dealing in the cement sector after cement companies listed on the Stock Exchange lost 12 per cent of their value in one month. 

Tourah Portland Cement was the biggest loser with a 19.6 per cent reduction in sales, followed by the Arabian Cement Company at 17.5 per cent, the Suez Cement Company at 17.2 per cent, and Ganoub Al-Wadi at 4.4 per cent.

“Tourah Portland Cement suspended its activities to save LE200 million after making LE684 in losses by the end of the first quarter of this year and following forecasts of continued losses in the medium term,” the Shuaa report said.

There was some good news, however. Vicat Egypt Cement, the biggest shareholder in the Sinai Cement Company, said it was pumping 30 million euros into supporting the company’s second production line, slated to open in 2020, in case sales increase. 

According to Abdel-Aziz, further mergers and acquisitions may provide the breather needed for the sector to bounce back. Developments in Sinai and the Gaza Strip, in addition to construction in Libya, Syria and Yemen, could all help the sector to recover, she said.

*A version of this article appears in print in the 1 August, 2019 edition of Al-Ahram Weekly under the headline: Cement market slides

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