Declining demand for building materials in Egypt due to the repercussions of the Covid-19 pandemic on the construction sector is casting a shadow over local cement companies, adding to the list of challenges facing the sector.

A recent law banning poorly planned construction has drastically affected demand for cement, slashing the amount sold from more than 56 million tons per year before 2015 to 46 million tons in 2021, said Tarek Talaat, managing director of the Misr Cement Group.

“Part of the demand for cement was based on unlicensed building, which the state has halted. Now there is demand from individuals and from the national mega-projects,” he said.

The Egyptian Competition Authority (ECA) in mid-July gave approval to 23 cement companies to lower their production for a year to decrease quantities in the market and hence raise the price. The decision did not calm the producers’ fears, however.

The ECA decision stipulated that the cement companies should cut their production by 10.69 per cent, giving them the choice of an additional cut of 2.81 per cent for each production line. Older companies were given an extra 0.96 per cent cut.

The investment value of Egypt’s cement companies has declined from LE250 billion to less than LE100 billion due to the crises the sector has witnessed during the past two years, said Medhat Estefanos, head of the Cement Division at the Federation of Egyptian Industries. He said the private sector represented 70 per cent of this value.

The cement companies say that their fears of a slowdown in demand for building materials amid a significant global rise in the prices of production inputs are due to supply-chain problems that have occurred over the past three months and impacts on the energy sector. They have also had to cope with a change in their customer base towards more regular customers and national mega-projects.

The price of coal, used as a source of energy in Egypt’s cement factories, has hiked over the past year, with a ton of coal reaching $170, or double the price of the year before, Estefanos added.

“The only solution is for the consumer to shoulder the price rise,” he stated.

The rise in the price of coal led to an increase in the price of cement by 46.25 per cent during the fourth quarter of 2021 despite the slowdown in demand in the local market. A ton of cement is now priced at LE1,170, up from LE800 in August.

The price rise is primarily the result of the ECA decision to regulate cement production at factories and decrease stocks in the market that had reached 78 million tons when actual demand stood at some 48.7 million tons, Talaat said.

“The recent increase in natural gas prices did not drive the cost of cement higher, but it will affect companies that use both natural gas and coal in their operations,” he added.

The government has raised the price of natural gas for industries that heavily consume it, such as iron, steel, cement, fertilisers and petrochemicals, to $5.75 per million British thermal units (mBTu), recording an increase of about 28 per cent.

In late 2014, the government gave the green light to cement companies to use coal instead of natural gas for their production in order to decrease liquefied natural gas imports and save more foreign currency.

However, many cement companies that use coal as a source of energy are now considering shifting back to natural gas, especially with the shifts that have occurred in Egypt over the past two years. The country has discovered major new gas fields in the Mediterranean, and cement-factory production lines could be connected to these, an official at a cement company said.

Shifting back to natural gas will cost $20 million for one production line, adding more pressure on cement manufacturers, but many believe this option is better than maintaining losses and using coal, the price of which is multiplying.

The cement companies admit that for them the only solution is to pass the energy price hike onto the consumer. “The ministry of industry’s decision to increase subsidies on shipping to Africa starting this fiscal year from 50 per cent to 80 per cent is not sufficient,” Estefanos said, adding that “all cement-producing countries have a surplus they are trying to export as well.”

The price of cement in the local market has to reflect its real cost, he stated, believing this is not yet the case. Fuel makes up more than 40 per cent of production costs, and its price has increased by more than 200 per cent.  

The problem is not decreasing demand as much as surplus production. The ECA decision was issued precisely to solve this problem, but it has not yet yielded the desired results.

The cement companies are seeking to strike a balance between production costs and profits, hoping demand will stabilise for the next five years to maintain operational capacity, Estefanos said. The national mega-projects are major customers of the majority of cement companies at present, he added.

The production capacity of Egypt’s cement companies is 93 million tons, but actual production stood at 44.9 million tons in 2020, said an official at a cement company. He added that maximum production had been recorded in 2016 at 56 million tons. The figure had gone down as a result of halting the issuing of construction licences.

The official proposed re-issuing the licences on the condition that agricultural land is not used for construction. Current circumstances could push the cement companies to stop production or to exit the market, he warned.

*A version of this article appears in print in the 25 November, 2021 edition of Al-Ahram Weekly.