Players in Egypt's construction industry adjust to changing environment

 

In 2016 a variety of factors contributed to price fluctuations in the normally stable cement industry. Although some variability remains, industry experts predict a return to stable growth in the long term.

Egypt has more than 20 cement producers operating 25 plants. Suez Cement Company is one of the largest producers with five facilities producing 11m tonnes of clinker per year. Another major producer, Lafarge Cement, has an annual production capacity of 10m tonnes. Smaller producers such as El Sewedy Cement Company, South Valley Cement and Cement Egypt are also boosting their capacities. These three firms received licences to build new cement plants – with a total production capacity of 6m tonnes per year – from the Industrial Development Authority in late 2016.

VOLATILE PRICES: After swinging between roughly LE808.27 (equivalent to $42.84 as of December) and LE780.97 ($41.40) per tonne throughout 2015, cement prices continued to fluctuate more than usual in the first quarter of 2016, in part due to the central bank’s devaluation of the Egyptian pound in March 2016. “The construction sector is not doing bad in terms of demand. There are several major projects resulting in sufficient activity. However, as long as the sector does not see cement prices stabilise it can barely benefit as a whole,” Magdi Kassabgui, chairman of Reliance, told OBG. Ghada Alaa, a researcher at Beltone Financial, told OBG that prices reached a record low of LE450 ($23.85) per tonne in January 2016, yet by end of February 2016 had jumped more than 20%, returning to the normal LE600-700 ($31.80-37.10) range. “This was fuelled, in our opinion, by panic from traders because of ongoing speculation in the market that the foreign currency shortage was peaking, which would hinder coal imports and lead to a lower supply,” said Alaa.

CHALLENGES OF SUPPLY & DEMAND: With new infrastructure and real estate projects, there has been an increased demand for cement, which has pushed the government to tender licences for a fee in anticipation of a demand of up to 80m tonnes by 2020, according to Alaa. Indeed, press reports stated in February 2016 that 37 companies applied for licences to construct new coal-fired cement plants across nine governo-rates. Industry fears based on the government’s 2014 announcement that it would no longer provide energy subsidies to cement factories – all new factories must provide their own power source – have since been somewhat assuaged by the April 2014 announcement that cement factories could use coal instead, which as of 2014 was around 30% cheaper than gas.

To this end, major producers begun retrofitting their plants to run on energy from imported coal. However, despite rising demand, current production capacity exceeds local demand. According to Beltone Financial, Egypt’s current total production capacity of 70m tonnes of cement means that 15m tonnes are surplus. Even with a forecast of 8% growth rates, this will not be fully absorbed by the market until 2019, when Alaa predicts that the fundamentals of demand and supply will balance again. According to a 2015 Ministry of Environment presentation, in 2011 local consumption accounted for 83% and exports 17%.

CONCERNS: The use of coal has prompted environmental concerns. In an effort in part to counteract the environmental damage, there have been focused efforts including tax exemptions for adding filters. .

“Energy shortages positively impacted the rate of overcapacity in the cement sector and forced companies to work actively on other sources of energy, such waste and renewables,” Bruno Carre, CEO and managing director of Suez Energy, told OBG.” Despite the fluctuations in sales prices and input costs, the outlook for the cement segment is relatively stable. Sherif Sweillam, associate director for business development at UK-headquartered construction consultancy Gleeds, said, “I believe cement is not one of the industries that will face a problem, because most of the projects in Egypt rely on cement as the main building material.”

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The Report: Egypt 2017

Construction chapter from The Report: Egypt 2017