Wednesday, 12 October 2022

With a rising cost of natural gas, how will Egypt’s cement and brick producers react?

What higher natgas bills mean for cement + brick producers in Egypt: A new government decree issued earlier this week enforced price increases on natural gas supplied to cement producers and brick kilns, in a move that will likely limit their use of gas. The move essentially makes it impossible for cement producers to start heavily depending on natural gas instead of other energy alternatives. But because natural gas already accounts for only 10-20% of cement producers’ energy mix — and only half of the sector has access to gas infrastructure — it’s unlikely that retail cement prices will rise significantly, industry players told Enterprise. Brick kilns, on the other hand, have their hands tied since natural gas is a bigger portion of their energy mix.

REFRESHER- Natural gas will now be sold to cement manufacturers at USD 12.00 /mmBtu, from USD 5.75 / mmBtu. Brick kilns will be charged EGP 110.00 / mmBtu, up from EGP 73.00 / mmBtu, according to the Official Gazette.

The rationale behind raising natgas prices: The government has been moving to redirect some of Egypt’s natural gas supply away from domestic consumption and earmark it for export, in a bid to bring in more FX revenues. This strategy, coupled with higher global gas prices, likely pushed the government to raise natural gas prices for cement and brick producers, Liquid Petroleum Gas Investors Association Chairperson Mohamed Saad Eldin told Enterprise.

Cement producers say it’s going to have a “limited” impact on production costs, since most cement factories rely primarily on coal as an energy source. The only cement plant that relies heavily on gas (30-40% of its energy mix) is military-owned Al Arish Cement, the head of the Federation of Egyptian Chambers of Commerce’s building materials division, Ahmed El Zeiny, told Enterprise. However, Al Arish’s retail prices are already among the cheapest, so they’re unlikely to surpass the market average even with an increase, El Zeiny explained.

Others say it won’t have an effect at all: EGX-listed cement producers Misr Cement Qena, Sinai Cement, and Egypt Beni Suef Cement will not be affected by the price hike, since they don’t use natural gas to operate their production lines, according to three separate disclosures (pdfs — here, here and here).

How much do cement players typically rely on natgas for production? Since the 2012-2013 gas crisis, cement players have limited their use of natural gas, Arabian Cement CEO and Managing Director Sergio Alcantarilla told Enterprise. Currently, cement plants with access to gas production use natural gas for an estimated 10-20% of their energy needs, head of the Federation of Egyptian Industries’ cement division Ahmed Shireen Korayem told Enterprise. 16 out of 18 of the cement producers in Egypt use coal in at least one part of their production process. Energy costs amount to approximately 70% of the production cost.

The energy mix is now unlikely to shift towards more natgas: The new price hikes are essentially prohibitive to any cement producers increasing their reliance on natural gas, Korayem told us.

But manufacturers need to direct more funds into creating more options: Cement manufacturers are expected to rely more heavily on coal, mazut, and solid and agricultural waste for energy production, said Korayem. However, the sector needs to invest in new or alternative energy sources, such as benefiting from the excess heat from kilns to generate energy and reduce emissions.

Still, don’t blame the lagging green shift in cement on higher gas prices: “The blame for not working toward decarbonizing the cement production industry or transitioning to clean energy can’t be pinned on gas price increases,” said Alcantarilla. Investments in creating alternative energy sources actually makes the industry more profitable, which is important considering several players had previously been either just breaking even or consistently in the red, Alcantarilla noted. Although the production caps improved the sector’s profitability, these levels are still not enough to unlock major capital expenditures, he said.

It’s a slightly different story for clay brick factories: Brick prices, which currently range between EGP 900-1k per 1k bricks, are expected to go up since natural gas accounts for some 30-40% of their energy mix, head of the Federation of Egyptian Industries’ Refractories and Bricks division Ali Singer told Enterprise. Singer added that the industry has been suffering for years: Since 2018, only 400 factories — out of more than 1k registered with the division — have been in business.

But again, the solution is to rely more on gas alternatives: Brick factories are expected to expand the use of mazut, biofuels, and fuels produced from recycled waste more in the coming period, Singer believes. Factories depend on imported mazut, which they struggle to finance in USD in addition to the environmental restrictions imposed on the industry, but they have no choice but to use more mazut, Singer said.

Will retail prices go up? The jury is out: “It is clear that an increase in the prices of any raw material will mean an increase in the production cost, and therefore the selling price should rise as well,” Alcantarilla told Enterprise. Korayem disagrees, pointing out that pricing is mainly determined by market supply and demand. With cement production caps in place until next July, under an August decision from the Egyptian Competition Authority, supply dynamics will likely keep prices steady. This suggests that the real estate and construction market won’t see a significant knock-on effect. Clay brick prices likely won’t have an impact on real estate and construction either because there is a continuous decline in demand for clay bricks in the market due to the suspension of building permits, El Zeiny said.

Your top infrastructure stories for the week:

  • UAE-based G42 and Benya Technologies will develop AI and other digital infrastructure including data centers, telecom towers, and cloud technology in Egypt, as part of an equity-based partnership.
  • Trial operations have begun on a stretch of the new Cairo Metro Line 3, running from Attaba to KitKat, that is set to open during COP27.
  • Belgium’s DEME has been awarded a dredging contract as part of the development of Abu Qir Port. The dredging work will serve the set up of new islands and a marina for yachts in Alexandria.

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