Wednesday, 16 March 2022

AM — Cabinet sees budget deficit widening — and announces smart investment incentives for green and emerging industries

TL;DR

WHAT WE’RE TRACKING TODAY

Good morning, wonderful people, and welcome to almost-THURSDAY, which longtime readers know is how we prefer to think of the day normals call “Wednesday.”

THE BIG NEWS TODAY has to be the ongoing policy maturity the Madbouly government is showing in what are indeed “very challenging times” (to recycle a crazily overused corporate euphemism that makes us miserable every time we read it). Vice Minister of Finance Ahmed Kouchouk was out yesterday noting that the ministry is revising the budget deficit target in light of a hit to the commodities line item and ministers have given the green light to price caps on unsubsidized baladi bread. We hate price controls almost as much as we do subsidies, but this is common sense in light of what’s happening now. Ministers should go a step further and make clear that there’s a sunset clause for the price caps.

Ministers are also showing more willingness to deploy smart incentives. Measures expected “within hours” (we’re as tired of that phrase as we are of “very challenging times”) will give farmers incentives to plant more wheat — with a corresponding requirement they sell more of their harvest to the state.

And looking beyond the current crisis, Cabinet announced a series of on-point incentives to drive investment in the green economy as well as other priority sectors including artificial intelligence, education, and localizing industry. More of this, please.

^^ We have chapter and verse on all of this and more in this morning’s news well, below.

WHAT’S HAPPENING TODAY-

An African Development Bank (AfDB) delegation is in town to talk COP 27. Led by VP Kevin Kariuki, the team is holding talks with several ministers to discuss our preparations for the climate summit, which will take place in Sharm El Sheikh in November. Foreign Minister Sameh Shoukry (who is double-hatted as president of COP 27), International Cooperation Minister Rania Al Mashat, Environment Minister Yasmine Fouad, and Electricity Minister Mohamed Shaker are all meeting with the delegation to discuss how the bank can assist the government with its preparations. The visit wraps up tomorrow.

Also from the AfDB: The development bank plans to invest USD 1 bn to boost wheat production in African countries, noting that much of the continent is heavily reliant on imports from Russia and Ukraine, Bloomberg reports. AfDB will channel the money into “climate-resilient technologies” that will help 40 mn farmers on the continent raise their output of wheat and other crops, the bank’s president, Akinwumi Adesina, told the business news information service.

It’s Fed decision day: The Federal Reserve will end its two-day meeting to review interest rates today and is expected to kick off its long-signposted tightening cycle with a 25-bps hike. The market previously anticipated the central bank to go bigger and raise interest rates by 50 bps, but now expects the uncertainties triggered by the conflict in Ukraine to have changed its calculations. Look for an announcement this evening, Cairo time.

The Central Bank of Egypt will hold its policy meeting next week on Thursday, 24 March, and analysts are increasingly expecting policymakers to raise rates in response to surging global inflation.

Are the Saudis really serious about ditching the petrodollar in favor of the yuan? Analysts tell Bloomberg that talks between Riyadh and Beijing to sell some of its oil in yuan is more about geopolitical posturing than a serious reconfiguration of how global oil is traded. “I don’t know if it is really real,” said one strategist. “It happens at a moment when the geopolitical order is moving. The Saudis are trying to play with what they can. It is just a signal sent to the US they want more consideration.” US-Saudi relations deteriorated with the election of Joe Biden as president, who described it as a “pariah state” during his election campaign. Riyadh reportedly refused to take Biden’s phone call last week as his administration accelerates its pursuit of a nuclear agreement with Iran.

CIRCLE YOUR CALENDAR-

Swvl is on course to hit the Nasdaq on 31 March: Egyptian mass transportation firm Swvl will go public on the Nasdaq “on or around the 31 March” should the shareholders of its SPAC, Queen’s Gambit Growth Capital, approve the listing in a meeting on 30 March, the company said in a statement (pdf) confirming that the merger has received the greenlight from US regulators. The company will list 35% of its shares on the tech-heavy exchange following a merger with Queen’s Gambit, and will trade under the tickers “SWVL.”

Backing the listing: The SPAC has raised USD 300 mn from investors and has secured USD 121.5 mn in PIPE investments from the EBRD and several US-based investors, Abu Dhabi-based Chimera Capital and Kuwaiti VC Zain Group.

A busy year for Swvl: The company has entered two new continents via its acquisition of Barcelona-based Shotl and the South American firm Viapool, which operates transit services in Chile and Argentina.

A call for agribusiness SMEs: CARE Egypt is calling on SME owners to apply for a training program aiming to equip agripreneurs to raise funds. You can apply for the program here.

Green energy forum: The German Arab Chamber of Industry and Commerce is hosting the Egyptian-German Green Energy Forum next Tuesday, 22 March. The event runs 5:30-9pm CLT at the InterContinental Cairo Semiramis.

Check out our full calendar on the web for a comprehensive listing of upcoming news events, national holidays and news triggers.

enterprise

*** It’s Hardhat day — your weekly briefing of all things infrastructure in Egypt: Enterprise’s industry vertical focuses each Wednesday on infrastructure, covering everything from energy, water, transportation, and urban development, as well as social infrastructure such as health and education.

In today’s issue: The commodity price shock is pushing up prices of building materials in Egypt, with local steel and cement prices soaring since the start of the Ukraine conflict. Local manufacturers say that these price increases are necessary as they face soaring input costs, including the prices of key energy sources such as coal and pet coke. Contractors, on the other hand, are feeling the pinch, and are lobbying for government support to help them absorb the shock.

enterprise

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ECONOMY

FinMin sees budget deficit widening amid commodities price shock

The Madbouly government sees the FY 2021-2022 budget deficit target widening to 6.9% from 6.7%, Vice Minister of Finance Ahmed Kouchouk told Al Arabiya. This comes as war-related global price surges putting a strain on the state budget. The ministry expects to have to find an extra EGP 15 bn to cover the higher costs of importing wheat.

Softer targets were flagged by Finance Minister Mohamed Maait last week, casting doubt on the government’s ability to keep to the 6.7% target in light of higher commodity prices and the loss of Russian and Ukrainian tourists. The ministry is also revisiting its spending and fiscal targets for FY 2022-2023, he said. The updated draft budget is due to be presented to the House of Representatives on 31 March.

It’s looking more and more as if the Central Bank of Egypt may be prompted to raise interest rates: EFG Hermes’s Mohamed Abu Basha has become the latest analyst to forecast a rate hike when the central bank meets later this month, telling Al Arabiya that policymakers could raise rates by 100 bps to help tamp down rising inflation. A rate hike would also support portfolio flows as inflation eats into the country’s real rate, which is among the highest in the world.

Higher interest rates = higher debt burden: The government is considering offering more short-term treasury bills to reduce the cost of a rate hike, Kouchouk told the broadcaster. Treasuries are typically perceived by investors as being lower risk than long-term bonds and carry lower interest rates as a result.

What does that mean for the debt diversification strategy? The ministry has been working to lengthen the average maturity of its debts by issuing fewer treasury bills and more long-term bonds. It’s aiming to extend the average tenor of its debt to five years, up from 3.4 years currently.

Our samurai bonds are on the chopping block (for now): Egypt’s first samurai bond issuance will likely be delayed due to the deterioration of market conditions, Kouchouk said. The Finance Ministry had aimed to sell around USD 500 mn of JPY-denominated bonds in Japan by the end of June as part of its debt diversification strategy.

ECONOMY

The Russia-Ukraine war will curb our economic growth and hit the budget –IMF

In case Ahmed Kouchouk’s warning wasn’t enough, the IMF also thinks emerging markets including Egypt will need to hedge against the economic risks associated with the war in Ukraine, IMF Director for ME and Central Asia Jihad Azour told CNBC Arabia (watch, runtime: 15:43). Egypt’s budget will likely face pressure on the back of surging commodity prices, while the decline in tourists from Ukraine and Russia — two of our most important tourism markets in volume terms — will affect economic growth, he said.

What does the IMF recommend? We need to focus on food security issues resulting from our reliance on Russia and Ukraine for wheat imports, according to Azour, and protect the most vulnerable in society by widening the social safety net. This needs to come hand in hand with measures to both curb inflation and reach our targeted 1.5% primary surplus for the current fiscal year.

What food security issue? Russia and Ukraine together account for 80% of our wheat import. The spillover effect of grain price hikes is already apparent here at home, with global price hikes threatening to cost the government up to EGP 15 bn this fiscal year in additional wheat import costs. The price of unsubsidized bread has doubled since the war broke out, and the government is soon to impose price controls on unsubsidized bread (see story below) and raised the price it will pay farmers for what it buys during this year’s domestic harvest.

The war is also threatening about a third of our inbound tourism market by volume. IMF boss Kristalina Georgieva also pointed to the threat the war poses to our tourism industry last week, noting that it “will be sharply hit by the collapse of the Ukrainian and Russian markets.”

On the bright-ish side: “The development of Egypt’s oil and gas industry will help it weather the volatile price hikes of oil due to the war,” Azour said. Oil Minister Tarek El Molla made a similar suggestion recently, saying that gas exports could compensate for part of the cost of importing oil and petroleum products. Oil has soared to 14-year highs over the past few weeks due to the war, hitting USD 130 last week before sliding more than 20% on hopes that Russia and Ukraine were moving towards a peace agreement.

Egypt has not yet approached the IMF with requests for a support package, Azour said, confirming comments by Planning Minister Hala El Said earlier in the week. We last secured from the lender a USD 12 bn facility tied to much-needed economic reforms amid the EGP flotation, followed by another USD 8 bn to support the economy through the pandemic.

Expect the IMF to cut our growth forecast next month: The IMF will likely be revising downwards its forecasts for MENA countries’ economic growth, Azour said, echoing comments made by Georgieva last week, who said it will downgrade its global growth outlook in response to the conflict. The Fund currently expects the Egyptian economy to grow at a 5.6% clip this fiscal year. It will publish its latest World Economic Outlook ahead of its Spring Meetings in April.

COMMODITIES

Price controls for unsubsidized bread are happening

Gov’t to fix price and specifications of unsubsidized baladi bread: President Abdel Fattah El Sisi ordered the government to set a fixed price for unsubsidized bread yesterday, in the latest move to hold down local prices amid surging global inflation, according to an Ittihadiya statement.

Local bread prices have climbed rapidly since the conflict in Ukraine began, with some reports suggesting that prices have doubled in recent days.

How much will it cost? The exact details will be announced “within days,” but industry professionals expect the unsubsidized loaf of baladi bread to cost around EGP 0.75 and to weigh around 90 grams, said head of the bakeries division at the Cairo Chamber of Commerce Attia Hamad in a phone-in with Ala Mas’ouleety’s Ahmed Moussa (watch, runtime 9:21). The decision sees the government providing flour to private bakeries at set prices for the next four months to ensure they sell them to consumers at the fixed price, Hamad said.

El Sisi has also told the government to offer incentives to farmers to ramp up wheat production to ensure sufficient supplies amid the global supply crunch. Incentives will be announced “within hours,” Deputy Agriculture Minister Mohamed El Kersh said last night in a phone-in with Al Hayah Al Youm (watch, runtime 4:42).

Farmers will be nudged to sell more of their wheat harvest to the government, according to a document seen by Bloomberg. The business information service appears to suggest that farmers taking incentives to plant more wheat will need to sell a minimum quota to the state. Farmers could also be prevented from selling the rest of their crop to other buyers without first getting a license, the document reportedly said.

More wheat, less expensive fertilizer: Farmers who provide at least 90% of their yield to the government this season will receive subsidized fertilizers for the summer, according to the document. Officials from the supply and trade ministries declined to give comment to Bloomberg.

The new measures come as the government tries to bump up local wheat cultivation (and to buy more of it to put in reserves) to make up for the shortage of Russian and Ukrainian wheat, whose exports have been heavily curtailed due to the conflict. The two countries provide around 80% of Egypt’s wheat and account for more than a quarter of global supply. The government is now aiming to buy more than 6 mn tonnes of domestic wheat this harvest season, up from its previous 5.5 mn-tonne target.

The government is upping its storage capacity to make space for additional supplies: The Supply Ministry now has space for 5.4 mn tons of wheat, up from around 3.4 mn tons previously, the cabinet said in a statement.

A wheat shipment is currently on its way from France, Reuters reports. A vessel with about 30,000 tonnes of French wheat is incoming, in what appears to be a sale to a private importer, not state-buyer GASC, the news agency said.

Food protectionism is growing: Morocco became the latest country to introduce export curbs yesterday, announcing limits on tomato exports to hold down prices ahead of the Ramadan season, according to Bloomberg. Argentina and Indonesia have taken similar measures to cut back specific exports, while Russia and Ukraine have in recent days announced export bans of food staples.

Egypt has put in place bans of its own, last week announcing that exports of food staples such as wheat, flour, corn and oils will be prohibited for the next three months.

INVESTMENT WATCH

Tax incentives announced for green + emerging investments

Gov’t announces tax breaks to boost green economy + other emerging sectors: The government has widened the number of companies eligible for tax incentives under the Investment Act as it looks to stimulate investment into strategic areas of the economy. Companies working on a wider range of renewable energy and manufacturing projects will now be able to deduct 30-50% of their investment costs from their tax bills under a decision announced yesterday by Prime Minister Moustafa Madbouly, cabinet said in a statement. Certain activities in the education and sports sectors have also been added to the legislation.

Who’s eligible? Companies working on the following projects will now benefit from the tax incentives in the 2017 legislation:

  • green hydrogen and green ammonia production, storage and export;
  • the manufacture of plastics-alternatives;
  • establishing schools, technical education colleges, and universities;
  • setting up sports facilities.

What incentives will they get? Companies who invest in specific sectors and areas of the country see tax breaks calculated on the amount invested in the project. The legislation also hands companies a flat 2% customs rate on machinery imported for the project, and a five-year exemption from stamp duty and notary fees on certain expenses.

You also need to be in specific areas of the country to get the most benefit: Projects in priority development areas such as the Suez Canal Economic Zone, the new capital and Upper Egypt receive 50% of their investment dedicated from their tax bills, while investment into “sector B” areas receive the 30% deduction. Sector B projects must be either labor-intensive, SMEs, powered by renewables, or export-oriented, according to the law.

Further incentives will be on offer for companies working in other sectors: Companies investing in the green economy, AI, research and innovation, workforce upskilling, and localizing industry will be granted other incentives, the statement said, without providing further details.

Cabinet ministers approved the tax breaks last week, as part of a wider package of incentives put forward by the General Authority of Investment and Freezones.

OTHER INVESTMENT NEWS-

Lamar is looking to invest EGP 500 mn over the next three years: Alexandria Agricultural Company (Lamar) is looking to invest at least EGP 500 mn over the coming three years to expand production and strengthen its transport fleet, CFO Youssef Talaat told Bloomberg Asharq. The firm also plans to build new factories within three to five years, he added. The dairy and juice maker invested EGP 250 mn last year, Talaat said.

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WAR WATCH

Optimism fades in Ukraine peace talks

Optimism fades in Ukraine peace talks: The latest news out of the ongoing peace talks between Russia and Ukraine isn’t quite as optimistic as it was a few days ago, with a senior Ukrainian aide saying yesterday that there are “fundamental contradictions” between the two sides. Writing on Twitter, presidential adviser Mykhailo Podolyak said that the ongoing talks are “very difficult,” while adding that there is “certainly room for compromise.”

The sentiment was echoed by Putin: Ukraine is “not showing a serious attitude toward finding mutually acceptable solutions,” Russian President Vladimir Putin told European Council President Charles Michel yesterday. Talks are nevertheless scheduled to continue today.

In what can only be called a baller move, European leaders traveled to Kyiv in show of support for Ukraine: The Prime Ministers of Poland, Slovenia and the Czech Republic arrived in the capital yesterday and met with Ukrainian President Volodymyr Zelensky to confirm the EU's unequivocal support for Ukraine, the Wall Street Journal reported.

Biden heading to Europe to meet with Nato allies: US President Joe Biden will travel to Brussels next week for an extraordinary Nato meeting, in his first trip to Europe since the war broke out. “We will address Russia's invasion of Ukraine, our strong support for Ukraine, and further strengthening NATO's deterrence & defense,” Nato Secretary-General Jens Stoltenberg wrote on Twitter.

China seeks to distance itself from Russia’s war after US warnings: “China is not a party to the crisis, nor does it want the sanctions to affect China,” Foreign Minister Wang Yi said in a phone call with his Spanish counterpart José Manuel Albares, according to a statement. His statement came a day after US officials voiced worries about Beijing’s close ties with Moscow, and warned China not to assist Russia’s military campaign. Hong-Kong listed Chinese stocks have plummeted in recent days on fears that Chinese companies will face western sanctions.

PLANET WAR FINANCE-

Russia could take years to recover from a default, with its current debt valuation near the levels of severely indebted countries like Venezuela and Argentina, the Wall Street Journal reports. The country’s government bonds have fallen below 10 cents on the USD since the US and EU battered its financial markets with sanctions, with uncertainty clouding a key interest payment on a USD-denominated bond expected today.

Today is key: Russia is due to make a USD 117 mn payment on two USD-denominated bonds today but has so far given mixed signals about whether it will pay in RUB. Ratings agencies say that the government will officially be in default if it opts to pay in RUB or fails to pay in USD during the 30-day grace period, though with most of its reserves frozen under the US’ sanctions regime, it remains unclear whether it is able to pay bondholders in USD.

The war won’t see European banks banned from dishing out to shareholders, as was the case during the pandemic, European regulators told the Financial Times. Dividend payouts and share buybacks were banned for almost a year as the pandemic plunged the global economy into recession, but regulators don’t appear as worried about the health of banks’ balance sheets during this latest crisis. European banks are expected to pay out EUR tens of bns in dividends and share buybacks this year.

enterprise

LAST NIGHT’S TALK SHOWS

Bread prices were still the topic du jour last night on our airwaves. The talking heads dedicated major chunks of their shows to the price controls on unsubsidized bread. Head to our commodities section (above) for all the details.

EGYPT IN THE NEWS

Topping coverage on Egypt in the foreign press this morning: The US will likely provide Egypt with F-15 fighter jets, head of US Centcom Gen. Frank McKenzie has said. “I think we have good news in that we're going to provide them with F-15s, which was a long, hard slog,” he told a congressional hearing yesterday. McKenzie didn’t disclose how many of the Boeing aircraft would be sold or when the sale would take place. Reuters and Politico have write-ups of the general’s comments.

Meanwhile: The US should help east Mediterranean countries export gas to Europe to decrease the continent’s reliance on Russian hydrocarbons, an opinion piece in the Hill argues. To do this, Washington needs to support Egypt and Israel to increase their LNG capacity and encourage the UAE and Qatar to invest more in LNG.

ALSO ON OUR RADAR

More details on the EV charging station company PPP: The private sector partners in the soon-to-be-established company for EV charging stations will hold a 55% stake (including a 25% stake for the operating and managing firm), Masrawy quoted Public Enterprises Minister Hisham Tawfik as saying. The remaining 45% will be owned by the ministry. Each stakeholder will put up a corresponding portion of the venture’s initial EGP 150 mn capital, with another EGP 300 mn to be raised from local banks. The company will set up 3k charging stations within 18 months in Cairo, Alexandria, Giza, Sharm El Sheikh and several highways.

Reminder: Companies looking to operate and manage the company have until this Thursday, 17 March to submit their bids, with the ministry set to announce the qualified bids the following Thursday, 24 March. The private sector partner selected to manage and operate the company will be locked in with a medium-term contract for its services in exchange for a portion of the company’s net income.

ALSO- Shatablee is partnering with EGX-listed Contact Financial Holding to provide financing options for its customers (pdf). The interior design startup recently received USD 1.2 mn in investment.

Other things we’re keeping an eye on this morning:

  • British energy services company Petrofac will conduct an early-stage feasibility study on a new green hydrogen / ammonia facility for a subsidiary of low-carbon energy firm Mediterranean Energy Partners, which is chaired by Alaa Arafa, industry magnate and founder of Dolphinus Holdings.
  • Pepsico spent USD 100 mn on expanding production and upgrading the tech infrastructure of its Egyptian business lines in 2021.
  • Hitachi Rail will prepare a feasibility study for the operation and maintenance of the fourth metro line.

PLANET FINANCE

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Stocks rally ahead of Fed meeting: US stocks staged a comeback in yesterday’s session as oil prices continued to fall and weak data from a key manufacturing survey calmed concerns that the Federal Reserve will hike interest rates aggressively, according to Bloomberg. The tech-heavy Nasdaq ended three straight days of losses to climb 3.2% while the S&P 500 rose 2.1%.

Oil continued to plunge on signs that a nuclear agreement with Iran might still be in the cards and uncertainty over how a new wave of covid lockdowns in China might affect demand. Brent crude ended the day below USD 100 for the first time since 25 February, falling almost 8% to USD 98.60 a barrel. The benchmark has now plunged 24% since spiking to USD 130 last week.

Also worth noting:

  • Dubai will kick off its plan to list up to 10 state firms by selling a 6.5% stake in the Dubai Electricity & Water Authority (DEWA), according to a press release (pdf), which didn’t disclose the sum the listing aims to raise. Both the retail and institutional offerings are set to open on 24 March. EFG Hermes, Credit Suisse, First Abu Dhabi Bank, and Goldman Sachs are acting as joint bookrunners.
  • Qatar has begun operations at the USD 10 bn Barzan natgas plant. The plant is set to process nearly 1.4 bn cubic feet of gas daily, to help meet growing energy demand ahead of this year’s FIFA World Cup in Doha. (Bloomberg | CNBC Arabia)

None

EGX30

10,423

0.0% (YTD: -12.8%)

None

USD (CBE)

Buy 15.66

Sell 15.76

None

USD at CIB

Buy 15.66

Sell 15.76

None

Interest rates CBE

8.25% deposit

9.25% lending

Down

Tadawul

12,408

-0.7% (YTD: +10.0%)

Down

ADX

12,407

-0.7% (YTD: +11.69%)

Down

DFM

3,305

-1.4% (YTD: +3.42%)

Up

S&P 500

4,262

+2.1% (YTD: -10.57%)

Down

FTSE 100

7,176

-0.3% (YTD: -2.83%)

Down

Brent crude

USD 98.53

-7.8%

Down

Natural gas (Nymex)

USD 4.57

-1.9%

Down

Gold

USD 1,929.70

-1.6%

Up

BTC

USD 39,588

+2.2% (as of midnight)

THE CLOSING BELL-

The EGX30 rose less than 0.1% at today’s close on turnover of EGP 991 mn (7.4% above the 90-day average). Foreign investors were net sellers. The index is down 12.8% YTD.

In the green: Mopco (+8.5%), Abu Qir Fertilizers (+6.1%) and Fawry (+3.3%).

In the red: CIRA (-4.2%), Rameda (-4.2%) and Ibnsina Pharma (-3.9%).

This morning in Asia: Chinese shares are in the green this morning after suffering their worst sell-off since 2008 this week, while the Nikkei and the Kospi are also seeing gains. Stock futures indicate that shares in the US will open in the red. European indexes are on course to rise when the markets open.

DIPLOMACY

Climate change adaptation and climate finance for developing countries were at the top of the agenda in a COP27-focused meeting between Foreign Minister Sameh Shoukry and Malaysian environment minister Tuan Ibrahim Tuan Man, according to a cabinet statement. Shoukry was in Kuala Lumpur as part of an Asian tour that will also see him visit Singapore, Indonesia and Pakistan.

Binding emissions targets on the table? The pair also discussed “strengthening countries for their nationally determined contributions [NDCs] under the Paris Agreement.” Egypt has signed onto the original Paris Agreement and the updated COP26 pledge, but (unlike Malaysia) we haven’t submitted any NDCs — binding targets for specific emissions reductions. Egyptian authorities may announce a net-zero carbon emissions target at November’s COP27 climate summit in Sharm El Sheikh, Oil Minister Tarek El Molla has said previously.

AROUND THE WORLD

Is the Iran nuclear deal back on?

Russia says it got its guarantees, paving the way for an Iran nuclear agreement: Russia’s Foreign Minister Sergei Lavrov said he has received written guarantees that his country’s cooperation with Iran will not be impacted by ongoing Western negotiations to restore the 2015 Iran nuclear pact, Reuters reports. It is unclear if Russia has dropped its demand to protect trade with Tehran, but Lavrov’s comments signal that Moscow won't block the finalization of the long-awaited agreement — which could remove sanctions on the Islamic Republic and restore Iranian oil to the market.

With sanctions relief in sight, Iran is reviving efforts to export LNG: Iran’s National Oil Company has invited investors to submit proposals for the construction of mini liquefied natural gas units, Bloomberg reports. The announcement comes just as European buyers look to replace Russian gas flows in retaliation for its invasion of Ukraine. Russia provided about 40% of the EU’s gas last year.

There’s pressure on GCC producers to step up oil production:

  • The UK wants the Gulf to pump more oil: UK PM Boris Johnson will travel to the UAE and Saudi Arabia this week to lobby them to step up oil production in light of the Ukraine conflict, which has triggered serious volatility in the oil markets, Bloomberg says.
  • Burn: Joe Biden has also tried to get the ears of the Gulf states, only for Riyadh and Abu Dhabi to refuse to take his calls.
hardhat

The commodity price shock is pushing up prices of building materials in Egypt, with local steel and cement prices soaring since the start of the Ukraine conflict. Local manufacturers say that these price increases are necessary as they face soaring input costs, including the prices of key energy sources such as coal and pet coke. Contractors, on the other hand, are feeling the pinch, and are lobbying for government support to help them absorb the shock.

The jump in global energy costs is pushing up cement prices, accounting for some 50% of the increase in cement prices, Beni Suef Cement CEO Farouk Moustafa tells Enterprise. Coal — the primary source of fuel used for cement production — has been rising since the beginning of the year, but began to really soar at the end of February, when the war broke out. One ton of coal was trading at around USD 240 on 25 February, jumping to USD 400 per ton on 2 March and peaking at USD 423 per ton on 9 March, according to market data. Prices have since cooled, with a ton of coal currently priced at USD 361.

Faced with these soaring energy costs, some local manufacturers decided to temporarily suspend production and rely on selling stockpiles in hopes of waiting out the price volatility, Arabian Cement CEO Sergio Alcantarilla tells Enterprise. But some producers who opted for this route depleted their cement stocks and are now faced with even higher input costs than when they had decided to suspend production, he says. “So it’s only natural that they will transfer this higher cost to the end product.” And even manufacturers who still have stocks to sell are likely going to be selling their cement at current market prices, to be able to ensure enough of a margin to cover the costs of their next coal purchase and manufacture more cement, Alcantarilla explains.

How much is cement selling for now? Prices vary between producers, depending on when they sourced their energy, Alcantarilla said. Producers are currently selling one ton of cement at anywhere between EGP 1k and EGP 1.k, he said. Head of the Cairo Chamber of Commerce’s building materials division Ahmed El Zeiny puts the price higher, telling Enterprise that cement is now selling at EGP 1.6k per ton.

What’s the solution? Local cement manufacturers want to increase their reliance on natural gas, and are looking to set their natural gas consumption at 10% of their fuel mix, Mostafa says, but the Trade and Industry Ministry has yet to make a decision on this. While relying on natural gas as a local energy source would be beneficial for manufacturers, particularly if the government supplies it at lower costs, this scenario seems far-fetched, since the energy shortage in Europe is the perfect window for Egypt to export more natural gas and increase its revenues, Alcantarilla says.

Even with these higher input costs, producers aren’t the sole source of the higher retail prices. Cement retailers have “significantly” increased their margins in the past several weeks, pushing up the final cost that customers are faced with even further, according to Alcantarilla. However, he suggests that these retailers could be justified in raising retail prices if they are facing increased transport and other logistics costs.

It’s not just the impact of the war: The cement industry was already seeing higher end-product prices after production cuts were introduced in July to ease the years-long supply glut. In place for a year, the quotas compel market players to cut production by at least 10.7%, while additional cuts of 2.81% per production line can also be made. The decision was a lifeline for the local cement manufacturing industry, Moustafa says, and the supply/demand balance is now looking healthier.

Although that decision was critical to keep several producers from shutting down, some want to see it reversed in light of spiraling commodity prices. El Zeiny has submitted a request to the Consumer Protection Agency (CPA) to scrap the quotas and is taking a similar request to the Trade and Industry Ministry next week, which he says is necessary to protect the building materials sector from “unwarranted” price increases.

Steel prices are also running red-hot: The war’s inflationary wave is also touching steel, the price of which jumped to EGP 21k from EGP 15.5k over the course of two weeks. This rapid jump is primarily caused by a significant rise in imported scrap metal prices (to USD 650 per ton, from EGP 514 per ton), which accounts for around 60% of the cost of steel, head of the FEI’s metal industries division Mohamed Hanafy tells us. Steel prices are also affected by higher shipping and freight costs, particularly in light of ongoing supply chain disruptions, Hanafy says. This issue is compounded by the shortage of raw materials, which is pushing manufacturers to import their goods from China and India (as opposed to Europe), resulting in even higher shipping and freight expenses, he explains. Pellet prices have climbed by 30% in past weeks, and are now selling at USD 910 per ton, from USD 700 per ton from 25 February.

Although there are clear market dynamics to explain the price increases, El Zeiny says that there is some manipulation at play, telling us that there are some manufacturers who are “taking advantage” of the situation and hoarding supplies. These extortionary moves are exacerbating the issue, El Zeiny said, calling for the CPA to investigate.

Faced with these higher costs, contractors are trying to mitigate the impact of these higher input costs on current projects. Contractors are calling on the government to delay the delivery of some projects, head of the Egyptian Federation of Construction and Building Contractors Mohamed Sami Saad tells us. This will help ease the pressure off the market, allow the industry to adequately assess the situation, and give prices a chance to stabilize, he said. After meeting yesterday, the federation is calling on the government to grant lower-priority projects a three-month extension so contractors can hold off on buying materials at current prices.

Contractors also want assurances that the government will pay arrears immediately to give them enough liquidity to cope with the rising prices, Saad said. They are also asking the government to postpone certain obligations and expenses, such as the 0.25% tithe on corporate revenues that helps fund the universal health ins. program. The union will send their recommendations to Prime Minister Madbouly, who has formed a crisis committee to combat the impact of the Russia-Ukraine war on prices.

Challenges are mounting for the government: “Put yourself in the government’s position, would you buy wheat and food staples to ensure food security, or buy steel and cement?” Saad says. “They are in a tough position.”


Your top infrastructure stories for the week:

  • East Delta Electricity Company plans to build a 125 MW power unit at the El Arish plant. The EGP 2 bn unit is expected to be completed during FY 2022-2023.
  • LNG carriers have started paying the full rate to transit the Suez Canal, after toll discounts were rolled back amid rising demand for natural gas.

CALENDAR

1Q2022: Launch of the Egyptian Commodities Exchange.

1Q2022: Swvl acquisition of Viapool expected to close.

1Q2022: Waste collection startup Bekia plans to expand to the UAE and Saudi Arabia.

1Q2022: Rameda Pharma will begin selling its generic version of Merck’s oral antiviral covid-19 med.

1Q2022: Pharos Energy’s sale of a 55% stake in El Fayum, Beni Suef concessions to IPR Energy Group subsidiary IPR Lake Qarun expected to close.

Early 2022: Results to be announced for the second round of the state’s gold and precious metals auction.

1H2022: Target date for IDH to close its acquisition of 50% of Islamabad Diagnostic Center.

1H2022: e-Finance’s digital healthcare service platform, eHealth, will launch its services.

1H2022: The government will respond to private companies’ bids to build desalination plants.

1H2022: Egypt’s second corporate green bond issuance expected to be announced.

1H2022: The Transport Ministry to sign a memorandum of understanding with Abu Dhabi Ports to set up a transport route across the Nile to transport products from Al Canal’s Minya sugar factory.

15 February-15 June (Tuesday-Wednesday): ITIDA’s Technology Innovation and Entrepreneurship Center is organizing the first Metaverse Hackathon.

March: Rollout of the government financial management information system (GFMIS), a suite of electronic tools to automate the government’s financial management processes (pdf) that will replace the existing “closed” financial management system.

March: Contracts for last two phases of Egypt’s USD 4.5 bn high-speed rail line to be signed.

March: 4Q2021 earnings season.

March: Deadline for the World Health Organization’s intergovernmental negotiating body to meet to discuss binding treaty on future pandemic cooperation.

March: World Cup playoffs.

March: The government hopes to sign a final contract between El Nasr Automotive and a new partner for the local production of electric cars.

March: Target date for Saudi tech firm Brmaja to IPO on the EGX.

March: Egypt to host World Tourism Organization Middle East committee meeting.

March: The Salam – new administrative capital – 10th of Ramadan Light Rail Train (LRT) line will start operating.

March: The new multi-purpose station at Dekheila Port and the revamped Ain Sokhna Port will start operating.

March: General Authority for Land and Dry Ports to issue the condition booklets for the operations of the Tenth of Ramadan dry port.

9-18 March (Wednesday-Friday): The annual Cairo International Fair.

Mid-March: Bidding for the construction of Anchorage Investments’ petrochemical complex in the Suez Canal Economic Zone starts.

14 March-30 June: The “Escape to Egypt” exhibition at the Coptic Museum, in celebration of its 112th anniversary.

15 March: Export Smart conference, Royal Maxim Palace Kempinski, Cairo.

15-16 March (Tuesday-Wednesday): Federal Reserve interest rate meeting.

20 March (Sunday): Applications close for Visa’s global startup competition, the Visa Everywhere Initiative.

20-22 March: International Maritime and Logistics conference Marlog kicks off.

22 March (Tuesday): Egyptian German Green Energy Forum, 5:30-9:30pm CLT, InterContinental Cairo Semiramis.

24 March (Thursday): Central Bank of Egypt’s Monetary Policy Committee meeting.

24 March (Thursday): GB Auto Extraordinary General Assembly (pdf).

24 March-1 April: Ahlan Ramadan Supermarket Expo, Cairo International Convention Center.

25 March (Friday): Egypt will host Senegal in the first leg of their 2022 FIFA World Cup qualifiers' playoff (TBC).

26 March (Saturday): Egypt-EU World Trade Organization dispute settlement consultations end.

28-29 March (Monday-Tuesday): The Egypt International Mining Show (EIMS 2022) will take place virtually.

28 March (Monday): The second leg of the 2022 FIFA World Cup qualifiers' playoff between Egypt and Senegal (TBC).

28 March (Monday): The court hearing for a case brought by Arabia Investments Holding (AIH) against Peugeot has been postponed until 28 March.

31 March (Thursday): Deadline for submitting tax returns for individual taxpayers.

31 March (Thursday): Vodacom purchase of Vodafone Group’s stake in Vodafone Egypt expected to be completed by this date.

31 March (Thursday): Supply Ministry expected to take final decision on bread subsidies by this date.

April: Fuel pricing committee meets to decide quarterly fuel prices.

April: Ghazl El Mahalla shares will begin trading on the EGX.

2 April (Saturday): First day of Ramadan (TBC).

3 April (Sunday): Bidding begins on the Industrial Development Authority’s license to manufacture tobacco products.

4 April (Monday): CDC Group will formally change its name to British International Investment.

14 April (Thursday): European Central Bank monetary policy meeting.

Mid-April: Trading on the Egyptian Commodity Exchange to start.

22-24 April (Friday-Sunday): World Bank-IMF Spring Meetings, Washington D.C.

24 April (Sunday): Coptic Easter Sunday (holiday for Coptic Christians).

25 April (Monday): Sham El Nessim.

25 April (Monday): Sinai Liberation Day.

28 April (Thursday): National Holiday in observance of Sham El Nessim.

30 April (Saturday): Deadline for submitting corporate tax returns for companies whose financial year ends 31 December.

Late April – 15 May: 1Q2022 earnings season

May: Investment in Logistics Conference, Cairo, Egypt.

1 May (Sunday): Labor Day.

3-4 May (Tuesday-Wednesday): Federal Reserve interest rate meeting.

4 May (Wednesday): 3 February (Thursday): Deadline to send in applications for Cultural Property Agreement Implementation projects to the US Embassy in Cairo.

5 May (Thursday): National Holiday in observance of Labor Day.

2 May (Monday): Eid El Fitr (TBC).

19 May (Thursday): Central Bank of Egypt’s Monetary Policy Committee meeting.

5-7 June (Sunday-Tuesday): Africa Health ExCon, Al Manara International Conference Center, Egypt International Exhibitions Center, and the St. Regis Almasa Hotel, New Administrative Capital.

9 June (Thursday): European Central Bank monetary policy meeting.

14-15 June (Tuesday-Wednesday): Federal Reserve interest rate meeting.

15-18 June (Wednesday-Saturday): St. Petersburg International Economic Forum (SPIEF), St. Petersburg.

16 June (Thursday): End of 2021-2022 academic year for public schools.

23 June (Thursday): Central Bank of Egypt’s Monetary Policy Committee meeting.

27 June-3 July (Monday-Sunday): World University Squash Championships, New Giza.

30 June (Thursday): June 30 Revolution Day, national holiday.

End of 2Q2022: The Financial Regulatory Authority’s new Ins. Act should be approved.

End of 1H2022: Emirati industrial company M Glory Holding and the Military Production Ministry will begin the mass production of dual fuel pickup trucks that can run on natural gas.

2H2022: The inauguration of the Grand Egyptian Museum.

2H2022: IEF-IGU Ministerial Gas Forum, Egypt. Date + location TBA.

2H2022: The government will have vaccinated 70% of the population.

3Q2022: Ayady’s consumer financing arm, The Egyptian Company for Consumer Finance Services, to release first financing product.

July: A law governing ins. for seasonal contractors will come into effect.

July: Fuel pricing committee meets to decide quarterly fuel prices.

1 July (Friday): FY 2022-2023 begins.

8 July (Friday): Arafat Day.

9-13 July (Saturday-Wednesday): Eid Al Adha, national holiday.

21 July (Thursday): European Central Bank monetary policy meeting.

26-27 July (Tuesday-Wednesday): Federal Reserve interest rate meeting.

30 July (Saturday): Islamic New Year.

Late July – 14 August: 2Q2022 earnings season.

August: Work to extend the capacity of the Egypt-Sudan electricity interconnection to 300 MW to be completed.

18 August (Thursday): Central Bank of Egypt’s Monetary Policy Committee meeting.

September: Egypt will display its first naval exhibition with the title Naval Power.

September: Central Bank of Egypt’s Innovation and Financial Technology Center to launch incubator for 25 fintech startups.

8 September (Thursday): European Central Bank monetary policy meeting.

20-21 September (Tuesday-Wednesday): Federal Reserve Finterest rate meeting.

22 September (Thursday): Central Bank of Egypt’s Monetary Policy Committee meeting.

October: World Bank and IMF annual meetings in Washington, DC

October: Fuel pricing committee meets to decide quarterly fuel prices.

6 October (Thursday): Armed Forces Day, national holiday.

8 October (Saturday): Prophet Muhammad’s birthday, national holiday.

18-20 October(Tuesday-Thursday): Mediterranean Offshore Conference, Alexandria, Egypt.

27 October (Thursday): European Central Bank monetary policy meeting.

Late October – 14 November: 3Q2022 earnings season.

November: Cairo Water Week 2022.

1-2 November (Tuesday-Wednesday): Federal Reserve interest rate meeting.

3 November (Thursday): Central Bank of Egypt’s Monetary Policy Committee meeting.

7-18 November (Monday-Friday): Egypt will host COP27 in Sharm El Sheikh.

21 November-18 December (Monday-Sunday): 2022 Fifa World Cup, Qatar.

13-14 December (Tuesday-Wednesday): Federal Reserve interest rate meeting.

15 December (Thursday): European Central Bank monetary policy meeting.

22 December (Thursday): Central Bank of Egypt’s Monetary Policy Committee meeting.

End of 2022: e-Aswaaq’s tourism platform will complete the roll out of its ticketing and online booking portal across Egypt.

January 2023: EGX-listed companies and non-bank lenders will submit ESG reports for the first time.

January: Fuel pricing committee meets to decide quarterly fuel prices.

**Note to readers: Some national holidays may appear twice above. Since 2020, Egypt has observed most mid-week holidays on Thursdays regardless of the day on which they fall and may also move those days to Sundays. We distinguish above between the actual holiday and its observance.

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