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Wednesday, 11 January 2017

Jose Maria Magrina, CEO, Suez Cement Group

José Maria Magrina is that rare foreigner who not only does business here, but truly loves the country — and intends to make Egypt his family’s home for the long term. We enjoy Magrina’s company because he balances an incredible appetite for work with being an engaged dad and active sportsman. The fact that he’s an active member of the Cult of Mac doesn’t hurt. On the professional front, Magrina has earned our respect for how he handled the IPO of Arabian Cement (the first IPO in the market after the events of January 2011) and for his quick, incisive thinking on everything from the economy to corporate strategy. Magrina is now the CEO of Suez Cement, at 12 MTPA the largest cement group in Egypt by capacity. With five plants and c. 7k direct and indirect employees, it is also the largest German industrial group in Egypt and one of Heidelberg Cement’s largest subsidiaries globally.

2017 will be the year of reforms, and I don’t think we’re over the hump just yet. The government took the right measures. They’re painful, but they’re steps that have set us on the path for medium- and long-term growth and recovery. Now, other things need to fall in place, like a further reduction of fuel subsidies given rising international oil prices. To date, the government has concentrated on reducing subsidies to industry, so it’s now time also to tackle the lion’s share, the subsidies that go to the majority of the population. Key to this is making sure that welfare benefits are directed to those in need. Subsidized utilities, food and fuel should be a matter of the past, and moving away from it will help rationalize consumption and alleviate the burden on the state, which can in turn use those funds to invest in more pressing needs including health, education and investment in infrastructure.

In the meantime, we have to see how these reforms settle into the population. How will the government shield low-income earners from the impact without continuing with the current subsidy system? They need to speed up the introduction of cash transfers to qualified beneficiaries.

The biggest challenge for the economy will be regaining our footing as a competitive exporter. We’re all presuming that in the short-to-near term, the economy will start exporting and generating foreign currency to maintain the deficit at a sustainable level. But we import more than we produce, and shifting the balance will demand new regulations and an investor-friendly environment. This isn’t just an issue for foreign investors — local investors will lead this recovery, they’re the ones who will push the economy forward. We need to go from an inward-looking economy to an export one. With the EGP now competitive, we need to take advantage of this to export.

Our industry faces a couple of significant challenges. First of all, the construction industry is going through a period of instability. 2016 will close with 7% growth in cement consumption, but there’s overcapacity and other state actors are building the world’s largest cement plant. The industry will definitely want more visibility on the role of the state in supply. Then there’s logistics: We’re on the verge of becoming export competitive, but that’s sapped by the cost and efficiency of logistics on the roads and in ports. Arbitrary toll fees and taxes on the roads are the main challenge.This is critical: Exports could be very important to our industry given both oversupply and the risk that the government pulls back from stimulus spending on infrastructure.

The biggest opportunities for us? Exports and serving government demand. From the Suez Canal to the New Capital, we’re delivering to major government installations right now, and if they keep investing in infrastructure like this, it’s a massive opportunity for everyone in the industry. The downside risk is the disappearance of this opportunity if they need to pull back on the spending front to redress the budget deficit. We’re also working to develop a nascent market for more sophisticated products. Through our ready-mix subsidiary, we are working with the biggest construction companies to develop extra-durable concrete for its use in heavy-duty applications as well as special mixes for underground applications and other interesting uses.

All of our natural export markets are at war or embroiled in conflict right now. Libya, Syria and Yemen. We’re starting to see exports to Libya and Yemen, and we’re hopeful about Syria, but not in the immediate term. We previously exported a lot of gray cement to other, more mature markets when we enjoyed a better cost structure, but that’s off the table now. We’re now exporting white cement to Europe, Saudi Arabia and the United States. It’s used as a plastering and decoration material, and our plant in Minya produces with a degree of whiteness equivalent only to Carrara in Italy. And on a same-price basis, the market typically prefers Minya.

Our group is going through difficult times right now, so it’s difficult for us to talk about exceptional salary rises. We’ll follow through on the basic increase specified in our collective agreement – high single digit. We just can’t afford to do more. We’ll have losses for FY2016 and we’ll probably still be in the red in 2017 despite everything we’re doing to turn the corner.

There will definitely be M&A activity this year — there are three companies in the market right now that are actively looking to sell. The economics are definitely more in favor of M&A than of a greenfield plant — there were no fundamentals for the new licenses. The market is already in oversupply and we already have some of the lowest prices in the world. In Spain, during the worst years of the global financial crisis, prices were still at EUR 52 per ton, and in Egypt we are currently at EUR 31 per ton. The return on investment to build a factory — where 60-70% of your equipment will be imported — is simply non-existent. We’re not in the market to buy — we’re comfortable where we stand. But there will definitely be M&A activity in our sector.

Who’s going to do best this year? Bankers and investment bankers always make out well in times of turbulence. The best opportunities are typically well-priced when there’s turbulence. Financial institutions are also going to make a lot of money this year — they have leverage and they tailor the regulations in their favor.

Give you an example? Why are capital gains made on the stock exchange exempt from taxes, but my company’s dividends would be taxed? Dividends have already been taxed — and those who created those dividends typically create a lot more value for the economy in producing them than do speculators in the stock market.

Automotive will be one of the worst performing sectors this year. They’re going to sell lower volumes of higher priced goods. I wouldn’t want to be in pharma. They had a reasonably profitable industry in the past, but they’re challenged now. I would be selectively bearish on some segments of the food industry because of the import component.

If I were to start my own business today, it would absolutely be in waste management. There’s a massive opportunity to transform waste into energy, whether it’s for my industry or the new power plants. We have tremendous potential, particularly with the new Siemens electrical stations and in industries such as ours, to transform waste into energy — but we’re held back by supply and quality. Suez Cement could use refuse-derived fuel for up to 25% of our energy needs, but we can’t because of a lack of reliable suppliers — today, you need to collect and treat from so many small landfills. The main hurdle for the growth of that industry is in the regulations around collection and landfills as well as the lack of clarity on which authority is the regulator for the market. A clear effort should be put in place to allow for higher use of alternative fuels in all industries, but the government has to start by drafting a comprehensive legal framework. The opportunity is huge, there are power plants in Europe that run almost entirely on waste, and when you see the price differential, it’s clearly a business opportunity.

The biggest regulatory issue on which we’re keeping an eye this year is definitely the role of the government and state-affiliated institutions in our industry. They should not be active players, but regulators and consumers.

The question that’s keeping me awake at night is “What can I do to alleviate the burden of rising costs for my staff in the current circumstances?” We can’t raise wages beyond what’s in the collective agreement due to our company’s circumstances, but I can also understand that purchasing power has been eroded. We have to find a medium-term solution.

The other question that keeps me awake is, “Is this the going USD/EGP rate? Or will it be closer to EGP 14 by the end of the year?” We all know that the overshoot to 19 is pent-up demand, but I’m a bit nervous. 19 is difficult to swallow.

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