Monday, 10 May 2021

Cement producers might have to cut production to finally fix the supply glut

Cement producers could be asked to cut production by at least 10%, as part of a proposal put forward by the Egyptian government to reduce the supply glut that is crippling the industry, two unnamed industry executives and a senior source told Reuters.

What’s the plan? Cement producers would reduce production by a baseline of 10.52% plus an additional 3.71% for each production line and 0.65% for each year since they began operating, according to one executive. This means cuts of at least 14%, while older and larger plants could face reductions of more than double that, one of the sources said.

There could be some pushback from foreign firms: The executives welcomed government action to tackle the problems in the market but said that the proposals are “unfair” for foreign companies with a long history in the country. “We don’t think [the proposal] is particularly fair, it’s biased towards some local players at the moment,” said one executive.

Cement has been flooding the market for years: Sales are less than half of the sector’s annual production capacity, which has surged to 85-87 mn tonnes in the past three years. Making matters worse was the new military-owned Beni Suef plant that came online a couple of years ago, which is adding another 13 mn tonnes of cement to the market every year.

Demand fell further last year: Annual sales declined to 41.7 mn tonnes last year from 43.8 mn in 2019. Some 49.5 mn tonnes were sold in 2017.

Without action, the problem will likely get worse later this year when another 2 mn-tonne plant is opened by Egyptian Cement in Sohag.

Some have doubts about whether production cuts are the solution: Some market participants claim that cuts will only lead local prices to rise, suggesting that boosting exports could be a solution. Authorities should require factories to export at least 5% of total production to reduce some of the extra supply instead, cement distributor and head of the Cairo Chamber of Commerce’s building materials division Ahmed El Zeiny previously told us.

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