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Wednesday, 15 September 2021

Cement prices are finally rising in Egypt — but producers continue to face challenges

Cement prices are finally rising in Egypt — but producers continue to face challenges: As nations ramp up investments in infrastructure projects that were hit at the height of the pandemic, prices of construction materials have been on the rise, with cement being no exception. In the UK, cement prices have risen as much as 30% in May from a year earlier, while in Turkey prices shot up 56% in July. We’re now seeing cement prices rising here in Egypt, a development that could help to repair balance sheets of companies that have been crippled by years of oversupply.

It’s not quite that simple though: Though demand is finally starting to pick up after years of falling consumption, market prices are also being driven by rising raw materials and shipping costs, which are squeezing producers’ margins, industry insiders say.

The cement sector is still struggling to claw its way out of a chronic oversupply crisis: For years, companies have been flooding the market with cement in a race-to-the-bottom price war which has forced several market players to suspend operations, left others on the brink of exiting the market, and according to some estimates caused sector-wide losses of more than EGP 1 bn. Exacerbating the situation further has been the military’s Beni Suef plant, which added another 13 mn tonnes of annual capacity to the market when it came online in 2018.

Cement prices have been climbing steadily this year, rising 20% between January and August to EGP 900 a tonne, official figures (pdf) show. Since then, cement has been trading between EGP 900-1k a tonne, Beni Suef Cement Company CEO Farouk Mostafa told Enterprise.

But Egypt still has some of the lowest cement prices in the world, industry insiders tell us. A tonne of cement in 2016 cost EGP 730 — or USD 92 before the EGP devaluation. Now a tonne of cement costs USD 60, which is often a lower price than the costs injected for production and around 33% less than what it was before the oversupply glut. In comparison, cement prices reached USD 272.9 per tonne in the US last month.

Why are prices climbing? A lot of it has to do with inflation putting pressure on margins. Local cement prices are climbing due to rising costs of fuel, electricity and raw materials, Suez Cement CEO Jose Maria Magrina told us. Electricity prices were hiked by the government at the beginning of the year as it continues to phase out subsidies, while the cost of petcoke is at its highest level in more than a decade and freight costs remain “extremely high,” according to a recent investor presentation (pdf) by Arabian Cement. “Consequently, it is normal that cement prices grow as there [is] no more margin on the producers’ side to keep absorbing extra costs,” the company said.

Coal is a particular problem: While the Oil Ministry has shielded factories from the oil rally, increasing coal prices are having an impact on margins. Sixteen of the 18 companies in Egypt use coal in at least some of their operations, a number of which converted their facilities to run on coal in response to the lifting of fuel subsidies since 2016. Companies are now feeling the pinch after the global economic rebound sent global prices soaring to a 13-year high of almost USD 170 a tonne in August, almost triple that of their 2020 low.

That’s not all though- demand is also finally starting to rise: Consumption is forecast to rise for the first time in five years in 2021, according to Trade and Industry Ministry projections which see demand rising 6% to just short of 49 mn tonnes.

Putting this in perspective though: A 6% rise would still not return us to pre-pandemic consumption levels, which came in at 48.8 mn tonnes in 2019. This in itself is a considerable fall from pre-supply crisis levels in 2016, which saw companies sell 56.6 mn tonnes through the year.

And this is still only slightly more than half of the sector’s current capacity, which has surged to 85-87 mn tonnes in the past three years, putting production well in excess of market consumption.

A reversal this year would be welcome but the current demand projections are not enough, suggests Arabian Cement CEO Sergio Alcantarilla. Assuming that no more capacity is added to the market, a healthy level of consumption in Egypt would see the sector shift around 72 mn tonnes per year, he says.

Production quotas introduced by the government in July are supposed to be removing a chunk of this excess supply. Companies have agreed to cut production by more than 10% until July 2022 in a bid to ease the supply glut and support prices.

But some aren’t convinced the cuts are having enough of an impact on prices: This includes Lafarge Egypt CEO Solomon Baumgartner, who recently told the Africa Report that prices remain “very, very low.” Baumgartner wants prices to rise another 30-35% by the middle of October, and will consider pulling out of the system if things don’t change, the website reported.

It’s still too early to assess how the quotas are affecting the market, Magrina tells us. Everyone needs to abide by the new regulation and the Egyptian Competition Authority needs to ensure it is implemented fairly and with transparency for the whole industry, he says.

But optimists remain: Alcantarilla believes that if economic conditions allow, the Egyptian cement industry should return to growth at its historical average of more than 5% a year. “I hope 2022 will be the first year to witness this,” he says.

Your top infrastructure stories for the week:

  • High-speed rail contract 2.0 coming in two months: This is according to Transport Ministry sources who told Amwal Al Ghad that Siemens is preparing the ink contracts for the second and third high-speed rail lines that will run from Cairo to Aswan, and Luxor to Hurghada. The German conglomerate signed a USD 4.5 bn contract for the first line running from Marsa Matrouh to Ain Sokhna with Orascom Construction and Arab Contractors last month.
  • The African Finance Corporation could help fund the high speed train and the Cairo monorail, Prime Minister Moustafa Madbouly said last week.
  • Elsewedy snags EETC EGP 1.15 bn contract to build 3 electricity substations: Elsewedy Electric signed two turnkey contracts to establish three electricity substations in Central and North Sinai.
  • The Oil Ministry said it is looking to digitize its petrol transport process: it has already begun implementing the SCADA system to oversee transport and distribution.

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