Are we on a date with the collapse of the cement industry in Egypt?

August 2, 2019

“We may witness bankruptcies if the state does not intervene to save the industry,” said the director of the cement division, Noha Bakr, in an interview last January. Bakr was speaking of the crisis facing the cement industry and that it may lead some companies to go bankrupt. The crisis may also lead to expelling foreign investment, which reaches up to 52 per cent of the volume of investments in the cement industry in Egypt.

Egyptian cement is the most expensive

On the reasons of non-competitive prices of Egyptian cement compared to other countries, said Bakr, Egyptian cement is more expensive than its counterparts because of the high production costs in Egypt.

The most prominent reasons for the rise in its price are high energy prices, as well as the imposition of a tax on the clay used in the production of cement which caused a 35 per cent rise in its price. The reasons also include a factory real estate tax, a 5 per cent to 14 per cent VAT increase in recent years, an increase in road charges, a 200 per cent rise in coal prices due to currency floating, and the rise in the global market price.

Cement companies closed

According to the data of five cement companies, sales declined during the first quarter of this year due to increased supply and reduced domestic demand for cement. This is alarming for the cement industry in Egypt.

This risk may be apparent after the Egyptian Public Sector Minister Hisham Tawfiq announced the closure of the National Cement Company due to its continual annual losses reaching EGP 1 billion. The minister said in a press statement that the net shareholders’ equity in the company is EGP 2.5 billion, hoping that the sale of the assets of the company would pay for its debts. He pointed out that the factory owed to the gas company EGP 4.4 billion, and to the electricity company EGP 700 million, and therefore there is no room for re-operation. This means that the company that was founded in 1956, ended in 2018.

The National Cement Company was not the last. A few months later, on May 19, the Suez Cement Company said that the Board of Directors had agreed to temporarily suspend the operation of the Portland Tourah Cement factory due to losses. The decision was based on the deterioration of the financial results of the Egyptian Portland Tourah Cement Company, in which the Suez Cement Company holds 66.12 per cent of shares.

In a separate statement to al-Borsa newspaper, Portland Tourah Cement Company said that it recorded a negative value of shareholders’ equity in 2018 amounting to EGP 196 million, while cement activity separately recorded losses of EGP 37 million in 2018, and EGP 72 million in the first quarter of this year.

The Suez Cement Company was the loser during the first quarter of this year, with a loss value of EGP 26.4 million in contrast to a profit of EGP 243.3 million during the same period last year.

Increased supply and low demand

The Suez Cement Company pointed out in its statement that the cement market is witnessing a huge increase in supply exceeding 30 million tons per year in return for lower demand. This leads to the lowering of prices to levels that do not cover the cost of production.

According to a recent report by the research unit at the Pharos Investment Bank, cement companies are under heavy pressure amid the increasing supply and the lower domestic and international demands. Demand declined with 9 per cent to a record 12.3 million tons in the first quarter of 2019 leading to a fall in sales in the first quarter by 5.3 per cent.

Collective retreat

Alexandria Company of Portland cement’s losses rose 123 per cent to record loses of EGP 77.6 million, compared to EGP 34.8 million losses. The results of the companies listed on the stocks show that Misr Cement Company (Qena), recorded a decline of 80.9 per cent in the profits of the first quarter of this year, recording a net profit of EGP 12.05 million compared to EGP 63.1 million during the same period last year.

The Arab Cement Company’s profit declined by 96.3 per cent during the first quarter of this year, recording a net profit of EGP 5.97 million compared to EGP 162.01 million during the same period last year.

Misr Beni Suef Cement’s profits declined by 76.5 per cent during the first quarter of the year, recording a net profit of EGP 29.53 million compared to EGP 125.9 million during the same period last year.

Could export save the cement industry?

In a recent research note, Shuaa Investment Bank reported the need for Egyptian cement companies to export to Africa in order to discharge part of the large surplus in the local market. Cement exports accounted for 1.2 per cent of the total production in the first quarter of 2019, and only 0.8 per cent of operational capacity.

“We note that potential conventional export markets such as Yemen, Syria, Iraq and Palestine have not been worked on yet. However, Egypt currently has no competitive advantage in these markets compared to Turkey, Iran and Saudi Arabia due to the current cost and prices in the domestic market,” said Shuaa.

The Shuaa report mentioned that “export is a must,” emphasising the importance for cement exporters to find a place in Africa, as there is an opportunity in East Africa with an average consumption of 33.9 million tons in 2018. This number is expected to rise to 37.6 million tons by 2020, while the total production capacity of this region is 21 million tons annually, with a gap of 13 million tons in 2018.

In contrast Ahmed Sulaiman, industry analyst at CI Capital, said that exporting is not a solution to the crisis of the Egyptian cement sector, with a large production surplus in the region around Egypt, describing the market and the export price as “not promising.”

Is the government taking action?

On July 21 Prime Minister Mostafa Madbouli held a meeting to discuss proposals to support the cement industry in Egypt, in the presence of the Minister of Trade and Industry and Medhat Istvanos, head of the cement industry and a number of officials. The meeting ended with the agreement to encourage the conclusion of bilateral agreements with African countries to export cement to them. Officials of the Central Bank asserted during the meeting that there is direction recommended to all banks to support cement companies and factories, to reschedule the debts of these companies and factories.

However, with cement stocks falling 12 per cent in one month, and real estate prices expected to rise by up to 30 per cent by the end of this year, it seems that the government’s move to export cement will not be the best solution to save the cement industry in Egypt.