CAIRO: Egypt’s steel sector is set to see a recovery beginning 2010, investment bank HC Capital said in a report Tuesday.
The report, which focuses on the impact of the financial crisis on the local steel market, and in particular on Egyptian giant Ezz Steel Rebars and its subsidiaries, predicts sector recovery beginning in 2010.
“We expect a 20 percent year on year drop in global crude steel production in 2009 and volume recovery in 2010. Current steel market prices are at normalized levels and we do not expect any price rebound in 2009, the authors of the report wrote.
The report cites resilient local demand and increased efficiency as two major factors that have helped keep production afloat, despite month on month fluctuations in production and pricing.
“Since the beginning of 2009, the steel market witnessed fluctuating production output. Production went up 5.3 percent month on month in January 2009, declined 2.0 percent in February, increased 8.8 percent in March, and finally dropped 2.9 percent month on month in April, the report states.
Price fluctuations have also plagued the market in recent months. Yesterday Metal Bulletin reported an Ezz Steel official as saying that the company has cut its domestic rebar price for the second month in a row in a bid to be more competitive.
We want to take advantage of growth in the Egyptian market. Turkish mills have been offering rebar at $465 per ton for July production and August delivery, down from sales of $470-475 per ton for July delivery. But end users in Egypt are now bidding at about $450-455 per ton, the official said.
Al-Mal reported that steel producers have raised their selling prices for the month of July 2009 by LE 20-25 per ton to a range of LE 2,850-2,870 per ton. Meanwhile Ezz Dekheila announced a price reduction of LE 150 per ton to LE 2,900 wholesale and LE 3,010-3,030 for retail.
Despite supply and price fluctuation, demand has remained relatively stable. Local demand was 5.9 million tons in 2008, and is expected to reach 13.4 million tons by 2013 according to the report’s analysis.
This strong demand provides opportunity for growth, but local producers will have to improve efficiency to keep up with demand growth rates into the future.
The authors of the report believe that vertical integration is the key to increased productivity in the sector, as evidenced by the success of Ezz Steel subsidiary Ezz Dekhelia, which has used vertical integration to maximize output margins.
Patrick Gaffney, a steel expert with Cairo investment bank EFG-Hermes, confirmed that vertical integration has been a successful strategy for local steel plants.
“Ezz Dekheila has been successful due to vertical integration, which allows them to take more profit from the steel making process, he said.
The report emphasizes the fact that local demand for steel products, particularly long steel, is real and increasing due to real estate construction and infrastructure projects that have continued despite the financial crisis.
The government has pledged LE 36.5 billion for infrastructure in the 2009/2010 fiscal year budget. Meanwhile, an estimated marriage rate of 600,000 yearly and the continued expansion of New Cairo is putting increased pressure on the local housing market.
“We believe that local rebar producers will maintain almost full utilization rates to satisfy the high domestic demand, the report concludes.
Long steel is used primarily in construction and infrastructure projects, and production capacity continues to lag behind local demand, prompting rising import figures of 200-300 kg per month in the first months of 2009.
The report’s authors predict an impressive year on year growth rate of 23.7 percent for the local long steel sector, though they warn that null customs duty on steel imports could pose a competitive threat to local producers in the future.
Gaffney says that volumes of long steel have remained relatively stable, while flat steel production has suffered due to shrinking consumer goods and export markets.
“Volumes have been pretty good in long steel but flat levels have been weak due to a falling export market. While flat volumes will probably recover in 2010, I don’t think they will recover to the levels they were at in the first half of 2008 for a while, he said.
Despite strong local demand, the report points out that Egypt’s per capita steel usage, at 79 kg per capita, is low compared to comparable economies. The authors predict that continued healthy rates of economic growth will bolster per capita steel use into the future to 177 kg per capita by 2013.
“Over time per capita steel use can be expected to increase as new cities go up around Cairo and real estate construction continues to expand, Gaffney concluded.
