CAIRO: Cement experts expect prices to skyrocket to unprecedented highs following last week’s cement auction, contrary to the government’s recent efforts to reduce prices.
“Prices of licenses were way above expectations, which automatically translates into an additional cost for producers, eventually leading to price upsurges in the market, stated Omar Mohanna, chairman of Suez Cement.
“In any investment, companies [naturally] have an operating cost, and prices of these licenses come as an additional cost, which will reflect on total production costs.
On Oct. 28, Egypt granted six licenses to build greenfield cement plants as part of efforts to increase domestic supply. The top-winning bid settled on a staggering LE 251 million for a license in Beni Suef, while the last one closed at LE 22 million for a plant in Assiut. Licenses to expand production by 1.5 million tons per year were also awarded for the prices of LE 202 million and LE 134.50 million, respectively.
The auction sparked controversy among some participants and other players who objected to what they called the “unfair prices of the licenses, which surged in light of the whopping price of the first license.
Amr Assal, chairman of the Industrial Development Authority – the entity that handled the auction – said the rise in bids for the first two licenses was normal because of the proximity of Beni Suef and Suez to ports, which would facilitate export. He added that these two governorates were particularly appealing as they contain large quantities of raw materials that could be used in cement production.
However, several experts in the field predict that cement producers will increase market prices in an attempt to offset the high value of the new licenses. The cement sector has recently become a thorny issue after nine cement companies were charged with practicing monopoly and gratuitously raising prices in the market.
Rising local cement prices drove the Ministry of Foreign Trade and Industry to introduce an export duty in February that rose to LE 85 per ton in August. Still, prices continued to increase, reaching LE 410-420 per ton last September. They are expected to reach LE 550 per ton by early 2008.
A further surge in cement prices could lead to escalating prices in construction and real estate, adversely affecting the country’s housing sector.
On the other hand, a number of cement experts predict that market forces of supply and demand will contain price upsurges. “Local prices could increase after the auction but at reasonable rates, said Nematallah Choucri, co-head of the research unit at HC Securities brokerage firm.
Government officials expect cement supply to increase 19 million to 20 million tons annually within five years after the new plants come on line and following the expansion of existing factories.
Egypt’s total annual production capacity of cement reaches 38 million tons, with 30 million bound for local production while the remaining eight million go to export. The Ministry of Trade cited the need to increase domestic supply of cement, estimating that Egypt’s total consumption of cement will soar to 55 million ton per year by 2011, which would create a deficit.
“Currently, local demand is growing at the expense of exports, Choucri explained. “The [new] capacity additions will increase local production . as well as exports.
Recent growth in local demand led the government to push producers to reduce exports. “In our [Suez Cement] case, exports were brought down from 30 percent to 10 percent in order to increase domestic supply, which has now become a government priority, said Mohanna.
