CAIRO: High-priced cement and steel are slowing the growth of the Egyptian construction industry. The Egyptian government is working with cement and steel rebar manufacturers in an attempt to keep prices from soaring any further.
HC Brokerage research department figures track the rising price of cement over the past two years from a market average of LE 242 in 2004 to LE 272 in 2005. And analysts expect 2006 to close with an average price ranging between LE 325 to 330. In addition, domestic steel rebar prices in June were 16 percent higher than in June last year.
The rising prices have been causing the government a great deal of trouble.
The construction and real estate industries are two of Egypt s fastest-growing sectors and they hold the keys to a number of areas of economic development. They are needed to help solve the pressing issue of the country s lack of low-income housing; to continue the rapid growth in lucrative luxury housing; and to construct numerous projects for the energy, retail, telecom and tourism industries.
The cement and steel industries are also fueling the government s own infrastructure and construction projects, which include high-profile ventures such as the third Cairo Metro line, the Toshka agricultural project and the Grand Egyptian Museum. All of these have been feeling the squeeze of higher cement and steel prices.
Mohammad Aglan, a board member at the Egyptian Construction Commodity Council, told Noozz in August, “Ton prices have skyrocketed to levels that pushed contractors to postpone the execution of a number of their projects for fear of potential loss-making. This trend continues as cement and steel prices continue to soar.
The reason for the price increase is unclear, and continues to be the subject of disagreement. Some manufacturers blame factors beyond their control. They point to increases in the cost of importing raw materials, to higher energy prices (following the 30 percent price hike in May) and to the reduction of government subsidies on inputs over the last few years.
But the government has another explanation. On July 17, Rachid Mohamed Rachid, minister of trade and industry and one of the Big Three ministers leading economic reform, sent an urgent request to the Anti-Trust and Competition Protection Authority to investigate whether the steel or cement manufacturing industries were engaging in monopolistic practices, either through price-fixing or through one company exploiting its controlling position in the market. The authority announced the start of the investigation the next day, saying that it would call in foreign experts to help.
Rachid seems to have a case. According to HC Securities, by late August the cement companies were enjoying gross profit margins of over 50 percent. This is despite a 21.7 percent rise in production in the 11 months to May this year, according to the government Information and Decision Support Center. It is easy to see why, when added together, these facts have raised suspicions.
In the world of steel rebars, the cause for suspicion is even more straightforward: the Ezz group of companies controls 62 percent of the market through its majority ownerships of Ezz Steel Rebars and Alexandria Iron and Steel (AIS). According to Beltone, Ezz Steel Rebars profits more than doubled in 2005, and those of AIS rose 72 percent. By contrast, the government-owned Delta Steel Company lost LE 14.1 million in the same period. Analysts have generally presumed that, when Rachid talks of one company exploiting its controlling position, it is most likely Ezz he has in mind.
It is likely that Rachid s sympathies for the manufacturers are further reduced by the fact that the government subsidizes their inputs.
Referral to an independent anti-trust authority is the way in which similar cases are dealt with in the kind of developed free-market economies that the minister hopes Egypt will become. But there is doubt as to whether the authority will be able to do the job: it was only established in April, and it has certainly not been able to produce results fast enough. In the weeks after the referral, cement prices continued to shoot up. The final straw came on Aug. 7 when the 95 percent-state-owned National Cement Company whacked up its factory-floor price from LE 290 per ton to LE 315 per ton. A fortnight later, a group of cement merchants were clamoring for a 15-day boycott of cement manufacturers in protest at their greed, and Rachid called a crisis meeting for Aug. 22.
The outcome of the meeting was a more primitive way of controlling prices: a price cap of LE 290 per ton on the factory floor and LE 330 per ton by the retailer. With average retail prices now at LE 360 per ton, this was a significant cut. And it was well below what market analysts had expected: HC Securities had forecast a factory-floor price for 2006 of LE 325-330 per ton, which is LE 35-40 per ton higher than is now permitted.
Over the next few days, the government announced various other measures to keep prices down. Rachid s ministry told manufacturers that if they exceeded the price cap, they would be banned from exporting any cement at all. Manufacturers and traders are to be forced to produce a weekly report showing the amount of cement produced, the amount available for sale, the amount available for export, the sale price and the export price. In order to prevent circumvention of export restrictions, only manufacturers will be allowed to export cement.
The cement manufacturers have tried to refuse to accept the price cap, meeting again with the ministry on Sept. 5 in an attempt to renegotiate. In the end, however, the government holds the trump card because it can deny them access to the lucrative export market.
The raft of new measures means that the cement producers revenues are now likely to be well below predictions – HC Securities estimates that its valuations of cement companies will now be reduced by 20 percent. That has not escaped the notice of investors. Until the imposition of the price cap, the share prices of cement companies had been rising with cement prices. Even as late as August 19th, the business daily Al-Alam Al-Youm was reporting a sharp rise in the cement share prices in response to higher local prices. But investors have been quick to react: on August 20, two days before the announcement of the price cap, cement share prices started to fall as investors sensed that something was wrong. By August 28, cement stocks were firmly on Beltone s worst performers list. The market seems to believe, quite reasonably, that the cement honeymoon is over.
The steel rebar honeymoon may not be far behind: the anti-trust authority may well find against the producers; and, even if it does not, there is a clear and present danger of a cement-industry-style price cap.
But none of this means that the industries should despair: both still enjoy a high rate of investment, cheap inputs, cheap labor costs, increasing local demand, increasing export demand (particularly as Lebanon starts to rebuild itself) and high international prices. Nevertheless, the halcyon days of 50 percent gross margins are almost certainly gone for good. NOOZZ
