TAKEStock: The Egyptian Cement Industry - Gauging the Impact
A mixed bag: weaker EGP + high interest rates + high fuel prices
The Egyptian Cement Industry
Egypt / Industrials
Impact: NEGATIVE | Degree: MODERATE
The Central Bank of Egypt hiked interest rates twice so far this year, 100bps on 21 March and 200bps on 19 May, while the EGP weakened by c.15%. Recently, Egypt’s Prime Minister directed the Egyptian Competition Authority (ECA) to reach a fair price for cement after the latest price surges. This will all put pressure on cement producers’ margins. From the surface, a weaker EGP may look promising for cement exporters, but not all exporters are created equal. In this note, we gauge the potential impact of a weaker EGP, a high-interest rate environment, and higher fuel prices. In sum, we would prefer companies that are operationally efficient with strong balance sheets.
From boom to bust
The Egyptian cement industry has gone through a boom and bust cycle over the past two decades. Having embarked on an infrastructure boom, the Egyptian government issued new cement licenses that eventually led to an oversupply status in the market. Today, with c.80mn tons in total cement capacity, the market sits on an excess capacity of c.30mn tons. This longstanding situation resulted in a couple of operating companies either exiting the market altogether (e.g. National Cement) or opting to turn off their production until further notice (e.g. Tourah Cement). Up until 2021, almost all operating cement companies have been suffering from low profitability levels, if at all. This led to an industry-wide solution that was approved by all 23 cement operating companies as well as the ECA around mid-2021. All cement producers agreed to a quota system, whereby they all cut their production capacity applicable to their local sales for one year starting 15 July 2021. These quotas were based on a preset formula applied by the ECA, indicating the amount of the production capacity cut for each company. See Page 7.
Back to profitability in 2021
Cement producers suffered from low levels of profitability and sometimes bottom-line losses back in 2020. Having applied the new quota system mid-year, cement producers began to see their profitability shoring up, making 2021 a really good year for the cement industry as a whole. Some companies turned their losses into profits as prices began to rise as a result of the new quota system. On the other hand, local demand for cement has been growing, reaching 48.6mn tons (+6% y/y) in 2021, thanks to several government-led infrastructure projects, housing developments, and the building of new cities. That said, local demand is still not high enough for some companies to stage a full recovery, such as Sinai cement [SCEM] and South Valley Cement [SVCE] which continued to report losses in 2021.
Exports growth helping alleviate the supply glut partially
We have seen significant growth in exports throughout 2021, jumping more than 5 times y/y to 8mn tons of cement and clinker. On one hand, the government’s export incentive programs helped some producers utilize their idle capacities. Yet, exports are not prevalent across all cement producers, limiting growth to a selected group of companies. Also, export sustainability is not enough when neighboring Turkey (the second largest cement producer in the world) and Saudi Arabia (the tenth) enjoy lower costs and fuel prices compared to Egypt.
Abdelkhalek Mohammed
Equity Analyst
T +202 3300 5717