The building materials industry is stuck between a legacy of wrong decisions and the inevitability to adjust to post-revolution measures
The post-revolution recession that hit the Egyptian economy impacted prices of many vital consumer goods, with the exception of building material. Prices of the two major building materials -- steel and cement -- actually recorded an increase throughout 2011 and into 2012. Why? Motorists on the ring road or along Cairo's highways can easily spot increased construction activity lining the city's major thoroughfares.
Egypt's affordable housing crisis, coupled with the opportunity-hungry contractors and individuals and the absence of the rule of law, have led to an wave of illegal construction that's eating up agricultural land and growing vertically in already overpopulated areas. The scale of this activity is yet to be ascertained but on March 10, Ahram Online reported that 50,000 demolition decrees for 18,000 buildings have been issued in Alexandria alone. Furthermore, El-Aqareya website reported that the increase in illegal building activity has raised the demand for building materials by 50%.
Mohsen Adel, managing director of Pioneer Funds, describes the scale of demand in the last year as enormous, stating that "for the first time since the first wave of Egyptian immigration to the Gulf countries of Saudi Arabia and Iraq, we are seeing such high demand. With the security breakdown and little supervision, the demand on building material was exceptional in all aspects: people wanted to build without licenses especially on agricultural land [...] and later on, there will be 'reconciliation' with the government as always."
According to the Ministry of Housing Utilities and Urban Development website, cement prices gradually declined from LE 530 per ton in January 2011 to LE 420 per ton in November 2011, settling at LE 495 in March 2012 per ton.
As for steel rebars, the prices remained stable from January through April 2011 at LE 4,490 per ton and gradually increased to peak at LE 4,950 in August of last year, dipping slightly to close 2011 at LE 4,751. These prices are low in comparison to 2008 and 2009 when steel rebars reached LE 10,000 per ton.
Ahmed Shabara, general manager of the Chamber of Building Materials Industries at the Federation of Egyptian Industries, says the high price of cement in Egypt has never been justified.
"Even with the increase of energy prices and workers wages, the total cost of the product does not exceed LE 180 per ton, all inclusive. We have cheap raw materials, energy sources as well as human resources. [The] cement industry does not require any sophisticated know-how, except maybe in energy-saving technologies."
Mohamed Hanafy, the general manager of the Chamber of Metal Industries in the Federation of Egyptian Industries believes that illegal activity could not maintain consumption at the usual level.
"Saying that the demand [for] building materials was high over the last year is not very accurate as such demand grew among individual citizens who represent only 20% of the market. The production is mainly consumed by government infrastructure, housing projects and major construction companies, which build cities and compounds, and work in both sections are on hold. The price of rebar in the domestic market [fell to the lowest] level which covers the expenses of production wages," he says.
His statement is contested by Ahmed El-Zainy, head of the building materials division of the Cairo Chamber of Commerce, who says that comparing the price of steel rebar in Egypt to the international price shows how unfair the pricing system is.
"We import Turkish steel rebar [at] LE 100 to LE 150 less per ton, despite the cost of shipping and the absence of energy subsidies in Turkey. How come? International steel prices range from $650 to $700 (LE 3,920 to LE 4,220), yet the Egyptian product is sold locally at the price of LE 4,750 per ton."
El-Zainy, who has been battling for years to reform the market and combat monopolistic practices, says cement factory prices in 2009 and 2010 had reached LE 496, while the average consumer price in Cairo and Giza was LE 538 and LE 565 in the Delta governorates.
"After the revolution and when the Armed Forces factory started producing last July, the [factory] price dropped to LE 350 per ton and LE 400 for the consumer. This was not announced to consumers nor communicated to the Domestic Trade Sector of the Ministry of Domestic Trade; instead producers pretended to be selling at the high price of LE 565 per ton, printed on the paper bags just to give themselves room for later raising prices," he says. "So we notified the Domestic Trade Sector and the Competition Authority who investigated the matter. They cheat the government and the Ministry of Trade cannot monitor the market when it's not notified with the actual price changes," said El-Zainy.
HISTORICAL BACKGROUND
One of the main problems according to Adel, is the rapid population growth that surpasses actual capacities to build the needed number of residential units.
"The real estate market is in a constant state of expansion, which means constant high demand on building materials." Until the late 1990s, there was a gap between supply and demand in building materials, especially since the building activity highly accelerated in that period with numerous large-scale development projects.
"It was logical that the government started issuing production licenses of cement and steel to private investors, and starting in 1999, a number of steel and cement producers entered the market," says Adel.
Companies like Ezz Steel, Misr-Suez Cement, Qena Cement, Sinai Cement were established at that time in addition to a number of small factories like Bishay and others.
"The market moved to a new phase where Egypt started to have surplus especially with the recession of real estate market from 2001 till 2003. Producers also started to open up export markets for both steel and cement. This change invited a wave of foreign investments in the field of cement production coinciding with stricter environmental measures in Central and Western Europe, which limited the number of licenses given to cement producers," says Adel.
Siemens, which is the second biggest cement producer in the world, bought Assiut. Lafarge and Vika were also large investors. Lafarge expanded its investments, and in 2008, bought the cement production sector owned by Orascom (the eighth largest cement producer in the world at the time) in a deal worth LE 67 billion. Now there are 20 cement producers in Egypt who produce 50 million tons annually with a surplus of more than five million tons.
As for the steel industry, the major change in the ownership was the acquisition of El-Dekhaila -- which wasn't entirely state-owned -- by Ezz.
"Though the cement and steel industries represent a major sector of the economy and represent 12% of stock market capital, their performance is very modest. The privatization processes that took place limited the size of shares available for free trading inside the market," says Adel.
THE ENERGY ISSUE
The International Monetary Fund (IMF) loan negotiations at the beginning of 2012 brought energy subsidies for the industry to the surface. The debate found its way to Egypt's new Parliament, which materialized into a government decision to raise the prices of energy for the industrial sector.
Energy subsidies represent 20% of the country's general budget (equivalent to LE 90 billion); however, since cement companies rely on natural gas and diesel for production, producers received the price hikes with concern.
"The recent decision to increase the energy prices for industry has been painful for cement and steel producers: it comes in a time of recession and an increase in the prices of iron raw materials caused by the high demand in India and China. Moreover, due to the high local demand there are some restrictions on export," says Adel.
The decision raised speculations about the industry's future and some experts fear the sector might lose its attractiveness. Producers have said the move would raise the cost of production by 15% and some of them have expressed their intention to raise prices in order to compensate.
BATTLE AGAINST MONOPOLY RESUMES
Regardless of producers' fears, El-Zainy's battle against monopolies go on. He thinks that the cement and steel producers benefitted under the former regime and it is time to reform the market.
"Ezz Group owns more than 65% of the steel industry which gave it the upper hand in the market and total control over prices, and the foreign cement producers representing 80% of the industry have formed a cartel, and have the same monopolistic practices. So in the coming period we need, first of all, to work on issuing laws that indicate minimum and maximum profit range," said El-Zainy.
The division asked the parliament to form a committee in coordination with the government to study the production cost of cement and indicate a fair margin of profit for these companies. "There are no variables in this industry because the product is 100% Egyptian, all the raw materials and production tools are Egyptian so we're never affected by the international prices," said El-Zainy. If they fail to control the profit margin, there has to be a mechanism for supervision other than the ministerial decree that stipulates producers notify the Domestic Trade Sector monthly with any price changes, something they did not do in the past.
MONOPOLY AND THE LAW
With the changes in the market and the industry, authorities had to come up with supervisory tools. Over the last decade the controversial Protection of Competition and Anti-Monopoly law was issued and the Egyptian Competition Authority was established. According to many, both still totally failed to control monopolies.
"Both of them need modification," says Adel. "For the Competition Authority to assume its role, the law must change, for it serves no one with its current wording; neither the consumer nor the producer."
As a result of continuous criticism of the anti-monopoly law that falls short of ensuring the independence and effectiveness of the Egyptian Competition Authority according to many, the cabinet has recently approved amending the anti-monopoly law to increase the fine for violations by 500%, to at least LE 300 million.
El-Zainy suggests that the state revise the pricing of the basic goods, by indicating "a suitable and fair profit margin every six months according to international standards and set the consumer price. This is how we realize social justice."
As for the ownership rules, Adel believes that the maximum percentage of company ownership has to be indicated by the law as well. "The case of Ezz is outrageous, and we simply have to define monopoly [because] the current definition is very elastic. An important guarantee that no producer can monopolize the market can give the state the authority to acquire a certain percentage of the companies that have record of repeated monopoly (20-25%). [...] One more issue; we need to name those who were harmed by the monopolistic practice in order to compensate them; what happens now is that the state receives the value of the fines."
Adel is concerned about the supervisory mechanisms. He says that the Competition Authority has no supervisory role as it only acts according to complaints it receives, "This is [...] post monitoring and not prior monitoring and this is a disaster."
FUTURE OF THE MARKET
Apart from recession, illegal practices and battles, it seems the market will adapt to the changes and potentially boom within a few years. The growing demand on building materials is not only local -- Libya and Saudi Arabia have hungry markets and issued 14 new cement licenses for Egyptian investors, so the market will eventually stabilize. Most importantly, the government recently announced the launch of a new housing project for youth that includes 75,000 units.
"The steel industry will receive capital coming from the US, Europe and the Gulf countries, a prelude was the establishment of El-Masreyeen Company for Iron founded by Qatari and Egyptian capitals. But investors will ask for two guarantees: energy availability and the right to export," says Adel.
Adel believes that the monopolistic practices of Ezz Group have been curbed since the change of the regime. Meanwhile, he thinks major infrastructure and urban development projects in Egypt will pick up as the new [political] parties aim to show the people they are working on services. "This will increase the demand maybe for four more years till 2017 but the prices will definitely go down," says Adel.
Hanafy insists producers suffered much over the last year due to the recession and he hopes that the local demand will return to normal and hopes the government encourages producers to open up new export markets; Egypt's production capacity of steel amounts to 9 million tons while the local market consumes only 6.5 million. "I also suggest that we put non-tariff barriers to cut down on imports at least temporarily for six months or till the end of the year until the market regains momentum."
Finally, El-Zainy has high hopes on the future, "I don't count much on the current government, though Ganzoury is trying to move the stagnant waters, but the change of cabinet is coming and I think that it's the Parliament's duty to assume its real responsibility and issue the needed legislations."
© Business Today Egypt 2012
