After a roller-coaster year of export tariffs and price-fixing allegations, an auction for new cement production licenses shows that the sector still has a bright future
It's never a quiet month in the cement sector. First, there was the introduction of export duties in early 2007, an effort to increase domestic supply and lower local prices. Months later, a government investigation into the industry raised allegations of price fixing and accused almost the entire sector of gaming the market.
And yet -- cement is hot. As an investment, at least. Businesses at home and abroad see huge potential for profit in Egypt's booming construction and development sectors, as well as great export potential from a nation with far less stringent environmental and regulatory controls than cement-producing counterparts in the European Union.
In late October, the sector saw a new milestone with the country's first open auction for cement licenses, the first step in what the government hopes will be a boom in local production. The licenses on offer allowed holders to build new greenfield cement plans or expand existing operations. Such permits commanded high prices -- the first license went for LE 251 million -- reflecting producers' confidence in continuing high demand for cement in Egypt and abroad.
The auction took place on October 28 in the plush confines of the Semiramis Intercontinental Hotel. Representatives from 14 firms gathered in a conference room, while their colleagues and members of the local and international press hovered in an adjacent banquet hall, watching small television screens in anticipation of news flashes from the bidders holed away next door.
No one quite knew what to expect. Organizers from the Ministry of Trade initially planned to announce the license winners one by one, as each bidding session closed. Then, the organizers decided, they would announced all the winners, after bidding on the first license took many hours longer than expected.
In total, the bids brought LE 801 million into state coffers. Cement production is estimated to increase by up to 20 million tons annually once the new plants begin production, although the high cost of the licenses has some concerned that the expanded supply will not stop the rise in prices.
Amr Assal, head of the Ministry of Trade's Industrial Development Authority, oversaw the auction's planning and execution. The 14 companies competing for the licenses were pre-approved and the companies' experience and financials were checked out.
"The idea that we offer [...] new licenses for newcomers is to strengthen the competition in the open market," he said before the auction.
Annual cement production currently stands at approximately 35 million tons, but the Ministry of Trade and Investment has estimated that growth and construction in Egypt could increase domestic demand to 55 million tons annually by 2011.
The expansion of the local cement industry has roused some critics, primarily those concerned about the growth of pollution-heavy cement plants. Writing in several opposition newspapers, environmentalists have objected to the impact of the construction of such a large number of new factories in such a relatively short period of time. Plants create pollution, including the emissions that cause global warming, and the European Union limits the amount of emissions that European cement factories can produce, effectively limiting the amount of cement that can be produced on the continent. Although this gives Egypt a competitive advantage, it is to the detriment of the country's already highly polluted natural environment.
The minister said the auction was in part motivated by a desire to protect Egypt's environment, by limiting the number of new plants while still mitigating the pressure on prices created by the rising demand for cement. Assal says that licenses are only constrained for the steel and cement industries because of those factories' high-energy demands and environmental impact. "It's an energy issue," he says.
Others speculated in the local press that the government held the auction to maximize current cash influx, perhaps in preparation for the high costs of a revamped public health insurance program. The licenses are issued only after the firms pay the full fee, which they must do within 90 days of the auction.
Playing with the Big Boys
The bidding at the auction reflected the dominance of the global giants on Egypt's cement sector, and the heavy consolidation that has taken place within the local industry. The barriers to entry into the sector are formidable, and most of the outfits that submitted bids were affiliated with or owned by a multinational firm.
Among the bidders were France's Lafarge, Italy's Italcementi, Portugal's Cimpor, Mexico's Cemex and the United Arab Emirates' Al Azizya.
Prominent Egyptian business figures were also keen to get in on the action. Oriental Weavers (ORWE, bt100 number 12) Chairman Farid Khamis was there, as was Ceramica Cleopatra Chairman Mohamed Abu El-Enein and Orascom Telecom (OT, bt100 number 1) Chairman Naguib Sawiris. Also there to bid were representatives of El-Sewedy Group, parent company of El-Sewedy Cables, the nation's largest producer of electrical cables.
Two auctions were held: one for licenses for new construction and one for expansion licenses. Nine companies were in the bidding for eight new construction licenses, of which only six were sold, and five companies bid for two expansion licenses, both of which were sold.
The first license for new construction went to Nile Valley Cement. The company, 75% of which is held by the EFG Hermes (HRHO, bt100 number 23), paid LE 251 million for the right to build a new plant in Beni Suif. The second license, for a new development in Suez, went for LE 201 million, and was bought by El-Sewedy Cement.
Al-Arabiya Al-Wataniya, held by a group of UK-based companies, paid LE 200 million to build in Minya, while an Egyptian-owned company, El Nahda for Industries, owned by a group of public-sector companies, paid LE 83 million for a license to build in Qena. The fifth and sixth licenses went to North Sinai Cement at LE 44 million and Egypt Kuwait Holding (EKHO, bt100 number 38) at LE 22 million. North Sinai cement is partially owned by Oriental Weavers group Chairman Farid Khamis.
The first license for expansion went to Assiut Cement, an affiliate of Mexican company Cemex, which paid LE 202 million. The second expansion license went to Lafarge affiliate Beni Suif Cement (MBSC, bt100 number 42), which paid LE 134.5 million.
A Bright Future
Tarek Shahin, a building materials analyst with Beltone Financial, told Business Today Egypt that the auction showed that the market for cement is still thriving. "That's why people are investing in the sector," he said. "I see government intervention as being an annoying detriment to the prospects of the sector, but the prospects are good nonetheless. Future spending on infrastructure and private investment in residential development are good drivers of demand for building materials, and a lot of that has yet to kick in."
Shahin said the high prices paid were not surprising, but the license fees, some of which exceeded LE 200 million, represent a high percentage of the total investment required of the companies seeking to build new plants. Regardless, it is unlikely that the investors, all of whom have had extensive industrial experience, allowed themselves to be taken for a ride. "These are people who supposedly did their homework," says Shahin. "I'm sure they have return on investment in mind."
The auction led to mixed reaction in the markets, as companies in the sector were suddenly re-examined in light of the newly determined values of their licenses. Shahin emphasized that the true value of their assets will still be determined by the ability of those assets -- the right to build new plants -- to generate cash. "As far as I'm concerned," he says, "it's now more about trying to assess what supply and demand will be a few years down the line."
Sarah Mishkin
© Business Today Egypt 2007
