Egypt's steel and cement sectors didn't shy away from big headlines in 2008.
When it comes to building projects, particularly in the midst of the real estate boom in Egypt, no industries have occupied minds and dominated conversations in the past year as much as steel and cement. It has been an ongoing industrial soap opera with 2008 full of export bans and wild price leaps, cement monopolies and criminal trials, all played out on the national stage while the ravenous real estate sector watched with dismay. At the end of the year, things appear to be settling down, just in time for a global recession.
Steel
The year in steel started with an extraordinary jump in prices. Steel bars that sold for LE 3,700 per ton in November 2007 jumped LE 1,100 to reach LE 4,800 in January 2008. By April they were at LE 5,700. With prices driven by the vibrant real estate sector and increased export opportunities, it soon became difficult for some buyers to bridge the price gap.
In came the Ministry of Trade and Industry (MTI) to try to manage the situation. MTI Minister Rachid Mohamed Rachid imposed a LE 165 per ton tariff on the export of selected steel products in February and soon after increased it to LE 185 per ton. The tariff, it was said, was intended to facilitate competition in the local market and discourage companies from exporting.
"Steel producers today have the option of exporting their products at very high prices; companies will always opt for export," Rachid told bt in an interview in April. "This created a situation in which people were reluctant to compete locally," he said.
The tariffs did little to stabilize the market at first, and by August steel prices had reached their high of the year, with prices ranging from LE 6,970 to LE 7,750. The government tried to reign in the companies by leaking news that the Egyptian Competition Authority (ECA) was investigating monopoly allegations against steel manufacturers. Even so, prices remained high, though they calmed in September, dropping to just over LE 6,000. Besides the high demand, rising energy costs was another factor in pushing prices up, as oil is a major expense of steel production.
In another effort to reduce prices, the government decided to further expand steel production in the country, selling four new licenses to both local and foreign producers at an international auction. The licenses gave producers the right to either extend their facilities or open new ones.
Days later, the ECA announced that the steel monopoly report required further investigation. Two months later, Al-Masry Al-Youm editor Magdy Elgalad criticized the agency for not announcing the results of the investigation, which he alleged had been completed. Elgalad said the report was blocked because of the influence of the biggest steel maker in Egypt, Ezz Steel owner Ahmed Ezz, who is considered a significant political figure in the National Democratic Party. Ezz's company produces more than 65% of locally-produced steel.
Continuing efforts to balance supply and demand, the MTI announced in late September that it would allow companies to import steel from Gulf countries. Weeks later, prices dropped to LE 5,100 per ton. The import decree could not take all the credit, however, as the decreasing prices of raw materials and foreshadowing of a global recession also contributed to th drop. Concerns about the detrimental impacts the impending financial crisis could have on local steel manufacturers forced the MTI to change its tactics and remove the tariff on steel exports, warning that it would reinstate the tariff if the local market becomes unstable again.
The prices continued sliding to nearly 2007 levels, reaching LE 3,800 per ton near the end of October, though they didn't stay at that level for long. Allegations that distributors and agents were back up to their old tricks of stocking steel products in order to push up prices surfaced once again in the second week of November, though nothing was proven. This was accompanied by the news of the first Turkish steel shipment to be sold in the Egyptian markets, for LE 3,850. Soon after, Ezz Steel announced a 30% decrease in prices, cutting them to LE 3,900 per ton, citing the global credit crunch as the driver.
Cement
Surpassing even the drama of the steel industry's show in 2008, cement industry news included the criminal trial of 20 high-level cement executives that ended in their conviction. Despite the drama, cement ended out the year with high prices and high market demand, though the worldwide financial crisis leaves the market looking a bit tenuous.
In November 2007, cement prices ranged between LE 330 - 350 per ton for ex-factory prices. After the first two months of 2008, prices had jumped to LE 450 per ton. As a result, the New Year started with the government ordering a ban on all cement exports to stabilize the wobbly market. However, the market, as it so often does, ignored official wishes as real estate developers feared further increases in both steel and cement and tried to close their deals faster and faster, inflating demand, and consequently, prices. Cement factories ramped up production to nearly 100% capacity across the board, trying to keep up with the extraordinary demand, and Egypt found itself ranked in the world's top ten producers.
Similar to their approach to steel, the government tried to boost production in order to relieve the market by selling licenses to new cement manufacturers. An international auction resulted in the sale of 14 licenses for LE 801 million in both Greenfield developments and existing factory extensions. These licenses are anticipated to increase the country's capacity by an extra 20 million tons per year. However the hoped-for increase will take at least two years to hit the market, as most cement factories' developers are occupied with operations in India, China and other emerging markets. The government also announced its own plans for investment, starting with the building of a factory in Upper Egypt in Qena governorate that will produce 1.5 million tons of cement annually.
The big news came when Rachid decided to send the results of the 14-month ECA cement monopoly investigations to Egypt's general prosecutor. In January, 20 Egyptian cement executives found themselves facing criminal charges of colluding to fix prices and controlling the national supply of cement. It was the first case of its kind and the list of the accused was long and distinguished, including Ameriah Cement, Beni Suef, Cemex, Egypt Cement, Misr Qena Cement, Misr Beni Suef Cement, National Cement Company, Sinai Cement and Suez Cement.
Experts were split in their opinions as the charges hit the news. Ahmed Shams El-Din, vice president of equity at investment bank and research firm EFG-Hermes, put local prices at wholesale within a regional context, in a bt interview in March.
"Egypt is the cheapest country in the whole region, although there are countries subsidizing energy and the price of energy [in those countries] is much less," he said. "Take Saudi Arabia for example; energy prices have been fixed for years and the price of a ton [of cement] is above $70 (LE 350), which is $10 (LE 55) more than in Egypt." He pointed out that the prices of cement in Sudan, Algeria, Saudi Arabia, UAE, Kuwait, and Iraq were all higher than in Egypt, adding that he believed the increase in prices could easily be attributed to the market. "We don't see that current prices reflect any monopolistic actions," said El-Din. "I think that the current price for cement is more than justified from an economic point of view."
The trial began in February and took nearly seven months to make its way through the courts. During that time, buyers had to swallow hard and pay the high cement prices that stayed around LE 450 per ton for the first eight months of 2008. Finally, in August, the court announced its verdict, proclaiming the companies guilty to monopoly charges and ordering them all to pay a fine of LE 10 million. All of the defendant denied the charges and their appeals are pending.
Based on consultations with local and foreign experts, the court ruled that the increase in prices -- which exceeded 33% between 2003 and 2004 -- was not justifiable when compared to costs, which increased by only 10%. The court said that prices in 2006 increased by 14% while the cost of production actually decreased by 3%. On the other hand, all companies maintained the high prices with no sign of any of them trying to lower product prices to gain a bigger share of the market -- strange behavior in a "competitive" market. This and other evidence and testimony led to a conviction based on the old monopoly law, which the People's Assembly amended in June. Each of the executives were ordered to pay a fine of LE 10 million.
As with the steel, the ban on cement exports was removed in early October to help the companies cope with the global financial crisis. However, prices have jumped again, reaching LE 500 per ton. Cement companies have received warning letters from the MTI and speculations are that the MTI may step in again and impose another export ban.
There is a lot at stake in the coming year for these big-news products in Egypt. A lot weighs on the industries' biggest driver, the real estate sector, which has been caught up in rampant luxury development for months. The future seems uncertain given the global credit situation. While the amendments to the monopoly law were not up to the expectations of Rachid, who has called for further amendments, the new law imposes a higher maximum fine -- up to LE 300 million from LE 20 million -- for those caught trying to control the market. Maybe the magnates will be more careful next time they think of messing with the market.
July
July takes a look at one of the fishing industry's worst periods as a result of a decline in fishing stocks due to over-fishing. The Red Sea's fish production has decreased to 46,940 tons-per-annum (TPA) in 2006 from 82,400 TPA in 1999. This lead to a heavy reliance on imports, in 2006 Egypt imported 207,564 tons of fish, which cost approximately LE 593 million.
Novartis Pharma SAE, a Swiss owned company, began exporting medicine to markets around the globe after an LE 18 million expansion. The company was established in Egypt more than 40 years ago and had since only exported to countries in the Middle East and North Africa (MENA) region.
El-Badr Plastics, a plastics packaging provider for the pharmaceuticals and food industries, and Masria Cards, a manufacturer of smart cards, become the first two companies to join Nilex, Egypt's mid and small cap stock exchange that was announced by government and stock exchange officials in December of last year.
The National Telecom Regulatory Authority (NTRA) announced June of last year that it would be accepting bids from domestic and foreign companies to provide consumers with the right to choose their service provider. This month saw the 12 serious bidders being made to buy a mandatory book of 'rules for purchase' from NTRA for LE 53, 500, as well as provide an auction guarantee of LE 10 million.
August
The 2005 Euro-Mediterranean Roadmap for agriculture has set trade grounds between Egypt and the European Union (EU) allowing for agriculture and fishery to be imported and exported out of the two regions. Other outcomes from this agreement include allowing the EU greater access to the Egyptian market, as well as a 90% of its products duty-free. However, duties will remain on products such as tobacco, pork and wine, while duties on products like chocolate, pasta and bakery will be halved.
Tharwa Petroleum Company secured $100 million in credit from the National Bank of Egypt to expand new oil and gas exploitation and production projects. The projects will see the development of natural gas fields near the Mediterranean run by Tharwa subsidiaries. The capacity is expected to jump from 55 million cubic feet of natural gas to 87 million by the end of 2008.
By Tamer Hafez, Al El Bahnasawy, Erin Cunningham, Dina Basiony, Passant Rabie, Jeff Neumann, Ethar El Katatney, James Chester, Lindsey Parietti, Rebecca Collard, Erika Sherk, Jessica Gray, Kholoud Khalifa
© Business Today Egypt 2008
