Business monthly April 05   EDITOR'S NOTE COVER STORY EXECUTIVE LIFE VIEWPOINT IN PERSON SUBSCRIPTION FORM IN BRIEF MARKET WATCH ADVERTISING RATES IN DEPTH CORPORATE CLINIC Search Business Monthly | Back Issues

IN DEPTH
Alexandeia Library Eyes Conference Circuit	Cement Prices Build Momentum
Competitors Eat Into US Wheat Share	New Fund To Expand Phone Service
North Coast Opens To Foreign Tourists	Projecting Success
Railways Loosen Reins On Services	Title Insurance On The Horizon

CEMENT PRICES BUILD MOMENTUM

By SUMMER SAID

Cement prices have been rising faster than the ready-mix can dry. Portland cement hit £E 320 per ton on the black market last month, up from £E 280 in February despite no obvious shortage in the local market. It’s a 130-percent increase over 2003 prices, when bagged cement was selling for £E 140 a ton. The price of white cement, meanwhile, has exceeded £E 650 per ton on the local market.
What’s behind the surging prices? It depends who you ask. Producers, traders and contractors each point the finger at each other.

Hassan Rateb, chairman of Sinai Portland White Cement, a subsidiary of Sinai Cement, accuses traders of price tampering. He claims middlemen are buying cement at the wholesale price of £E 240 per ton and selling it on the market for up to £E 320 per ton. “The problem is not with the producers or the cement industry, it has to do with these traders and they are the only beneficiaries from the recent price increase,” he says. “Traders who are doing their best to increase their margins have caused price differentials between the factories and the local market.”

Rateb says the problem is more serious with the white cement. “The selling price for one ton of white cement is £E 485, but we were surprised when people came to us and complained that they cannot find it in the market for less than £E 650,” he says. “This has nothing to do with the rule of supply and demand, because we already export 10 million tons of cement every year. It has to do with the mediating traders.”

Cement traders, however, say their mark-up is neither exorbitant nor unusual. They point instead to government contracts with China. Egypt has exported enormous volumes of bagged cement to China, where cement prices are substantially higher, while simultaneously importing cement to complete national megaprojects. “We don’t have enough local cement production to build roads, dams and sports venues, so we are importing it from Iran and the US,” remarks one local trader.
Contractors argue that there is no shortage of cement in the market. They accuse cement companies of monopolizing the market and artificially increasing cement prices – which costs about £E 130 to produce in the factory – under various pretexts. A study released in January by the Chamber of Construction Materials at the Federation of Egyptian Industries bolsters their claim, noting that rising cement prices were due to the government’s inability to monitor the cement market and fight monopolistic practices.

“The production cost of cement in Egypt is much cheaper than in many other countries, especially as most of the raw materials used in manufacturing cement are available in the local market and we have very low sales takes on cement,” explains Ali Mousa, the chamber’s deputy chairman. “What we are witnessing now is just a monopoly killing the market.”

Ezzeddin Abou Awad, head of the Cement Traders’ Association, suspects foreign investors are manipulating market prices. “We’ve had so many local companies sold to foreign investors that they’ve already managed to monopolize the market,” he told Business Monthly. “We should also expect that more foreign investors will show interest in buying local companies as Europe plans to demolish this industry by 2010 because of its negative effects on the environment.”

France’s Lafarge and Mexico’s Cemex are among the giant foreign companies that entered the local market through state sell-offs in the mid and late 1990s. Seven of the 10 largest privatization transactions have involved cement firms, generating £E 6.3 billion, more than a third of all privatization proceeds since 1991. In early March, Italy’s Italcementi raised its stake in Egypt’s largest cement producer, Suez Cement and its affiliate Torah Cement, to more than 70 percent.

Suez Cement controls an estimated 35 percent of the market, which could make it a target of the newly passed antitrust law, long overdue legislation designed to prevent monopolistic practices. According to Abou Awad, however, the new legislation will not come into effect until July. “It’s still too early to see if this law will have any effect on the market or not,” he cautions.

Mousa, however, believes the government has encouraged foreign investors to monopolize the market by offering them tax exemptions and holidays for up to 10 years in priority sectors. This gives foreign-owned cement firms a chance to manufacture cement at much lower costs.

The government denies the existence of monopolies or shortages in the sector. Officials point out that the Egyptian market supports 12 cement producers with a combined annual production of 35 million tons. About 24 million tons are consumed locally, with 11 million tons bound for export. “If we add to this that we have lifted the tariffs on both packed and unpacked cement imports, it will be hard to find any monopolistic practices in the Egyptian cement market,” Minister of Foreign Trade and Industry Rachid Mohamed Rachid announced earlier this year.

Whatever the reason, the rising price of cement is likely to have a negative impact on the upcoming construction season. “Because cement prices are going up, I have a drop in my company profits and therefore I’ve canceled or postponed many building projects until prices decline again,” complains Said Al-Gamal, owner of a construction company in Sixth of October City. “The government has to understand that any increase in cement prices negatively affects the construction and real estate sectors, and causes the prices of flats to go up very rapidly.”

Abou Awad feels the only solution the government has at the moment is to sideline mediating traders by demanding that factories sell their production directly to consumers or to authorized traders bound by fixed prices. Others suggest the government should formalize a range of profit percentages for traders and better monitor the market.

But not everyone is convinced that cement prices have risen sharply. Cemex’s Cadenas claims cement producers have so far absorbed the rising cost of mazout, a heavy furnace oil used in the manufacture of cement. “Prices for Cairo producers have gone up between 2 to 4 percent since last September, hardly enough to offset the 68 percent increase in the cost of mazout seen last year. At the retailer level, prices in Cairo fluctuated back and forth between £E 250 per ton and £E 263 per ton during the same period. In fact, we believe cement prices have remained remarkably stable despite [these] fuel price increases only because of the favorable export situation that has been absorbing Egypt’s surplus capacity.”

Cement exports are expected to fall in 2006 after newly-established factories in other Arab countries, particularly the Gulf region, begin operating at full capacity. “This will mean a dramatically less favourable export situation that will lead to redirecting excess capacity back to the local market, and this is something that could hurt the industry in the near future.”

Mousa agrees. “It will be a tough time for the cement industry in Egypt and exporters will have to find another way to attract local contractors and boost the construction sector so that they will be able to face the expected sharp slump in cement exports.”

Submit your comment

Top