Prices of key production inputs for Egyptian firms have seen a rapid surge for the second consecutive month, rising at their highest rate since March, with 14% of companies reporting an increase in the prices of raw materials, according to S&P Global’s Egypt Purchasing Managers’ Index (pdf). Despite the sense of optimism in the sector over the state’s plans to localize production and remove obstacles for firms in the industrial sector, rising production costs represent a persisting challenge.

This comes despite comparatively favorable private sector activity: Egypt’s non-oil private sector activity in July was at its second highest level since August 2021, dipping to 49.7 from an almost three-year peak of 49.9 in June, according to S&P Global. Despite business activity being at its strongest than it has for a long time, the reading nonetheless marked the 44th straight month that the country’s non-oil private sector has been in contraction.

Rising freight costs are a big reason behind increasing input costs: Chamber of Engineering Industries member Bassim Youssef questioned how long the private sector can withstand the continued rise of input prices, especially for goods coming from East Asia now take the longer and more expensive route around the Cape of Good Hope instead of via the Red Sea. The change in shipping routes to and from Egypt following attacks in the Red Sea by Yemen’s Houthis on passing vessels has helped push container prices up to an average of USD 7.5k per container, from around USD 1.9k previously, Amr Al Samdouni, the secretary-general of the Federation of Egyptian Chamber of Commerce’s international transport and logistics division, previously told Enterprise.

Some are calling for the localization of some raw materials as a way to keep costs down: Expensive shipping costs means that raw material imports are making it hard for Egyptian products to stay competitive, Chamber of Engineering Industries head Mohamed El Mohandes told Enterprise. Localizing the production of raw materials — where possible — would help cut down on costs for many Egyptian industries, El Mohandes argues.

But even transporting goods from A to Z within Egypt has gotten pricier, with domestic shipping costs having gone up by 25% and with the potential to increase a further 10% on the back of the government’s recent decision to hike diesel prices.

A weaker EGP against the greenback could exacerbate the problem: The recent strengthening of the USD against the national currency will make it even more difficult for the industrial sector’s ability to cope with the rising input prices, Youssef said.

Industry players have resorted to reducing profit margins: Manufacturers have been reducing profit margins to work around the rising prices of raw materials as they look to avoid raising prices to maintain demand levels that can drive up industrial growth, Youssef told us.

While others have also gone to the parallel market to look for raw materials: Many manufacturers meet their raw material needs — especially for imports — by resorting to the parallel market as a way to keep costs low by avoiding taxes and other financial obligations, a source from the industrial sector told Enterprise.

Protectionist measures could help boost the local production of raw materials: The government could “impose restrictions on importing goods that have local alternatives” in a bid to promote the local production of raw materials, Youssef told Enterprise. That way, Egypt would see a rapidly growing industrial sector wherein manufacturers would have to adjust their pricing to reflect a smaller import bill, leading to higher sales and the development of locally manufactured products, Youssef added.

Gov’t incentives are already providing a big push for the manufacturing industry: A considerable number of importers are looking to become manufacturer these goods instead, head of the Internal Trade Committee of the Importers Division of the Federation of Chambers of Commerce, Matta Bishay, told Enterprise. The decision of thee companies follow the government’s efforts to increasingly favor local manufacturing and the use of raw materials and other production inputs that are manufactured and produced locally. One initiative — dubbed Your Factory is Always Running — will help factories obtain international compliance certificates and increase operations, which will boost the sales of local products and reduce production costs, Bishay said. The government is looking to raise the industrial sector's contribution to GDP to 20%, up from 16% currently.

International investments for local production: Helping manufacturers cope with rising input prices won’t be possible without attracting foreign investment to localize industries or inputs that aren’t available in Egypt, which — aside from lessening imports — would expand Egypt’s industrial base and improve Egyptian manufacturing as a whole, Bishay tells us. Egypt is looking to become a regional hub for manufacturing and the new cabinet is looking for investments for 152 projects as part of the new government’s industrial strategy that is focused on reducing the country’s import bill.

Tax incentives could also bring down production costs: Industry players have called for tax adjustments and incentives that promote the use of local components in the production process, Tenth of Ramadan Investors Association member Sayed El Barhamtoushy told Enterprise. El Barhamtoushy also called for insurance benefits that rise with increased employment rates to support companies as they deal with the high production costs.

Your top industrial development stories for the week:

• Egyptian-Algerian pressure vessel manufacturer in the works: State-owned oil and gas contractor Petrojet and Algeria’s state-owned oil company Sonatrach are set to study the feasibility of setting up a company in Algeria to design and manufacture pressure vessels after the two parties inked an MoU last week. (Sonatrach statement)
• WE to set up technological infrastructure for Sokhna 360: Majority state-owned telecoms giant WE is set to provide integrated telecommunications services and smart city solutions to ElSewedy Industrial Development’s Sokhna 360 industrial city under an agreement inked by the two parties. (Hapi Journal)
• AOI to locally manufacture cell towers: The Arab Organization for Industrialization (AOI) has launched an initiative to localize the manufacture cell towers in cooperation with an aircraft factory affiliated with the organization, the AOI said in a statement. The aircraft factory has already delivered locally manufactured cell towers for Etisalat Egypt in June as part of an agreement between the two companies and is now expanding production through agreements with other major telecom providers in Egypt, the statement said.