{"id":551616,"date":"2022-07-03T13:58:25","date_gmt":"2022-07-03T13:58:25","guid":{"rendered":"https:\/\/enterpriseam.com\/egypt\/inside_industry\/is-the-government-responding-to-manufacturers-requests-to-extend-the-cement-production-cut-for-another-year\/"},"modified":"2022-07-03T13:58:25","modified_gmt":"2022-07-03T13:58:25","slug":"is-the-government-responding-to-manufacturers-requests-to-extend-the-cement-production-cut-for-another-year","status":"publish","type":"inside_industry","link":"https:\/\/enterpriseam.com\/egypt\/inside_industry\/is-the-government-responding-to-manufacturers-requests-to-extend-the-cement-production-cut-for-another-year\/","title":{"rendered":"Is the government responding to manufacturers' requests to extend the cement production cut for another year?"},"content":{"rendered":"

<\/a> Cement companies have started lobbying the Egyptian Competition Authority <\/strong>(ECA) to extend a <\/strong>regulation<\/a><\/strong> which stipulates that cement production be cut by at least 10%. Companies have requested that the Federation of Egyptian Industries (FEI)\u2019s cement division begin discussions with ECA to renew supply cuts brought in last year, Shorouk News<\/a> quotes division head Ahmed Shireen Korayem as saying earlier this month.<\/p>\n

And they\u2019re likely to get it<\/strong> as the Trade and Industry Ministry supports the extension<\/strong>, because actual supply continues to outstrip real demand in the market, several industry executives told Enterprise.<\/p>\n

Background: <\/strong>Last year, The ECA heeded the request of 23 local cement companies to slash production by more than 10%. The regulation came into effect mid-July last year, and has a one year expiration date. The regulation was implemented to revive an ailing industry that had been struggling for years from a supply satiation that drove many cement companies to halt their operations<\/a>and rendered others on the brink of closure.<\/p>\n

Building materials companies staunchly <\/strong>opposed<\/a><\/strong>the ECA\u2019s decision last year,<\/strong> raising the point that price hikes would put players in their sector under pressure.<\/p>\n

How has the sector fared since the decision? <\/strong>Consistent rise in prices since the decision:<\/strong> Cement prices surged 47% reaching EGP 1250 per ton in May, according to a Housing Ministry report (pdf)<\/a>. Before the regulation came into effect in July, the price of cement was EGP 850 per ton.<\/p>\n

The regulation\u2019s goals have come to fruition,<\/strong> effectively reducing the losses incurred by cement factories in pre-regulation years, CEO of Beni Suef Cement Company Farouk Mustafa, told Enterprise. The regulation provided manufacturers with the stability to plan out their operations, such as production, sales movements, and inventory management, Ahmed Abdo, Lafarge's head of commercial and marketing, told Enterprise.<\/p>\n

This improvement is reflected in their earnings: <\/strong>Arabian Cement returned to the black in<\/a> 1Q2022, with its bottom line recording EGP 58.9 mn during the quarter compared to net losses of EGP 6.3 mn in 1Q2021, according to the company\u2019s financials (pdf)<\/a>. The company\u2019s sales rose 145% y-o-y to EGP 1.06 bn in 1Q2022. Misr Cement Group similarly saw a 161% boom in their profits y-o-y in 1Q2022.<\/p>\n

The regulation provided a lifeline and resuscitated companies that had halted their <\/strong>operations:<\/strong> Saad El Din Group restarted theSpanish-Egyptian Cement Factory<\/a>in the Port Said Freezone, after a three-year hiatus. The cement production quotas enacted last year factored in the company\u2019s decision to revive the factory, Saad El Din CEO Mohamed Saad El-Din, told Enterprise, adding that the factory is set to operate at its full production capacity (600K tons per annum), though he did not disclose when.<\/p>\n

So, if all is better in the sector, why should the production caps be extended? For one, capacity still outstrips demand: <\/strong>Demand for Egyptian cement is expected to amount to 50 mn tons by the end of the year, an increase from 2021\u2019s 48.5 mn, according to Abdo. Local cement factories\u2019 production capacity remains at around 83 mn tons, Abdo said. He expects demand for cement to increase by 2-3% by 2023, he said.<\/p>\n

Demand may surge if the government is willing to increase the number of building permits in the country\u2019s governorates, <\/strong>according to Mostafa. The government had previously enforced a six-month ban<\/a> of construction permits in 2020 in an effort to combat building code violations, and then reopened the doors for permits on a provisional basis in 2021<\/a>.<\/p>\n

Inflation in energy costs<\/strong>: The price tag of coal, which is used<\/a> by approximately 16 out of 18 cement companies, rose to USD 300-350 from USD 60-80 during the past year, industry players told Enterprise. Energy costs amount to approximately 70% of the expenses that go into cement production.<\/p>\n

Cement companies aren\u2019t out of the woods yet:<\/strong> While some cement companies have seen their earnings grow since the cap, some are still in the red, Korayem said. Sinai Cement\u2019s net losses narrowed 54.6% y-o-y to EGP 67.2 mn in 1Q2022 from EGP 148.0 mn in 1Q2021, according to their financials (pdf)<\/a>.<\/p>\n

Lack of financing as well as commitments to reduce carbon emissions are both drivers<\/strong>:<\/p>\n

Banks remain reluctant, \u201cwith minor exceptions,\u201d to finance cement companies due to the instability of the sector, according to Korayem. Furthermore, cement companies are under pressure to cut carbon emissions and adhere to environmental regulations ahead of COP 27, he added.<\/p>\n

The cost of converting a single production line to run on alternative energy is at least <\/strong>EGP 50 mn<\/strong>, he adds. Capturing surplus heat from their factories and reusing it to generate electricity and further minimize emissions also comes with a hefty cost. Some factories are currently exploring the possibility of partially introducing solar energy to their operations, he added.<\/p>\n

And ultimately, the survival of the industry is of benefit to consumers:<\/strong> If players leave the market, it won\u2019t help prices in the long term, as we will see a concentration of production in the hands of fewer players, Korayem tells us.<\/p>\n

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