Distributors and traders are the reason behind cement price increases... and we intend not to deal with them

 

December 23, 2011

 

The situation will clear out when the parliament is formed, and the revolution will attract big foreign investments. 

 

No need to fear the rise of the Muslim brotherhood, whether on local or foreign investments. A lot of investors are waiting for the situation to settle to enter the Egyptian market for the first time, thanks to the revolution.

 

The market does not need new cement licenses, and energy resources are insufficient.

 

No fear from the Islamic Current and we’re taking steps to develop the cement sector.

 

Real estate has zero demand on cement after the revolution and illegal constructions saved our sector from falling apart.

 

Jose Magrina, ACC CEO and the representative of the Spanish shareholder in the company, said that the crucial step for all Egyptians now is to have legitimate parliament and government, so there shouldn’t be real concern about the rise of Islamists and their dominant presence on the political arena. Magrina indicated that he expects no negative impacts of the political scene on the Egyptian economy. He further said that he doesn’t know much about Islamic banking, however “if Islamic finance is to offer us the best choices, we will certainly take it”.

 

“Prediction of the economic future now is just an impossible thing to do. However, the situation will definitely become clearer after the formation of the parliament, while the whole situation will be accurately assessed after the new constitution, which paves the way for an elected president to come to office” said Magrina.

 

Answering our question about the Ministry of Industry’s plan to launch new cement licenses, Magrina confirmed that the Egyptian market needs no more licenses, commenting that “The total amount of produced cement in Egypt is 60 million tons per year, while the local demand reached only 48 million tons. We simply have a surplus of 12 million tons. The Egyptian companies are willing to export their surpluses to Libya, Ethiopia, and Djibouti. On the same hand, we expect the total amount produced in 2012 to reach 67 million tons, which would lead to the increase of surplus.

 

Despite the exceptional situation in Egypt currently, the best case scenario expects the demand on cement in 2012 to be the same as this year. Also for the forthcoming 5 years, if the consumption growth reached 10% annually starting 2013, then the cement companies will increase the total production capacity to reach 70 million tons, which means that there will be also surpluses of cement in the future as well.

 

Magrina added also that the per capita consumption rate of cement in Egypt is 650 kilograms, with no anticipation for major future increase, taking in consideration that every individual, who builds a house or a factory, is doing so once in his life, so it is not calculated just like the consumption on food or clothes. “The maximum projected consumption of cement in Egypt within the forthcoming 10 years is 55 million tons, including the cement needed for infrastructure projects. If Egypt wants to increase cement production in the future, GDP should also be increased in parallel.

 

The exportable amount of cement in Egypt is 12 million tons every year, however a small number of cement companies is able to export and in small quantities, as the Egyptian cement isn’t competitive in terms of price in the international market, and this is a big problem for us. If we have a look at competing markets such as Pakistan, Thailand and particularly Turkey, you’ll find that Egypt can’t compete with them in terms of prices. It is not an issue of production costs at all, but the transportation and logistics costs are very high, representing 25% of the final price.”

 

He further said that Egyptian exports are not expected to exceed two million tons of cement next year, out of 12 million tons of surplus. He said that cement prices differ from one producer to the other; however the range of prices is able to compete with Thai or Philippine cement in regional markets if the former is sold for the same prices offered in the local market. However it could not compete with Turkish cement for instance. KSA cement could compete with Turkish one if they decided to export it.

 

Speaking about solutions to develop the cement industry in the local market, he said that there are several steps to be taken quickly, including raising awareness among Egyptian of the importance of the industry and its revenue and benefit to the economy and Egypt in general, because people tend to view the cement as a non-fundamental product, which is incorrect because cement is a strategic product. He explained that India undertook such a campaign to raise awareness regarding the importance of cement as a product. Following this campaign, people’s view for cement changed indeed. However, same results are difficult to reach in Egypt, especially with many cement companies being accused of monopoly. Awareness about cement types is also important, as the Egyptian market is still focused on only one type, despite the fact that there are other more efficient types with less cost and more environmental friendly.

 

Magrina also said that a union for cement producers must be formed, not to control prices but to develop the industry and undertake the aforementioned awareness campaigns. Most cement companies are now afraid of official meeting where they are mostly accused of monopolizing the market.

 

For the second step to develop the sector, Magrina said that “we need amendments in construction regulations, in order to make it compatible with actual construction requirements. Current requirements are too much and consume unnecessary amounts of cement. What needs to be increased is the control over construction works and not the amount of building materials used.

 

The third step would be for producers to directly communicate with end users without having to deal with distributors and traders – who are the reason of price increases. He said that despite the existence of laws to regulate the relationship between producers and consumers, companies do not have any guarantees to be reimbursed in case of selling by installments system. Having such guarantees is crucial especially in decreasing prices in the market.

 

Speaking about the need to activate the control over distributors and traders, he said “we will not need to activate such a control, because when producers deal directly with consumer, there will be no need for distributors and traders. This will lower the cost and is more save.” Big enterprises are the only ones that buy ready mixed cement, while 90% of cement sales are to individuals who buy raw cement.

 

Regarding environmental preservation measures, he said that new plant are adhering to such standards strictly, whereas old plant are not, because back they were established, they were far away from residential areas, however now they are in the heart of residential areas so they need to improve their environment preservation measures.

Speaking about the cement sector after the revolution, Magrina said “the sector was only 10% affected by the revolution in the first 6 months, and everything went back to normal afterwards in the second half of 2011, thanks to the illegal construction works.”

 

“Egypt has a significant location geographically and is an attractive spot for investments, and after the revolution, I believe it will be even more attractive because investors would like to invest in Egypt but were reluctant because of the policies of the former regime. Now the governments to come are expected to provide the required investment atmosphere.”