No concrete agreement
A new pricing agreement concluded earlier this week between local cement producers is unlikely to succeed if problems are not addressed at the root. Sherine Abdel-Razek reports
Representatives of almost all local cement producers met last week and set a price range for cement of between LE167 and LE176 a ton. Just hours before the meeting, the price of cement had fallen to an exceptionally low LE125 a ton. The drop had caused serious worry among cement producers, pushing traded cement shares over the edge and rendering the sector less appealing to foreign investors.
Recently, Irish cement producer, CRH, reduced its bid for the local Misr Beni Suef Cement (MBSC) to 36 per cent of the company, as opposed to its previous offer to purchase the entire equity of company. CRH said declining local market cement prices was the reason behind this change of plan.
Cement producers admit their agreement constitutes a short-term solution. The root causes of the price decline need to be addressed. "We do not have any guarantee that prices will not fall again, but it is a way to stop the bleeding of losses for local cement companies for a while," said Azzam Abdel-Azeem, head of the marketing department at the National Cement Company. He said such agreements are usually concluded at times of price wars and are often broken later on.
Until 1999, the cement sector was publicly owned and facing problems of low utilisation of production facilities and dependence on imports. In the past three years, the picture changed completely. The government sold majority stakes in cement companies to four foreign and two local strategic investors. Meanwhile, four new private companies -- the Egyptian Cement Company, Misr Beni Suef, Qena Cement and Sinai Cement -- entered the market, supplying nearly 1.4 million tons each.
The multinationals soon caught up on the opportunity to tap into a market characterised then by under-supply and began expansion programmes. As a result, market capacity increased by 7.5 million tons and imports fell to 4.2 million tons, turning Egypt from a net importer to a net exporter of cement.
Things could not have been better had it not been for the economic slowdown, which negatively affected cement demand and created an over-supply situation.
"This over-supply is one of the main reasons for the decline in cement prices. Companies working in the market are trying to snatch a piece of the local market cake," said Mohamed Abul-Enein, head of the People's Assembly housing committee.
The fierce race to secure a place in the market was a challenge to newcomers. Joseph Iskandar, investment analyst at Prime Securities, pointed out that these newly established companies began lowering the price of their goods, sometimes selling at the break-even point to ensure a market share and meet the financial obligations of the loans they took out to establish themselves.
With no anti-trust laws in operation, prices will continue to fluctuate.
"Given that past attempts were unsuccessful, it remains doubtful that a price cartel will work out," said Taher Gargour, senior analyst at HSBC. "The presence of small players, helped by a network of wholesalers, is the leading factor, since unlike the public sector era, distributors now deal with any cement company which gives them a good bargain."
Cement company representatives discussed other solutions in the meeting. "We could agree on another plan to fix market share for different cement companies according to their production capacities," said Maged Nezar, head of Suez Cement sales department.
While Nezar agrees that such agreements would violate market forces, he believes they would be better than the price wars, especially the "unequal ones", referring to war that was said to have been launched by international cement companies. In fact, there was a consensus among senior government officials, people from local cement companies and media reports that these companies were the main reason behind the decline in prices.
After a series of privatisation deals, Egypt's cement sector is now 30 per cent dominated by foreign cement conglomerates, such as Mexican Cemex, British Blue Circle and the French Lafarge.
Abdel-Azeem told Al -Ahram Weekly that the first spark in the price war was caused by the privately owned ECC's exporting its production to the Spanish Canary Islands at much lower prices than that offered by Cemex, a Mexican cement producer with a majority stake in Assiut Cement. Abdel-Azeem and Nezar said Cemex and other foreign companies retaliated by pushing local prices to their lowest levels to prevent local companies from exporting by burdening them with losses.
But Mona Boutros, communications and image director at Cemex Egypt, denied the allegations. "Local cement companies are free to export wherever they want," she said. "Would a big company like Cemex, with an overall worldwide production of 81 million tons a year, be affected by the exports of the relatively small Egyptian companies to its markets?"
Cemex was infuriated by these allegations and its sales team did not attend last week's in protest.
While ECC declined to comment when contacted by the Weekly, an anonymous source close to the deal asserted that ECC has lowered the volume of its shipments to the Canary Islands by 75 per cent as a reaction to the local price war.
"We cannot control the practices of foreign companies," Abdel-Azim said. "Being the affiliates of international cement heavyweights, they can afford losses for one or two years till they achieve their aims in the market. "
MP Abul-Enein has another opinion. "Egyptian cement companies have to start looking to export markets as a destination for excess production in order to maintain price levels at home," he said. "We have to use aggressive marketing strategies to target international markets, such as Europe, Mexico and the US, which pay better prices for cement. By doing so, we will push foreign companies to sell their low-cost production at lower prices rather than the high ones they are asking now."
Demand for cement is booming in international markets as environmental concerns have succeeded in closing down large parts of the environment-polluting cement facilities there.
