Cementing steel prices
and Sherine Nasr
gauge mixed reactions to a recent decision by the Ministry of Trade and Industry to impose additional fees on cement and steel exports
Prices of steel and cement witnessed a substantial decline a week after a decree by the Ministry of Trade and Industry to impose fees on Egyptian exports of both products. A drop ranging from LE300 to LE400 in steel prices was reported in the past two days, while the price of cement took a slight dip. A tonne of steel now sells for LE3,350 instead of LE3,700, while a tonne of cement costs LE345. Experts believe that a further decline in prices is likely in the next few weeks.
In an attempt to contain a surge in cement and steel prices, the Ministry of Trade and Industry decided to interfere and guarantee a balance between supply and demand for both products. On 27 February, Minister of Trade and Industry Rachid Mohamed Rachid issued Decree 142 which included several regulations on trading cement and steel in local markets.
The decree imposed LE65 per tonne of cement and LE160 per tonne of steel in additional fees when exporting. It also required that all steel and cement dealers, as well as agencies and producers, inform the ministry's internal trade department of their production rates, stocks, export figures and prices on a weekly basis. By virtue of the decree, a fine has also been imposed, on all of those who do not comply with the new regulations. This will enable the internal trade department to monitor the trading process of each company and factory to guarantee the stability of the market.
Rachid stated that the aim of the decree was to control the market by increasing supply and regulating the trading process of these products. According to the Ministry of Trade and Industry, the additional export fees will neither adversely affect company profits nor the competitiveness of these industries on the international market. The ministry asserts that over the past few months the prices of imported materials used in the steel industry rose, resulting in instability and marked shortages on the local market.
The price of a raw material known as pellets imported from Turkey jumped from $420 per tonne in August, 2006, to $520 per tonne in February, 2007. As for cement, the cost of locally produced clay rose by eight per cent, while the price of a cement bag increased by 10 per cent. Investments in the real estate sector witnessed a notable growth in recent months, hiking demand on both products.
Meanwhile, some factories manufacturing steel and cement preferred to export their production in order to benefit from the increase in international prices. While the increase in exports of both commodities positively impacted the balance of trade, it raised subsidy costs in the state's budget since these two heavy industries are heavily subsidised. "The increase in exports means that the subsidies go to the international market, which completely contradicts the government's subsidy policy aiming at supporting Egyptian consumers," noted a press release issued by the Ministry of Trade and Industry on 27 February.
Deputy Chairman of the Sinai Cement Company Adel Abdel-Karim strongly supports the new measures, arguing that they should have been implemented a long time ago. "I agree with the government that it is illogical to provide electricity and gas subsidies to exported products," asserted Abdel-Karim. "Although electricity and gas costs rose by 30 per cent in 2006, prices remain lower in comparison to international rates." In response to the decree, cement prices dropped from LE380 per tonne to LE340 in Cairo, and he expects them to remain at an average of LE340 per tonne during summer -- a high season for the cement market.
Abdel-Karim cautioned, however, that the decree be applied gradually in order not to disrupt any export contracts that have already been signed by cement and steel companies. His other criticism is that the government issued the decree suddenly without discussing it with concerned parties. According to him, there are many reasons for price hikes, such as expensive transportation costs particularly for cement companies operating in Sinai. Due to overcrowding at the Suez Canal crossing, cement trucks have a 72-hour wait which raises the cost of cement. Another reason is that production exceeded local consumption last year, resulting in eight million tonnes of cement exports. Compounding the issue further is a decree by the Ministry of Housing stipulating that if owners of empty plots do not start building within a few months, their land will be taken away from them. This caused landowners to hurriedly build and sharply raise demand on cement and steel.
Last month's decree also seems to have had more serious repercussions on the market, other than reducing inflated prices of both commodities. Traders claim that the market has been paralysed in anticipation of what might be next in the coming few days. "All trading operations have come to a halt and the market is confused," revealed Ezzat Maarouf, an expert in the steel industry.
While the decision aimed to curb more exports of these two strategic commodities as a step towards increasing local supplies, the decision will not help solve other anomalies in the market. For example, the steel which is now being sold on the local market was originally purchased at a higher price than the current offering, which means more losses for traders. Some feel that the decision is a minor measure: "It is both inadequate and inefficient," argued Maarouf. "If we really want to solve the problem, it has to be addressed at the roots." He believes the long-standing monopoly of the steel industry by a few companies is the main reason behind the fluctuating prices of this vital commodity.
A recent report by the Central Agency for Auditing (CAA) investigated the ebb and flow of steel prices in the past few years, and found that one tonne was sold for LE1,750 in 2001, then prices slowly crept upwards until in April, 2005, one tonne of steel cost LE3,100. Three months later, there was a drop to LE2,551 per tonne followed by a sudden jump to LE3,300 per tonne in January, 2006. It hovered around the same price until 2007 when prices jumped in recent weeks.
Maarouf explained that over the past six years, production costs have remained fixed except for two elements. The cost of pellets used in steel production -- mainly imported from Brazil, Sweden and Australia -- increased by almost 50 per cent, and transportation has doubled since 2000. "The increase in these variables is hardly compatible to corresponding price hikes in the market, nor can they be regarded as the main reasons behind these rises," according to the steel expert. Maarouf noted that the CAA's report underlined the fact that steel prices have increased by 336 per cent in the past six years, while profitability multiplied six fold due to these unprecedented price spirals.
"The report concludes that the pricing of steel in Egypt is done in a random fashion and described price fluctuation as 'unjustified'," stated Maarouf. He cautioned that it is a great loss not to introduce drastic measures to correct the path of this highly-strategic industry, particularly in the light of the comparative advantages which Egypt enjoys in this industry. These include the availability of infrastructure, subsidised energy sources, cheap labour and easy access to harbours. "All these elements come together to contribute to a strong steel industry, which is considered the backbone of heavy industries in any country," asserted Maarouf.