Construction projects in Egypt rely heavily on local cement production

 

As Egypt is poised for rapid construction growth, the cement industry will become increasingly important as the bedrock of the sector. While the industry has plenty of capacity, it remains vulnerable to energy availability and pricing. As the last year has shown, a spike in fuel prices can hit the cement industry, and thus the whole construction sector, particularly hard.

The cement segment is an important component of the domestic economy. In 2016 it was the 12th-largest cement industry in the world, and it has substantial capacity to spare. Between 2010 and 2015, the country added 20m tonnes of production capacity, reaching a total of 70m tonnes at the end of the period, enough to meet current demand.

Rising Demand

In 2015 the country produced 49m tonnes of clinker. However, given the government’s ambitious development plans, the demand for cement is likely to increase rapidly. The International Finance Corporation (IFC) predicts that clinker production will reach 72m tonnes per year by 2025.

Furthermore, the government is pushing for more investment in cement capacity, given its construction-led economic development strategy. Indeed, in December 2016 the government sold three new licences for the construction of cement plants to El Sewedy Cement, South Valley Cement, and Cement Egypt for a combined LE500m ($32.9m). The developments are expected to attract investment of LE10bn ($659m) and create nearly 1000 jobs, mostly in Upper Egypt. The licences will add 6m tonnes to the country’s existing production capacity.

However, while the industry is relatively well placed to meet a surge in building material demand from a pure capacity point of view, there are some concerns about the its vulnerability as a result of energy dependence. This has been demonstrated throughout 2017 as the industry had to adjust to government moves to reduce fuel subsidies. For example, in June 2017, as part of a wider reduction in fuel subsidies, the government effectively increased the price of fuel to cement factories by 40%, with costs reaching LE3500 ($231) per tonne. Construction costs were estimated to have increased by as much as 15% as a result of the subsidy removal. Consequently, it has been a difficult period for many local cement producers. For example, in the first half of 2017 net profit at Misr Beni Suef Cement fell by 41% to $3.13m.

Price Surges

Price spikes around energy have been an ongoing issue for cement producers. In 2014 the government increased the price of natural gas provided to cement producers to $8 per million British thermal units (Btu) from $6 per million Btu. At the same time, these producers were facing a gas shortage and began to transition to using coal as a feedstock. The industry has become highly reliant on this, with the IFC predicting that the industry will need 9.7m tonnes of coal per year by 2025. This not only leaves producers vulnerable to supply issues on the international market, but also pressurises hard currency reserves and leaves the sector vulnerable to environmental regulation of coal. Indeed, the IFC estimates that the use of coal in cement production would lead to CO emissions of 27m tonnes per year by 2025. This is more than the total annual emissions of countries such as Tunisia, Estonia and Croatia.

Given the impact of cement production on construction costs and the health of the sector, these challenges will affect the wider industry. However, while the cement segment’s energy dependence is a cause for concern, the longer-term outlook is more positive. A 2016 survey by the IFC found that 86% of participating cement plants used, or planned to use, 30% alternative fuels in production within the following five to 10 years. This will not only reduce carbon emissions, but will also put the sector on surer footing by providing a reliable source of power. As such, the potential for supply and price shocks to the wider construction industry will be reduced.

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The Report: Egypt 2018

Construction & Real Estate chapter from The Report: Egypt 2018

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