The sector is recovering thanks to a more favourable economic climate

The most populous country in the MENA region has not only its second-biggest economy, but also one of its most diversified. The manufacturing industry is a central part of Egypt’s economic engine, producing goods for the huge domestic market and for export across the world. The sector was affected by the difficult post-revolution years, which slowed domestic market demand growth, disrupted supply chains and compelled some investors to delay plans. But as of 2014, the outlook seems more positive, with the economy slowly improving, increasing policy stability and growing demand from key trade partners. Egypt has benefitted from particularly strong trade ties with Europe and the Middle East, but is now also turning its attention to Africa and Asia. Recent negotiations have sought to strengthen trade ties between Egypt and the Common Market for Eastern and Southern Africa.

Manufacturing industries accounted for 15.6% of GDP in the fiscal year (FY) 2013 (July 2012-June 2013), according to Bank Audi, a Lebanese financial institution. Manufacturing grew by 2.3% in FY 2013, up from just 0.7% in FY 2012. Petroleum-based manufacturing industry expanded 2.7%, rebounding from a 4.7% contraction in 2012. Other manufacturing segments together grew 2.2% in 2013, picking up from 1% in FY 2012. However, Egypt’s extractive industries contracted by 2.7% in FY 2013, according to Bank Audi, following modest 0.1% growth in FY 2012. The gas industry shrank by 4%, having dropped 0.7% in FY 2012, while petroleum fell by 1.2% after growing 1% in FY 2012. Other extractive industries (i.e. mostly mining) grew by 2.9%, picking up from 2.3% growth the previous fiscal year.

Ups & Downs

The sector’s recovery has been supported by a more favourable global economic climate, as well as by a return to greater stability following the presidential elections in early 2014, and while output suffered from the uncertainty of the post-2011 era, the country’s industrial infrastructure remains largely intact. “Despite the turbulence of the last three years, Egypt is still an industrial and commercial hub for the region,” Mahmoud Bdeir, CEO of Sipes, a paint manufacturer, told OBG. Still, the revolution and its aftermath had a number of direct and indirect economic impacts, including weakening the Egyptian pound and a sharp drop in Egypt’s foreign exchange reserves as the central bank sought to defend the currency (see Economy chapter). This led to capital controls and a shortage of forex. But this shortage, and the weakened currency, affected some more than others. “Companies that export elsewhere have not truly felt the shortage of foreign currency that the country faces. In fact, markets such as Europe and the rest of the MENA region have become key recipients of Egyptian exports,” Ahmed Hafez, chairman and managing director of Ideal Standard International Egypt, a bathroom and sanitary ware company, told OBG. “And although the cost of production has increased in recent years, Egypt is still a competitive market, both in terms of costs and finding skilled labour.”

Devaluation

“The weakening of the Egyptian pound is set to contribute to manufacturing exports and stronger services, which would be further assisted by a strengthening of global economic sentiment more generally,” Bank Audi said in a report on the Egyptian economy in March 2014. But while the fall in the pound helped some industrial exporters by making their goods more affordable for buyers abroad, those relying on substantial imported inputs suffered.

“The Egyptian pound’s devaluation has had a negative impact on local manufacturers, who have had to increase product prices in order to remain profitable, but the Egyptian market is very price-sensitive, which limits manufacturer flexibility,” Kamal Gabr, the managing director of Duravit, told OBG.

Bank Audi noted that improvements in the Egyptian business environment have helped restart a number of long-delayed projects, particularly in the energy sector, with hydrocarbons and electricity investments that should help improve security, supply and bring new capital to the country, such as the recently signed $500m agreement between the US’s General Electric and Egypt’s Carbon Holdings for the development of what will be the largest liquid cracker in the world at a petrochemicals plant on the Gulf of Suez (see below).

Looking Up

Egypt has a range of strengths on which manufacturers can capitalise, whether aiming to serve the domestic market or export, or both. The large and growing population of close to 90m is the biggest in the MENA region, guaranteeing a long-term market.

This is also the second-biggest economy in the MENA region, after that of Saudi Arabia, and one of the most diversified. The country also has strong government support for investors through the General Authority for Investment and Free Zones, the Ministry of Investment’s promotion agency, which implements policies and procedures to facilitate doing business, including maintaining Egypt’s one-stop shop for investors.

The country also has favourable trade access to a range of markets, including the EU and the US (see Economy chapter). “The free trade agreements that Egypt has been developing with many Western countries have proved central to maintaining the international competitiveness of local firms. Now the focus is shifting towards increasing the African ties,” Magd Manzalawi, chairman of the Tiba Manzalawi Group, said.

Russian Support

In March 2014, the Ministry of Industry and Trade announced that Russia would be supporting certain industrial developments in Egypt, following a meeting between Mounir Fakhry Abdel Nour, the minister of trade and industry and Denis Valentinovich Manturov, his Russian counterpart. The deal will see Russia assist in the modernisation and development of plants including the Egyptian Iron and Steel Factory at Helwan, the El Nasr Automotive Manufacturing Company and aluminium plant Egyptalum, in Nag Hammadi. As part of the agreement, Russia will also help the development of the Aswan High Dam’s electricity plants, which are an important contributor to the country’s energy mix. It will also see negotiations start on the establishment of a free trade agreement between Egypt and the Eurasian Customs Union (Russia, Kazakhstan and Belarus) as a part of deals on agriculture, industry and trade. The two countries aim to boost trade to $5bn in the near future.

Challenges

Abdel Nour has promised to address other difficulties facing manufacturers, including a lack of skilled labour and energy shortages. He admitted that the energy shortage that caused disruptions in a number of industries would have to be met with imports in the short term, but would ease by 2016. The government is in the process of reviewing Egypt’s energy system, and is looking to boost the development of gas fields and renewable energy to increase self-sufficiency in the medium to long term. “Coal is being revived as a source of energy for manufacturing and power generation in Egypt, but we are also looking at alternative sources such as waste treatment,” Magdi Kassabgui, chairman of Reliance Egypt, told OBG.

“Although Egypt lacks a proper waste management regulatory policy right now, as much as 40% of the energy needs for heavy industries could potentially be met by biomass and refuse-derived energy feedstock if properly developed,” said Hisham Sherif, CEO of Tawazon, a waste management company (see analysis).

Efforts to tackle labour bottlenecks will necessarily be even more long term in nature, though measures to improve vocational education are ongoing. Ahmed El Masry, commercial director of bathroom and sanitary ware company Jacob Delafon, said, “Talented white collar workers are available in the market, but they re characterised by high turnover and a high cost of retention. By contrast, blue collars are generally not well trained.” Reducing the paperwork and streamlining bureaucracy is also a concern for industrial investors. While the government is good at encouraging and facilitating big investment deals, day-to-day bureaucracy is more than a frustration – it is a cost burden.

In the World Bank’s “Doing Business 2015” report Egypt was ranked 112th out of 189 economies surveyed. Although the country improved its overall position from the previous year – its rank in the 2014 report was 113 – its position in the “starting a business” category fell from 67th to 73rd, while its ranking in the “dealing with construction permits” category declined from 141st to 142nd and in “getting electricity” it dropped from 102nd in 2014 to 106th in 2015.

“Less government interference could translate into higher industrialisation, as the country would become more attractive for foreign investors,” Tor HatloJohansen, the managing director of Jotun, a chemicals firm specialising in paints and coatings, told OBG. “Investments in industry are being hampered by the price of land in industrial areas, which limits companies’ capacity to expand their facilities.”

Industrial Zones

In order to help address this issue, the government has accelerated its industrial zone programme, which looks to provide turnkey facilities and expedited processes for new tenants.

In February 2014 Abdel Nour announced that a total of 35 industrial zones across 22 governorates would be launched, with basic infrastructure to be installed by June of that year. The zones are a response to industry concerns and are intended to address a shortage of land suitable for industrial development and connected to infrastructure such as roads, power and water.

Abdel Nour had already announced in December 2013 that LE1.5bn ($213m) would be allocated to infrastructure development in the 35 zones, with the cash made available thanks to an agreement between the Ministry of Planning and the Ministry of Industry and Trade as part of a LE2.6bn ($369.2m) allocation under Egypt’s fiscal stimulus programme, which is part-funded by its allies in the Gulf Cooperation Council.

The industrial zones are spread across the country in an effort to stimulate growth in a variety of governorates, including in Upper Egypt, the Delta, the Suez Canal Zone, Sinai and around Cairo. One of the first zones to be developed will be a LE6bn ($852m) zone in Aswan, one of two in the city covering a total area of 36 sq km, according to the Egyptian Federation for Investors Association (EFIA). The first will include 31 small- and medium-sized projects focusing on construction materials and decorative stones, while the second, with an investment of LE12bn ($1.7bn), will manufacture phosphates.

The zone projects may also help improve social and economic development in less affluent areas, which is a natural priority for the government after the events of the past few years. “In order to address concerns over unrest, the government must focus on attracting capital, jobs and investments into areas, cities and neighbourhoods that are currently marginalised,” Darwish Ahmed Hassanin, CEO of the Saudi Egyptian Construction Company, told OBG.

Construction Materials

One of Egypt’s largest industrial sub-sectors is heavy industry, and particularly for products such as steel and cement. The construction industry more broadly grew by 5.9% in FY 2013, outstripping broader economic growth by some margin, and rising from 3.3% in FY 2012, according to Bank Audi, bolstering domestic demand for materials. The total value of investments carried out rose a remarkable 93% in FY 2013 in local currency terms, data from the Central Bank of Egypt show. This should be seen in the context of the Egyptian pound’s weakening, general volatility and the recovery from a precipitous 71% drop in FY 2012. Notably, the private sector’s share of construction and building investment was 73.2% in FY 2013, a substantial rise from 52.4% in FY 2012, and increasing the share of Egypt’s total investment accounted for by the sector from 0.7% to 1.4%.

The construction investment recovery was mainly driven not by the government looking to step in and pump-prime the economy with funds for infrastructure development, but by private sector companies. Construction investments are expected to reach some $7.3bn by 2015, up from $6.2bn in 2013, according to data from Bank Audi. “In 2014, we expect to see construction materials segments growing. The decorative and industrial coatings markets, for example, we expect to grow between 8% and 10% in value,” Manish Mehra, the CEO of SCIB Paints, told OBG.

Opportunities Are Growing

The upsurge in the construction industry will also help the cement sector, which has endured a difficult period due to natural gas shortages and rising energy prices. Fayez Habib Gress, the chairman and general manager of ASCOM, told OBG, “There is high and increasing demand for cement, not only from large corporations, but also from the average user.” The country is one of the biggest producers of cement in the region. Production figures vary between 46.m tonnes of cement in 2013, down slightly from 46.1m tonnes in 2012, according to the US Geological Survey, a US government scientific agency, to an average of 52m tonnes over the past three years. As of mid-2013, the latest date for which figures were available, there were 19 cement producers operating in Egypt, with combined capacity of around 60m tonnes, according to the American Chamber of Commerce in Egypt (AmCham). These are divided between a mix of foreign, domestic and state-owned companies, as well as one military-run facility.

As of mid-October 2014, average Portland cement prices hovered around LE640 ($91) per tonne, but with some variation (going up as high as LE700, $99), according to Cement Egypt, an industry organisation. Prices had moderated somewhat since earlier in the year. In March, cement consumers were hit with a sudden 30% rise in prices as producers passed on a surge in energy costs. The context of the price rise was a move towards market pricing, as well as the government’s attempts to lower gas usage by cement plants (see analysis). By early March, cement was selling for between LE705 ($100) and LE800 ($114) per tonne, against LE550 ($78) and LE600 ($85) just a month earlier, according to local press reports quoting Ahmed El Zeiny, the head of the building materials division at the Cairo Chamber of Commerce. At the time, global prices stood at around $65 per tonne. Even then, some big producers continued to produce at a lower cost – the military-owned El Zeiny at LE550 ($78) per tonne and Lafarge Cement at LE600 ($85), the companies said.

Energy Shift

Supply disruptions also constrained output. In May 2014, a number of cement firms were forced to halt production after the Egyptian Natural Gas Holding Company (EGAS) stopped the flow of gas to 10 plants accounting for more than two-thirds of the industry’s output. EGAS acted to ensure sufficient supply elsewhere on the grid (see Energy chapter). The supply constraints have galvanised the industry into pursuing diversification of energy sources. One alternative source is coal, on which the government eased import restrictions in April 2013. In April 2014, Suez Cement, one of the country’s biggest producers, announced that it was planning to shift to a fuel mix of 80% coal and 20% waste material. Another player, Misr Beni Suef Cement Company, said that it would be using diesel in at least one of its production lines following gas shutoffs, and later announced plans to build a coal mill as well. Bruno Carré, CEO of Suez Cement, said the changes reflected the country’s energy needs, but would have at least a short-term impact on the market, prices and the trade balance. “Companies like cement producers must diversify their energy mix, as was recently approved by the Cabinet,” he told OBG. “But this will take some time to implement, during which cement production will continue to be constrained and costly cement imports will be necessary.”

Chemicals

Chemicals production is a significant industrial sub-sector in Egypt. The segment is large and diversified, including manufacturing of everything from plastics, detergents and batteries to glass, rubber and fertilisers. Petrochemicals and fertilisers are the biggest sub-segments, with sizeable production for domestic demand as well as exports. Chemicals exports were worth $4.7bn in 2012, the last year for which figures were available, according to AmCham. Of this, batteries accounted for $1.22bn, fertilisers $1.21bn and plastics $1.15bn. Major export markets include the EU, the MENA region, Turkey and the US. Exports are, however, outweighed by imports, which totalled $9.3bn in 2012. Rebalancing this by increasing domestic supply is likely to be a priority for the coming years.

Egypt is one of the world’s leading producers of nitrogen-based fertilisers and urea. The domestic fertiliser market is also large and growing, with around 8m-9m tonnes used a year, in rice, wheat and corn cultivation. Egypt’s drive for greater self-sufficiency in agricultural products, including through increasing yields, should see this market continue to expand in the foreseeable future. Output of nitrogen-based fertiliser reached 12.35m tonnes in 2011/12, up from 11.32m in 2010/11, with phosphate-based fertiliser output totalling 1.51m tonnes, up from 1.44m tonnes the previous fiscal year, according to the Central Bank of Egypt. The phosphate sector is dominated by the Egyptian Financial and Industrial Company, which has a 70% share of the local market. With long-term growth in mind, Misr Fertilizers Production Company (MOPCO) is expected to expand two of its plants in 2015 with an investment of $1.9bn. This will increase the company’s urea output by 1.4m tonnes per year to over 2m tonnes.

Fertiliser prices have been on the rise – partly due to rising energy costs as the government looks to ease back on subsidies and prioritise resource allocation to the power sector. Fertiliser companies saw their input cost rise by $4/m British thermal units in July 2014, raising the cost of a subsidised tonne of urea from LE1500 ($213) to LE2000 ($284), the local press reported. Industry representatives say that plants make a loss, and that gas cut-offs have stopped production, making it difficult for firms to meet their export obligations.

Petrochemicals

In 2002, Egypt – which benefits from ample supplies of upstream feedstock (albeit much of which is destined for export) – embarked on an ambitious 20-year master plan to expand its petrochemicals industry, overseen by the state-owned Egyptian Petrochemicals Holding Company (ECHEM). The plan aims to boost capacity by 15m tonnes per year, generating annual revenues of $15bn, and creating 100,000 jobs directly and indirectly. The total investment planned is $20bn, and the plan envisages 14 petrochemicals complexes being developed, with 50 production units, in 24 projects. As well as the obvious benefits of generating revenues and jobs, and reducing reliance on imported products, ECHEM expects the plan’s completion to help attract major international investors in joint ventures, build value from downstream derivatives and boost the country’s investment rating.

The three-phase plan targets a range of products. The first, running from 2002 to 2008, saw $6bn invested, including in five fully-operational facilities producing products such as alkyl, benzene, polypropylene and propylene, ammonia and polystyrene. Phase two, with $7bn in investment planned, runs from 2009 to 2015. It includes products such as purified terephthalic acid, polyester and latex, and also entails aromatics and olefins complex development. Phase three from 2016 to 2022 should see another $7bn tranche and the development of a third olefin complex and a second propylene and polypropylene complex, as well as facilities for vinyl and detergents, among other products.

Development went much as planned in the first phase and in the early part of phase two, with Egypt’s annual petrochemicals capacity rising to 3150 kilotonnes in 2012 from just 600 kilotonnes in 2002. However, the target of 5370 kilotonnes of capacity by 2015 will be more difficult to meet, due to delays to some big projects caused by the post-revolution fallout.

Tahrir Complex

After some delays, progress is now being made on the Tahrir Petrochemical Complex in Ain Sokhna in the Gulf of Suez. This plant, with total investment of $5bn-6bn, is expected to be the world’s biggest naphtha cracker plant when it opens in 2017 or 2018. It will have a production capacity of 1.3m tonnes per annum (tpa) of ethylene, 1.35m tpa of polyethylene, 600,000 tpa of propylene, 210,000 tpa of butadiene and 420,000 tpa of benzene. In May 2013, the General Authority for the north-western Suez Gulf Economic Zone agreed to launch the project. The previous November, US-based General Electric and Egypt’s Carbon Holdings, a private holding group and the largest stakeholder for Tahrir, inked a $500m deal for technology and equity support for the development of the naphtha cracker and related olefins complex. The partners will bring advanced technology to the plant in a model that the government helps can be replicated elsewhere, to develop value added, increase technology and knowledge transfer, and build confidence in Egypt.

Textiles

Egypt has a large and vertically integrated textiles industry, from its famous cotton fields to finished products. Textiles account for around a quarter of industrial output, according to AmCham, but this proportion is likely to fall, because of the rise of sectors such as petrochemicals, as well as intense international competition. The state-run businesses in the sector face a range of challenges, including industrial action and thus rising costs and production disruption, inefficient management and large workforces.

Nevertheless, there are success stories: major international apparel and clothing brands such as Walmart, Marks & Spencer, GAP and Levi Strauss buy garments and textiles made in Egypt, and AmCham expects the garment industry to grow by a steady compound annual growth rate of around 4% between 2013 and 2016. In addition, the sector has benefitted from Egypt’s qualified industrial zones (QIZs), which allow tariff-free exports to the US if 10.5% of the item value is sourced from Israel and 35% of the value added within the QIZ.

Outlook

After several years of instability and slow economic growth caused by both internal and external factors, Egypt’s near- to medium-term outlook is more bullish. This is good news for the sector, which has been buffeted by the turbulence, including through market stagnation, disruption of production and distribution, and slower investment from foreign partners. The recovery of domestic demand is one reason for confidence, as are the country’s long-term economic and demographic fundamentals.

While the domestic market is the primary focus for many investors, Egypt’s relatively low costs, decades of experience in many sectors and skills base all make it an attractive location for production for export. The government’s initiatives to channel capital into industry are also encouraging, with a spate of new industrial zones and fiscal incentives, although there is still a need to address energy and labour bottlenecks.

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The Report: Egypt 2014

Industry & Retail chapter from The Report: Egypt 2014

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