Egypt: a game of controlling variables

The Egyptian economy has seen some headwinds in the past few years. After four devaluations in the span of two years, inflation and interest rates have skyrocketed. The Egyptian pound has lost ~70 per cent of its value in a very short time, which exerted a lot of pressure on cement producers and the purchasing power of end consumers. On one hand, inflation numbers (as measured by urban headline inflation) recorded an all-time high of 38 per cent in September 2023, then started to slowly go down to 26.25 per cent in August 2024. This was mostly driven mostly by a weaker Egyptian pound, which led prices higher despite the Central Bank of Egypt’s (CBE) intervention by hiking interest rates eight times over the last two years, reaching 27.25 and 28.25 per cent from a low of 9.25 and 10.25 per cent in early 2020 for deposit and lending respectively. On the other hand, the devaluation of the Egyptian pound did not help the economic situation much as there has been a shortage of foreign currency in banks for a period. Importers were forced to look for other options to secure their foreign currency needs or buy from the parallel market at higher prices which reached a high of EGP75/US$. 

However, the economic conditions started to ease after Egypt announced the Ras El-Hekma deal in March 2024, when the government was able to secure US$35bn of foreign investments to build a mega-city on the Mediterranean Sea. The deal led to the foreign currency stabilising, and closed the gap between the official and parallel foreign exchange markets. The deal is also expected to add US$150bn of foreign investments over the span of the project as well as being a huge catalyst for cement producers.

Egypt’s cement industry: from boom to bust to recovery

The Egyptian cement industry consists of 23 producers operating 47 production lines, with a combined nominal capacity of ~80Mta (compared to a total demand of ~51Mt) in 2023. The top five producers hold ~54 per cent of the market, while the remaining 46 per cent is fragmented among the other 18 companies. Production capacities range between 1.5-12Mta per factory, with each company operating between one and nine production lines.

Several international cement companies are present in the Egyptian market, including Heidelberg Cement, Cemex, Titan Cement, Holcim Group, InterCement and Vicat. These companies collectively control 44 per cent of total production with 18 production lines and a total capacity of ~27Mta. However, the largest producer in the country is Watania Beni Suef Cement, owned by the Egyptian military. It is not only the largest plant in Egypt but is also considered one of the world’s largest single factory sites, with a rated capacity of 12.5Mta.
Over the past two decades, the Egyptian cement industry has experienced a cycle of growth and decline. During a period of infrastructure expansion, the government issued new cement licences, which eventually led to market oversupply as the industry now has an excess capacity of ~30Mta. This persistent oversupply has forced some companies to exit the market (eg, National Cement) or halt production temporarily (eg, Heidelberg-owned Tourah Cement).

In 2017, when demand peaked at 54Mt, the government issued six new cement production line licences, adding 12.5Mta of production capacity to the industry, an increase of ~18.5 per cent. This sudden expansion led to a significant decline in capacity utilisation, from a peak of ~80 per cent to a low of 65 per cent, triggering a price war as producers competed for market share.
The situation worsened when the surge in infrastructure projects began to slow by 2020, resulting in decreased demand and additional pressure on cement producers. Demand declined to 51Mt in 2023, stabilising at this level since. 

Controlling supply

Until 2021, almost all cement producers in Egypt struggled with low profitability due to the pricing war. To address this, the industry adopted a collective solution approved by all 23 operating companies and the Egyptian Competition Authority (ECA) in mid-2021. The agreement involved a quota system, where each company reduced its production based on a formula set by the ECA. The formula considered the number of production lines and the age of the company (categorised as 15, 10, or five years): 
y = x * (a + b b1 + c b2)
where: 
y = size of production capacity cut for the company
x = company’s production capacity
a = constant, set at 10.69 per cent
b = constant, set at 2.81 per cent
c = constant, set at 0.968 per cent
b1 = number of production lines
b2 = age bracket (15, 10 or five years).

This quota system was first implemented for one year starting on 15 July 2021, and has been renewed every year since.

The effect of a controlled supply became visible starting mid-year 2021 as cement producers’ margins and profitability jumped and many producers turned again to profitability. This was backed by a surge in cement prices in the local market, which makes sense if there is de-jure price collusion. The key rationale for the quota system is that it is the only option to save the Egyptian cement industry from massive losses and leading players to go out of the market. On the other hand, the rebuttal to that argument is that the end consumer will bear the brunt of unfair pricing. While the quota system is a thorny topic, it is expected to remain in place for the near future.

Cement prices

Cement prices in Egypt are influenced by the dynamics of supply and demand in a market grappling with overcapacity and moderate demand. From early 2019 to mid-2021, a pricing war among producers kept prices around EGP800/t, squeezing profitability margins to the point where many companies incurred operational losses just to maintain their market share.

However, the situation shifted dramatically in mid-2021 when producers implemented a quota system. Within six months, cement prices surged by 33 per cent, stabilising above EGP1000/t. Prices continued to rise in the first half of 2022, driven by increasing production costs. By the second half of the year, cement prices soared even further due to higher costs and a stronger US dollar, pushing prices to an all-time high of around EGP2700/t. For cement producers, this was a welcome development, as it enabled healthy profit margins and the ability to reinvest in their operations. However, the sustainability of these gains remains uncertain if the quota system were to be removed. However cement prices are expected to ease off a little during the rest of the year as the ECA increased the supply quota in September to control the rising prices.

The export dilemma

In response to government encouragement to boost exports, Egypt’s cement producers have been working to leverage their excess capacity. Despite their potential, they face fierce competition from Turkey and Saudi Arabia, the world’s second and 10th largest cement producers, respectively. Furthermore, Egypt’s higher production costs make it challenging to compete globally. As a result, local producers often resort to exporting clinker and cement at minimal margins, relying on subsidies to make up for the shortfall. This strategy helps them manage their surplus capacity and secure the foreign exchange needed for operations.

In August 2024 Egypt’s clinker and cement exports nearly doubled compared to the previous year. Total exports are projected to grow by 50 per cent, reaching 20Mt by the end of the year, fuelled by the government’s push for increased exports and the producers’ need to optimise production capacity. To support this export growth, several dry-bulk ports have built clinker storage silos, simplifying the process for producers to access international markets.

Fuelling the future: challenges and opportunities

In Egypt the cement industry largely relies on imported thermal coal for production, though some plants use alternative fuels such as petcoke and refuse-derived fuel (RDF). Despite Egypt’s abundant natural gas reserves, only South Valley Cement (SVC) has production lines capable of using it. Unfortunately, due to licensing issues and the high cost of natural gas for cement producers (US$9/mmBtu), SVC’s operations have come to a standstill.

Cement producers have been hit hard by a double whammy of soaring global fuel prices and an unfavourable exchange rate. The cost of coal and petcoke skyrocketed following the Russia-Ukraine conflict, reaching unprecedented levels. To make matters worse, the depreciation of the Egyptian pound compounded these challenges. However, there is a silver lining: global commodity prices are expected to stabilise, with coal and petcoke likely to follow suit. This potential reprieve could provide much-needed relief for Egyptian cement manufacturers.

Capex on hold: a tactical pause

With the industry under pressure in recent years, cement producers have put expansion-related capital expenditures on hold, focussing instead on essential maintenance to keep their operations running smoothly. As a result, several factories have undergone overdue upgrades to boost efficiency and sustain production capacity. 

Looking ahead, as profitability improves, the sector can anticipate a resurgence in capital investments aimed at modernising facilities and expanding operations.

In the meantime, while the industry had high hopes for greenfield investments in newer and more efficient energy sources, no major projects have materialised so far. There was an expectation of increased investment in solar energy to reduce electricity costs and initiatives to repurpose waste for kiln fuel. However, with the Egyptian government raising electricity prices for factories by 20 per cent in 2022 and more hikes expected in the coming year, the urgency to adopt alternative energy solutions has never been greater. This is especially important if Egyptian producers want to export cement to Europe, they will have to invest more in sustainable manufacturing to meet European standards.

As of 2024 Arabian Cement, Suez Cement and Amreyah Cement have integrated RDF into their fuel mix, ranging from 15-25 per cent. Notably, Suez Cement Group and Amreyah Cement have established their own RDF processing facilities, while Arabian Cement has set up a sister company dedicated to processing its RDF needs. These steps towards sustainable fuel solutions are promising, but the industry still has a long way to go in terms of energy innovation and efficiency.

The bottom line

Looking ahead, a rebound in overall cement demand in Egypt is expected, driven by the Ras El-Hekma project and reconstruction efforts in Libya and Palestine. Additionally, cement producers are likely to continue channelling their excess capacity into export markets across the Middle East and Africa. Meanwhile, the quota system is expected to remain in place for several more years, as demand will still lag behind supply. This is why local producers are largely supportive of the quota system. Consequently, profit margins are forecast to stabilise in the short- to medium term, with profitability staying positive. Differences in operational efficiency will be the key factor in distinguishing performance among producers. The primary opportunity for boosting sales volumes lies in producers being able to enhance the sustainability of their products, which could improve their appeal in European markets. 

This article was first published in the November 2024 issue of International Cement Review.