Global Research. Sector. Egypt. Egypt Cement Sector

Transcription

1 Global Research Sector Egypt Egypt Cement Sector Against All Odds... July 2009

2 KSCC Global Tower, P.O. Box Safat Kuwait Tel: (965) Fax: (965) stock market indices can be accessed from the Bloomberg page GLOH and from Reuters Page GLOB Faisal Hasan, CFA Head of Research Phone No:(965) Mahmoud Soheim Manager-Egypt Research Phone No: (202) Ahmed Abu Hussein, CFA Financial Analyst Phone No: (202) Radwa Weshahy Financial Analyst Phone No: (202)

3 Table of Contents Investment Summary 1 Global Cement Industry 5 MENA Cement Industry 14 Egypt Cement Industry 28 Valuation and Recommendation 60 Players Profile 63 Sinai Cement Company 64 Misr Cement Qena 81 Misr Beni Suef Cement 98

4 Investment Summary The structure of the world cement industry has become more globalized with a small number of multinational companies dominating the world cement manufacturing capacities. Moreover, the interaction between the cement market s supply and demand forces on the national, regional and international arena, created a new world order. The world cement industry experienced a period of rapid growth during the past decade, where the world aggregate cement consumption increased at a CAGR of 7.3% over the period from The robust growth in the cement industry came on the back of strong global economic performance, which was mainly attributable to the vigorous economic activity and developments in emerging markets, growing at a CAGR of 7.5% over the same period. The cement industry situation has changed considerably after the global financial crisis, where the added cement capacities during the past couple of years and the announcement of multiple new capacities coming on-stream in the next 4 years, mainly in emerging markets, coupled with the expected slow-down in the construction sector will create an inevitable oversupply situation in the global cement markets. The world map of cement has changed dramatically over the past 60 years, where the center of gravity has been moving steadily away from the west toward the East or developing economies. North America and Europe (developed market) share in world cement consumption has been declining from around 80% in the 50 s to around 20% recently. This trend is attributable to developing countries large population growth, as well as the continuous construction development plans, including large scale infrastructure and real estate projects and cheap labor and raw materials. On the regional level, the MENA region s cement industry has been expanding remarkably over the past five years, on the back of the high activity witnessed in the construction sector to undertake large scale real estate and infrastructure developments, including housing, tourism, industrial and public projects. MENA region cement consumption has been expanding at a CAGR of 9.6%, reaching 258.7mn ton in 2008, whereas cement production reached 255.6mn ton in 2008, achieving a CAGR of 7.6% over the same period. The MENA region cement production capacity in 2008 is estimated at around 376mn ton, which is forecasted to increase by 40.5%, reaching around 529mn ton in 2012, according to the announced expansion plans. Arab Countries cement annual production capacity stood at 222mn ton, representing 59% of the MENA region s cement annual production capacity. Arab Countries cement annual production capacity is expected to increase by 99mn ton over the next 4 years, reaching 321mn ton. These huge cement capacities addition in the MENA region coming on stream over the next years, unluckily coincided with the global economic slowdown and a declining activity in the construction sector. This situation is expected to create an over-supply in the regional cement market and trigger price wars, in addition to possible delays in the planned commissioning dates of the new capacities, shutdowns of some of the inefficient existing capacities and lower utilization rates. July 2009 Egypt Cement Sector

5 Therefore, we believe that countries with low cash cost of production per ton will be better positioned to survive the declining global cement prices and export their excess capacities at competitive prices. With respect to the local market, the Egyptian cement industry has been growing vigorously over the past 5 years, on the back of the high activity experienced in the construction and real estate sectors. Egypt s cement consumption has been growing at a CAGR of approximately 6% over the past 40 years. Despite the declining global demand, resulting from the global financial crisis, cement demand in Egypt continued its robust growth fueled by lower steel prices, which triggered higher construction activity. The Egyptian grey cement sector consists of 13 cement manufacturing companies, of which 9 companies are controlled by 6 multinational companies. At the end of 2008, Egypt s cement production capacity reached 43.3mn tons, compared to 41.8mn ton in 2007, recording a growth rate of 3.9%. Egypt cement production capacity is expected to add around 18.5mn tons between 2009 and 2011, growing at a CAGR of 12.6% over the next 3 years. Accordingly, Egypt cement production capacity will come very close to 62mn ton. The government intervention in the cement industry through increasing energy prices for energy intensive industries, including cement, harmed the competitive edge of the Egyptian cement sector, for its relatively low cost of production. In addition, banning cement exports could jeopardize the position of the Egyptian cement in export markets, yet we believe the negative effect will be marginal, as Europe, which represents Egypt s main export market, is witnessing a severe decline in demand. Finally, we believe that Egypt s cement sector outlook is positive, on the back of the continuing activity in the construction sector. The growth in the construction sector is expected to be driven by the government plan to boost investments in infrastructure projects, as well as low income housing and industrial development projects, in addition to the improvement of under developed areas in Egypt. Furthermore, the private sector investments in the residential, commercial and hospitality real estate segments are expected to support the construction sector, as well. Table 01: Global Valuation Matrix Price Target Price Upside BVPS* EPS* PBV^ Company Name (LE) (LE) Reco. potential (LE) (LE) (x) (x) Sinai Cement Buy 49.0% Misr Cement Qena Buy 17.1% Misr Beni Suef Cement Buy 83.9% * 2009 projected EPS & BV ^ Multiples are based on projected EPS, BVPS & last market prices as of June 30th, Source: Global Research PE^ 2 Egypt Cement Sector July 2009

6 Introduction The world cement industry experienced a period of rapid growth during the past decade, where the world aggregate cement consumption increased at a CAGR of 7.3% over the period from The robust growth in the cement industry came on the back of strong global economic performance, which was mainly attributable to the vigorous economic activity and developments in emerging markets, growing at a CAGR of 7.5% over the same period. The global front has changed dramatically since mid 2008, as the US economy went into recession. A liquidity squeeze appeared in the horizon, on the back of defaulting subprime mortgage borrowers, due to easy credit granted to home buyers with a low creditworthiness. In mid-september, the situation deteriorated rapidly all over the world, where a series of defaults in many financial institutions occurred simultaneously, leading to the world s worst financial crisis. Huge stocks sell-off wave hit the world s markets triggered by investors panic, leading to tremendous losses on the global stock exchanges. Although the world governments efforts to curb the downward trend to avoid recession, through adopting expansionary policies, including lowering interest rates and injecting money in the world economy, the global financial crisis still persists to date. The global concurrent economic slow-down will negatively affect consumer demand, which in turn will drag the growth of the entire sectors of the world economy. The construction sector, which drives demand on building materials, will not be different and will be adversely affected by the slowing world economy. In addition, tight credit conditions will act as an obstacle to real estate developers in the implementation of their planned projects on all fronts, leading to delay or cancellation of these projects. Consequently, the double effect of a slower world economy and dry credit markets will negatively affect demand on building materials, including cement. The cement industry situation has changed considerably after the global financial crisis, where the added cement capacities during the past couple of years and the announcement of multiple new capacities coming on-stream in the next 4 years, mainly in emerging markets, coupled with the expected slow-down in the construction sector will create an inevitable oversupply situation in the global cement markets. Consequently, this will lead to delay in the planned commissioning dates of the new capacities, shutdowns of some of the inefficient existing capacities and lower utilization rates. However, there is some good news represented in lower oil and natural gas prices, resulting from reduced oil demand, which will have the effect of lowering the cement production cost. Cement demand growth in developed markets, Western Europe and North America, is expected to decelerate. Whereas, emerging markets cement demand growth is forecasted to remain positive, although at a slower pace than previously projected before the global financial crisis. July 2009 Egypt Cement Sector

7 Therefore, the majority of the new capacities additions are directed to emerging economies, which are still under-developed and needs a lot of spending on infrastructure projects, in addition to emerging markets comparative advantage in terms of cost differential, where labor and energy cost are cheaper and CO2 emission restrictions are lower than in the developed economies. This will somehow alleviate the pressure on the construction sector, resulting from the slow-down in the housing sector and mitigate the negative effect on the growth of the global cement consumption created by developed countries. Given the new set of circumstances, a new competitive environment will emerge, where countries with lower cash cost of production will be better positioned to survive the declining global cement prices and export their excess capacities at competitive prices. The purpose of this report is to assess the position of Egyptian cement industry within the context of the global and regional cement industry. We will apply a top-down approach by exploring the cement market dynamics in each respective market. Egypt Cement Sector July 2009

8 Global Cement Industry The structure of the world cement industry has become more globalized with a small number of multinational companies dominating the world cement manufacturing capacities. Moreover, the interaction between the cement market s supply and demand forces on the national, regional and international arena, created a new world order. The cement consumption is cyclical and closely related to the construction industry business cycle, which in turn is largely determined by the overall macro economic growth. However, cement is to some extent protected from extreme cycles in the construction industry, because it is almost used in every type of construction. That is why the cement demand as a building material is the last to be influenced during economic recessions and the first to benefit from an economic recovery. The cement consumption is seasonal throughout the year, where consumption decline in the winter season due to bad weather conditions. Furthermore, the demand on cement is inelastic in nature, as a decrease in cement prices will not significantly boost consumption during a down cycle in the construction sector, as well as an increase in cement prices will not materially reduce demand throughout a high construction activity period. The cement industry has some distinctive characteristics. It is a capital intensive industry, where the typical investment cost of a green field plant with an annual capacity of 1mn ton is estimated to be in the range of USD mn. In addition, the cement industry is an energy intensive industry, where the production of one ton of cement requires around kg of fuel oil or its equivalent, depending on the cement type and the production process, and about 105kwh of electricity. The cement industry is closely related to the population, this relationship is intuitive because the ultimate purpose of any building and construction development activity is to serve people, whether in the form of housing, commercial, industrial, service or infrastructure developments. The supply curve of cement kept shifting upward in close relation to population, exhibiting a 95.8% correlation between cement production and population. Chart 01: World Cement production against world population 3,500 7,500 3,000 2,500 6,500 Ton mn 2,000 1,500 1, ,500 4,500 3,500 People mn - 2, Cement production Wrold Population Source: USGS, U.S Census Bureau & Global research July 2009 Egypt Cement Sector

9 Supply and Demand Analysis The world cement industry witnessed a stage of rapid growth over the period from , resulting generally from good economic performance in world economies. The world GDP growth achieved a CAGR of 4.6% over the same period and a growth rate of 5.2% in This growth in the world economy came mainly on the back of strong economic performance in emerging economies, which were able to achieve high economic growth rate during the period from 2002 to 2007, growing at a CAGR of 7.4%, compared to 2.7% in developed economies. Chart 02: Real GDP growth rates 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% World Developed Economies Developing Economies Source: IMF & Global research Much of the growth in developing countries is attributable to intensive spending in the field of social development and construction activities, especially in the Middle East and Asian economies. Consequently, global cement consumption has been growing vigorously over the past 5 years at a CAGR of 8.7%, reaching 2.76bn tons in 2007 up from 2.57bn tons consumed in On the other hand, world cement production responded to this increasing consumption by growing robustly at a CAGR of 8.5% over the same period, where cement production reached 2.76bn ton in 2007, compared to 2.57bn tons in Chart 03: World cement production and consumption 3,000 2,500 Ton mn 2,000 1,500 2,200 2,185 2,371 2,342 2,619 2,568 2,814 2,763 2,872 2,857 1, Production Consumption Source: Cembureau, ICR, USGS & Global research By far China is the world s largest cement producer and consumer, accounting for about 50% of the world s aggregate supply and demand. China s large population of 1.3bn people, besides the massive numbers of infrastructure projects and continuing urbanization are the driving forces behind its tremendous cement consumption and production quantities. The Egypt Cement Sector July 2009

10 second largest producer and consumer of cement is India with a population of 1.1bn people and substantial housing and infrastructure development projects. Chart 04: World cement 2008 by region Production MENA, 8.9% Others, 5.2% MENA, 9.1% Consumption Others, 5.8% Americas, 9.0% Americas, 9.1% Europe, 9.5% China, 49.1% Europe, 9.0% China, 48.7% Asia Pacific, 18.3% Asia Pacific, 18.4% Source: Cembureau, ICR & Global research The world map of cement has changed dramatically over the past 60 years, where the center of gravity has been moving steadily away from the west toward the East or developing economies. North America and Europe (developed market) share in world cement consumption has been declining from around 80% in the 50 s to around 20% recently. This trend is attributable to developing countries large population growth, as well as the continuous construction development plans, including large scale infrastructure and real estate projects and cheap labor and raw materials. Chart 05: Growth in World cement consumption in developed vs. developing countries 20% 15% 10% 5% 0% -5% % -15% World Developed Countries Developing Countries Source: Cembureau, ICR, USGS & Global research The world has changed dramatically after the emergence of the financial crisis in the United States and its rapid spillover effect all over the world. Deteriorating credit markets and tight credit conditions prevailing around the globe, as well as slower economic growth will act as major drags on the construction and building materials sectors, in terms of lower demand and hard project financing. The strong performance of the world cement industry over the past half decade is believed to come to an end, as the world cement consumption increased by 3.4% in 2008, compared to 7.6% in 2007, whereas the world cement production achieved a growth rate of 2.1% in 2008 against 7.4% in Therefore, we believe that the world cement industry already started its down cycle, which is expected to prevail at least during the coming year, if not longer. July 2009 Egypt Cement Sector

11 The decline in world cement consumption was mainly attributable to developed economies weak demand, which is estimated to be decreased by around 9.6% in 2008, compared to a decline of 1.7% in Although, cement demand in developing economies is estimated to decrease too, it is still on the positive side, growing by a moderate 5.9% in 2008, against a 9.6% in The continuing construction spending in emerging economies will offset the negative cement demand growth witnessed in developed countries. Chart 06: World expected cement demand by region Source: Global research Moreover, an examination of how the growth in cement production evolved historically over the past 60 years can provide us with some insight on where the global cement industry is heading. As indicated in chart 07, we plotted the growth in cement production for different time periods for years 2007 and We found that the trend line for 2008 different periods CAGR shows a flatter slope than the trend line for 2007, which supports our previous argument that the cement industry entered a period of slowdown. The cement industry production achieved a growth rate of 7.4% over 2007, compared to 2.1% in 2008, which is even lower than cement production long term growth. Therefore, we believe that the cement industry will grow at its long term average growth rate in the range of 4.5 to 5% over the short term, before rebounding again when the world economy starts to recover. Chart 07: World cement production CAGR for different periods 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 80 years 50 years 25 years 20 years 15 years 10 years 5 years 1 year Trend 2008 Trend 2007 Source: USGS & Global research Egypt Cement Sector July 2009

12 Cement Pricing The world average cement prices have been growing at a CAGR of 5% over the past 4 years, reaching an average of US$ /ton in 2008, compared to US$85-90/ton in This robust growth in cement prices came mainly on the back of the rapid growth in cement demand, especially from emerging markets as we explained earlier, in addition to the rising international energy prices, particularly the prices of steam coal and petcoke, which represent the main energy source in the cement industry. Chart 08: Australia -New Castle Steam Coal FOB price US$/ton Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Source: World Bank & Global Research The production cost of cement varies significantly from one country to another, depending on the availability and cost of energy, raw materials and labor. As long as energy cost is the largest contributor to the cement s production cost, cement producers in countries with lower cost of energy will have a competitive advantage over their counterparts. In addition, environmental regulations and carbon dioxide (CO2) restrictions in some countries will add an incremental cost to the overall production cost. As an example for these restrictions, Europe s current CO2 price is EUR25 per ton of clinker produced. On average, energy cost represents around 30% of the cement total production cost. Keeping all other things constant, a rise in energy cost will be translated into higher production cost, causing cement manufacturers to increase their selling prices in order to maintain their target profit margins. The extent to which the cement prices will respond to an increase in energy cost will depend primarily on the prevailing conditions in the construction market, which directly affects demand for cement. Capacities Additions The world new cement capacity additions experienced a period of significant growth to cope with the increasing cement consumption. This trend is evidenced by the large increase in the contracted cement kiln capacities, achieving a CAGR of 33.5% for the period Given the annual contracted new cement kiln capacities globally excluding China, as indicated in chart 09, and the fact that a time period of 2-3 years is needed between the contract award and the commissioning of production, we can forecast that around an additional 400mn ton of cement capacities will come on stream outside China during the next 3 years. July 2009 Egypt Cement Sector 9

13 Chart 09: New Global contracted cement kiln capacities (excluding China) Ton mn % -1.6% 86.7% 43.1% Middle East Africa Asia (excl. China) Europe N. America S. America Source: FLSmidth & Global Research However, new cement capacities annual order book declined in 2007 and 2008 by 10.7% and 1.6%, respectively, reflecting cement producers concern regarding the coming 2-3 years outlook of the world cement consumption. This implies that the growth in cement consumption during near future is expected to grow at a slower pace compared to the previous robust 5 years. An analysis of the distribution of the annual contracted order book among different regions shows that around 90% of the contracted new capacity additions were originated from developing countries, especially from MENA region and India, against only 10% in developed markets. The shift in cement manufacturing toward the Eastern hemisphere was mainly driven by tight supply conditions and escalating demand environment, on the back of increasing population and continuous development of immature housing and infrastructure projects, which remain a fundamental driver for growth. The supply/demand imbalance in emerging markets enabled cement producers to command higher prices and enjoy higher profitability, which created surplus funds available for investment and further capacity expansions. Furthermore, emerging markets have a competitive advantage with respect to production cost and price differential, which is considered another reason encouraging cement producers to shift east. Access to cheap labor and energy cost, as well as relaxed environmental regulations were two main factors contributing to the lower production cost in emerging markets. In addition, high cement prices in developed markets compared to emerging markets, with the exception of Africa due to limited supply and dependence on imports, created the basis for exports to developed markets at competitive prices. Moreover, Chinese equipment manufactures provide cement plant projects at lower cost. The Chinese Sinoma Company is able to provide turnkey projects at approximately 30% less than European suppliers. Therefore, the return on invested capital for cement producers employing the Chinese technology for a typical 1.5mn ton cement plant reaches 16%, compared to 10% for an identical plant build by any European supplier. It is worth mentioning that Sinoma had a market share of 34% in 2008, taking the lead for the first time from FLSmidth. 10 Egypt Cement Sector July 2009

14 Chart 10: Cement plants equipment suppliers market share 2008 Others, 13% FLSmidth (Denmark), 32% KHD (Germany), 7% Polysius (Germany), 14% Sinoma (China), 34% Source: FLSmidth & Global Research The emergence of the financial crisis and its negative consequences on the construction sector, especially in the developed markets, resulted in capacity reduction and projects delay, as well as exacerbating the move of the new cement capacities to the emerging markets. In Developed markets, companies will focus on vertical integration into ready-mix concrete and aggregates, as a strategy to protect their market share and profitability. Lafarge, the world largest cement producer, modified its initial global capacity expansion plan down from 60mn ton to 48mn ton and extended the plan time horizon by 1 year to end in In addition, Lafarge re-allocated the planned 10% capacity expansion in developed countries in its initial plan, to become 100% directed toward emerging markets. In addition, major multinational players are expected to abandon merger and acquisition activity during 2009, as they will focus mainly on cash flow generation and achieving a sound liquidity position through cost optimization, applying a conservative investment approach and keeping low leverage. However, cement manufacturers emerging from developing countries are serious competitors to the traditional industry leaders. These emerging market players are gaining momentum and increasing control over the cement industry, on the back of high profitability making them cash rich companies eager for growth and willing to diversify abroad. A new competitive environment will emerge in the global cement industry, where countries with lower cash cost of production will be better positioned to survive the declining global cement prices and export their excess capacities at competitive prices. Trade Generally, cement is not an export oriented product because it is a heavy and low value product. Therefore, cement transportation cost is considered an important factor in determining its import/export destinations world-wide. Consequently, the world total cement trade represented only 6-8% of the world total consumption over the period from 1999 to July 2009 Egypt Cement Sector 11

15 Chart 11: Cement world trade Ton mn E World cement trade Seaborne trade % of global consumption Source: Ocean Shipping Consultants, Clarkson, ICR & Global Research 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% The United States of America is the largest importer of cement in the world. However, the volume of cement imports to the United States has been significantly slashed by 33.2% and 42.8% in 2007 and 2008, respectively. This decline resulted from the construction sector slow down, which mainly came on the back of weakness in the housing segment. On the other hand, China is the world s largest cement exporting country, thanks to its huge capacities, which produce around 50% of the world cement production, and its competitive cement selling prices of approximately US$55/ton. Cement Seaborne Shipping is much more economically than inland shipping, allowing cement to travel very long distance at lower cost. Therefore, seaborne shipping has the lion s share in global cement trading, where around 80% of total cement trading is shipped by sea. However, seaborne cement trading accounted for a small percentage of the world dry bulk shipments amounting to 4.5% of in 2007 and it is estimated to be 4.2% in Chart 12: World dry bulk shipments 2007 Phosphate rock, 1.1% Phosphate rock, 1.0% 2008E Others, 14.9% Iron ore, 25.9% Others, 14.8% Iron ore, 27.2% Steel products, 8.9% Steel products, 8.9% Forest Products, 5.8% Forest Products, 5.6% Cement, 4.5% Bauxite/ Alumina, 2.8% Grains, 10.0% Coal, 26.1% Cement, 4.2% Bauxite/ Alumina, 2.7% Grains, 9.9% Coal, 25.7% Source: Clarkson & Global Research The bulk carrier freight rates, which are determined by factors outside the cement sector, including fleet supply, seasonal factors and bunker price (carrier fuel), can change the cost competitiveness of one country compared to others in global markets. The international seaborne dry bulk freight rates, as measured by Baltic Dry Index (BDI), which provide an assessment of the price of moving the major raw materials by sea, has witnessed a dramatic drop by around 93% since late May 2008 till the end of December 2008, back to its 2005 levels. However, the index started to recover some of its losses since early Egypt Cement Sector July 2009

16 Chart 13: Baltic Dry Index 14,000 12,000 10,000 8,000 6,000 4,000 2,000-3-Jan-05 3-Apr-05 3-Jul-05 3-Oct-05 3-Jan-06 3-Apr-06 3-Jul-06 3-Oct-06 3-Jan-07 3-Apr-07 3-Jul-07 3-Oct-07 3-Jan-08 3-Apr-08 3-Jul-08 3-Oct-08 3-Jan-09 3-Apr-09 Source: Bloomberg & Global Research The current financial turmoil along with the global economic slow-down, especially in developed economies, will result in reduction in the global cement consumption growth. Therefore, the volume of global cement trading is expected to be negatively affected, as most of the cement volumes are forecasted to be produced and consumed locally, whereas cement trading will be mainly concentrated in the Eastern hemisphere, where demand still exists. July 2009 Egypt Cement Sector 13

17 MENA Cement Industry For the purpose of the report, the Middle East and North Africa (MENA) region is represented by 20 countries, including 18 Arab countries and 2 non-arab countries, as follows: - Gulf Co-operation Council (GCC) Countries; Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates (UAE). - The Arab Peninsula; Iraq, Yemen and the GCC region. - The Levant; Jordan, Lebanon, Syria and Palestine. - North Africa; Algeria, Egypt, Libya, Morocco, Sudan and Tunis. - Non-Arab Countries; Iran and Turkey. They are added to the MENA region because they are considered major cement producers. Table 02: MENA economic indicators 2008e Arab Countries Arab Peninsula Non-Arab Countries The Levant North Africa GCC region Country Source: IMF, CIA and Global Research GDP growth Population (mn.) GDP per capita (US$) Inflation rate (End of period) Bahrain , Kuwait , Oman , Qatar , Saudi Arabia , United Arab Emirates , Iraq , Yemen , Jordan , Lebanon , Syria , Palestine , Algeria , Egypt , Libya , Morocco , Sudan , Tunis , Iran , Turkey , Sector Drivers Economic Activity The MENA region is endowed with a substantial energy reserve, where more than 66% of the world s crude oil reserve exists and around 47% of the global natural gas reserve is located. Accordingly, the hydrocarbon sector is a main contributor to MENA s economy, 14 Egypt Cement Sector July 2009

18 especially for oil-exporting countries, such as Saudi Arabia, UAE, Kuwait, Algeria, Libya and Iran. Other countries including Egypt, Morocco, Tunis, Oman and Jordan are not mainly dependent on the hydrocarbon sector and have more diversified economies. Chart 14: Global Oil and Natural Gas proven reserves (end of 2008) OIL Natural GAS Other MENA, 8.4% Other MENA, 5.7% UAE, 7.8% Algeria, 2.4% Rest of the UAE, 3.5% Kuwait, 8.1% World, 34.7% Saudi Arabia, 4.1% Rest of the World, 54.5% Iraq, 9.1% Qatar, 13.8% Iran, 10.9% Source: BP & Global Research Saudi Arabia, 21.0% Iran, 16.0% The overall MENA region witnessed a period of strong economic performance, growing at a CAGR of around 5.3% over the past 5 years. Economies were expanding vigorously on all fronts, following the global growth trend, achieving a growth rate of 5.8% in 2008, the same as MENA oil-exporters economic growth rate declined from 6.4% in 2007 to 5.8% in 2008, resulting from slower domestic demand growth in Iran. However, GCC economic growth reached 6% in 2008 from 4.1% in On the other hand, MENA diversified economies achieved an economic growth rate of 5.7% in 2008, compared to 3.8% in Chart 15: MENA GDP growth rate 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 3.8% 6.4% 4.1% 5.8% 5.7% 5.8% 6.0% 5.8% 4.0% 3.9% 4.3% 3.9% 5.7% 5.0% 6.0% 5.2% 0.0% e 2009f 2010f MENA Diversified MENA Oil Exporters GCC MENA Source: World Bank & Global Research The significant surge in the international food and oil prices starting in 2007 to mid 2008 caused inflation rate to exceed the 10%-mark in the majority of MENA countries. Crude oil prices reached almost US$145/barrel in mid 2008 from around US$55/barrel at the beginning of This remarkable increase in oil prices created surplus liquidity mainly in oil exporting countries, especially the GCC economies. On the other hand, more diversified economies, which are dependent on food and oil imports, experienced a decline in their current account balances as a percentage of GDP, due to higher cost of imports. July 2009 Egypt Cement Sector 15

19 Chart 16: MENA current account position as percentage of GDP 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% 14.9% 12.8% 13.5% 6.0% 4.1% 19.2% 17.2% 18.7% 8.0% 5.4% -1.2% -3.6% -7.3% -0.7% 0.0% -10.0% Source: World Bank & Global Research MENA MENA Oil Exporters MENA Diversified The governments of the GCC countries utilized these excess funds to diversify their economies to become less dependent on the oil and gas sector, as they invested a substantial amount of these excess petrodollars in society development, such as real estate and infrastructure projects, in order to attract private investments, which were primarily directed to develop high-end housing, commercial and tourism schemes, as well as industrial project. These large scale multi-facet development projects on all fronts, as well as infrastructure developments created a great demand for building materials, including cement. The world economic slowdown, resulting from the manifestation of the global credit crunch, which started in mid September 2008, negatively affected MENA economies. The direct effect of the crisis was relatively mild, compared to developed economies, as financial institutions in MENA region were not large holders of subprime mortgage securities. However, the vulnerability of MENA economies to the ripple effect of the financial crisis was more severe than its direct effect, with respect to shrinking global demand, squeezing liquidity and falling stock markets. Therefore, MENA countries economic growth are expected to slowdown, on the back of lower revenues, resulting from weak demand for the region s exports and tourism, falling oil prices and tight credit conditions. This will lead to decline in investment spending, which will result in scaling down and postponement of ambitious investment projects. Oil exporting countries current account position will be negatively affected, as receipts from hydrocarbons were slashed, on the back of falling crude oil prices, reaching around US$45/ barrel from a peak of US$145/barrel in mid On the other hand, diversified economies will benefit from lower commodity and oil prices, as their current account position will improve. It is worth mentioning that oil price is an essential key factor affecting the region s economy, as well as the world economy. Therefore, any decision by the region s main oil exporting countries, which are also members in the Organization of the Petroleum Exporting Countries (OPEC), to cut oil production to set a floor under oil prices will play a major role in shaping the region s growth profile. Population Population is one of the main determinants of cement consumption. As any construction activity undertaken to develop any type of real estate or infrastructure project, is implemented to serve the people whether in form of housing, tourism or public services projects. MENA 16 Egypt Cement Sector July 2009

20 region has a large population base, with a total population of around 461mn people, growing at a CAGR of 2% over the past 10-year period. Population in the MENA region is expected to grow by its historical annual average rate until it reaches approximately 507mn people in Furthermore, MENA region has favorable population segmentation with around 39% of its population are young and less than 18 years old, which ensures strong demand on housing and utilities development projects. Chart 17: MENA historical and forecasted population % 2.5% Population mn % 1.5% 1.0% 0.5% MENA population MENA population Growth Source: IMF, US Census Bureau & Global Research 0.0% Arab Countries contribute to around 69% of total MENA population, with a total population of 318mn people in 2008, compared to 142mn people in non-arab countries. North Africa was the greatest contributor with a share of 43% of total MENA population. Chart 18: MENA Population distribution 2008 Non-Arab Countries, 31% Arab Peninsula, 19% GCC, 8% Yemen, 5% Iraq, 6% North Africa, 43% The Levant, 7% Source: IMF, US Census Bureau & Global Research Construction activity The MENA region s construction activity has been expanding vigorously over the past years to develop large scale real estate and infrastructure projects. Generally, this high level of activity in the construction sector came on the back of the good economic performance all over the MENA region, as well as different governments hefty investments, through the public sector to develop immature housing and infrastructure projects to upgrade the living standards and social services offered to the increasing population. Moreover, the contribution of the private sector to this construction boom was mainly focused on the development of luxurious residential, commercial and leisure schemes. July 2009 Egypt Cement Sector 17

21 The GCC region witnessed the highest level of construction activity in the MENA region, driven by two main factors; the high oil prices, which created a surplus liquidity, and willingness to diversify their economies to become less dependent on the hydrocarbon sector. The world economic recession resulting from the outbreak of the global financial crisis and the subsequent free fall in the world oil prices, as a consequence of slower global demand, negatively affected the liquidity levels of oil dependant economies. Moreover, dry credit market conditions worsened the situation even more, with project financing became very hard to obtain, as banks willingness to finance real estate projects disappeared. This situation has adversely affected the construction activity, leading to a slowing-down in the sector and downsizing and rescheduling of ambitious development plans. Accordingly, demand on building materials decreased, leading to a decline in their prices. According to data published by MEED, the Gulf region, which includes GCC, Iraq and Iran, projects value in March 2009 reached US$3.1bn, growing at a CAGR of around 10% over the past 10 quarters. Although the total projects value increased by 16.5% during the last quarter in 2008, it advanced only by 5% in the first quarter of The large increase in the projects value in the last quarter of 2008 came on the back of the stimulus packages announced by the governments to invest in infrastructure projects, in order to counter attack the slowdown resulting from the financial turmoil. Chart 19: Gulf region projects value against their growth rate US$ mn. 3,500 3,000 2,500 2,000 1,500 1, Dec Mar Jun Sept. Dec. Mar Projects value Jun Growth Sept Dec Mar % 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Source: MEED & Global Research The value of the projects in itself is promising and assures a good activity in the broad construction sector over the next years. However, the two crucial questions are how many projects will find their way to the light with the current liquidity constraints and falling demand and how such projects are distributed among different economic sectors. We believe that the coming period will determine the destiny of many projects, where infrastructure and economically feasible projects with adequate financing will be the surviving projects, although they may witness some delays relative to their original completion dates. On the other hand, projects that are speculative in nature, mainly luxurious real estate projects, will be the ones that are more likely to witness cancellations. The UAE has the largest construction market worth US$1.23bn, representing around 42% of the Gulf region projects value, where some 80% of the UAE planned activity is in the real 18 Egypt Cement Sector July 2009

22 estate construction segment. Therefore, the UAE vulnerability to the negative consequences of the credit crunch is much harsher than other countries in the region. There are around US$335mn worth of projects on hold, representing 25% of UAE projects value and even ongoing projects were rescheduled with extended time frames and minimal work force because of lack of funding and lower population projections, due to downsizing of the expatriate work force. Chart 20: Gulf region projects breakdown by country on March 2009 UAE, 41.9% Iran, 9.7% Iraq, 5.0% Bahrain, 2.2% Kuwait, 9.9% Saudi Arabia, 20.7% Oman, 3.5% Qatar, 7.1% Source: MEED & Global Research The decline in building material prices, which is considered a positive factor in stimulating the construction sector, was not enough to fuel more real estate investments due to declining demand and the severe lack of funds to finance projects, in addition to that the fiscal budget of oil exporting countries, mainly GCC, came under pressure due to lower oil prices. Although the construction sector is under pressure, the governments still have the ability to ease strain on a slowing down construction sector by injecting funds to stimulate the economic activity. Therefore, many governments in the region adopted stimulus package plans to enhance their economies, mainly through increasing public spending on society development projects, such as schools, universities, hospitals and infrastructure projects, as well as injecting fresh money in the troubled financial system. Data shows that merely the top 12 infrastructure projects in the MENA region will cost around US$55bn, to be implemented during the coming years. This level of expected expenditure on infrastructure projects should provide a good level of assurance that the construction activity in the overall MENA region is not expected to fall sharply. However, the construction activity will vary from one country to another. Accordingly, MENA demand on building materials is not expected also to decline severely. July 2009 Egypt Cement Sector 19

23 Table 03: Top 12 railway and road mega projects Value Project Country (US$ bn) Scope GCC rail network GCC region 14 3,000km rail network connecting Completion Status Date Planning 2016 the 6 GCC countries Kuwait national rail network Kuwait km railway linking Saudi borders Planning 2014 in the south with Iraqi borders in the north though Kuwait cities Land bridge Saudi Arabia 6.6 1,155km railway linking port cities of Jeddah, Dammam and Jubail through Riyadh Makkah-Madina railway Saudi Arabia 6 440km railway linking the 2 holy cities of Makkah and Madina with Jeddah Mina-Arafa railway Saudi Arabia 5.3 The railway will link the Holy city of Makkah with Mina, Muzdalefa all the 7 emirates together Total railway projects 41.5 Friendship causeway Bahrain/ km road and railway linking Qatar Bahrain and Qatar Subiya Causeway Kuwait km bridge linking between Developer selection Contract awarded Contract awarded and Arafat UAE railway UAE km high speed railway linking Planning 2015 Red Sea bridge Yemen/ Djibouti Kuwait city and Subia peninsula 2 27km road and railway linking the Contract awarded Planning 2016 Planning 2020 Arabian Peninsula and Africa Jamarat bridge Saudi Arabia 1.5 Expansion of the Hajj bridge in Mina Construction 2009 Persian Gulf bridge Iran 1 Bridge linking Qeshm island with Planning 2014 Iranian mainlan Island bridges UAE 1 20 bridges linking islands of Total road projects 13.4 Total rail & road projects 54.9 Source: MEED, Zawya & Global Research Suwwa, Reem and Umlafaine Contract awarded N/A Regulations The cement industry is highly regulated, as it is subject to high level of intervention by most the region s governments. The reason behind this is that cement is considered a strategic commodity, as it is an essential building material for all and every kind of society construction and infrastructure development activity. Therefore, different governments across the region issued various regulations on their respective local cement markets to regulate trading of cement, with the objective of prioritizing meeting local demand and controlling local selling price of cement. In Saudi Arabia, cement prices soared from an average of US$67/ton in 2007 to over than US$100/ton, on June In turn, the Ministry of Commerce and Industry (MOCI) imposed a ceiling on the factory price of cement at SR250/ton (US$68/ton). In addition, the 20 Egypt Cement Sector July 2009

24 government banned all cement exports effective June 2008, following growing complaints from contractors and individuals that traders are directing cement for exports, attracted by higher profit. On May 25th, 2009, cement export ban was removed on condition that cement companies abide by the government decision to sell each bag of cement on the local market for SAR10 (US$2.67). It is worth mentioning that, Eastern Province Cement Company decided to shut a production line, which produces 3,500 ton per day, for four months (for a lengthy maintenance), as the government decision to ban exports has inflated the Company s stockpiles. However, Saudi Arabia decision to remove export ban, was driven by two reasons, the current high level of inventory and the expected new capacities additions. Table 04: Main government regulations Country Regulations Effective date Egypt Price cap of US$58.5/ton August 2006 Export duty of US$12/ton February 2007 Export duty of US$15/ton August 2007 Export ban March 2008 to September 2008 Removal of export duty of US$15/ton October 2008 Allowing imports April 2009 Export ban April 2009 to August 2009 Saudi Arabia Price cap of US$68/ton June 2008 Export ban June 2008 Removal of export ban May 2009 UAE Price cap of US$81/ton 2007 Price cap of US$99/ton 2008 Reintroduction of 5% imports duty February 2009 Oman Export duty US$78/ton June 2008 until now Syria Price cap of US$130/ton February 2009 until now Iran Export ban May 2008 to December 2008 Price cap of US$50-60/ton July 2008 Export Duty US$100/ton July 2008 to December 2008 Price cap of US$65/ton January 2009 Source: ICR, Reuters & Global Research On the other hand, UAE government decided to set cement price at US$81/ton in Price cap was further raised to US$94/ton and again to around US$99/ton in The surge witnessed in cost of raw materials and fuel coupled with supply shortage pushed cement prices to a record high. Accordingly, the Ministry of Economy signed an agreement with producers to increase production and remove import duties, as well as reducing port handling fees on May Later in February 2009, import duties of 5% were reintroduced to protect local manufacturers, as well as avoiding oversupply in the market. During March 2008, Oman two cement companies along with the Oman Chamber of Commerce and Industry (OCCI) agreed to increase the retail price of cement by OMR0.20 to OMR1.50 per bag equivalent to OMR30.0 per ton (US$78.0/ton) for cement manufacturers, effective June 1st, July 2009 Egypt Cement Sector 21

25 In 2008, the Syrian Prime Minister decided to extend, until June 2009, the permission to import cement to satisfy the rapidly growing demand. This decision is revised on June of every year. On February 2009, the Syrian government decided to fix the cement price at US$130/ton, in order to protect the local producers, from the notably cheaper imported cement from countries with lower production cost. Moreover, the Iranian government banned producers from exporting cement because of concerns to witness a local shortage, effective May However, recently established plants were allowed to export a proportion of their production to cover bank repayments and other debt, but have to pay an export tax duty of US$100/ton, which was imposed by the government on July Additionally, Iran government has enforced a US$50-60/ton cement price, as the black market price was more than double the ex-work price, effective July On January 2009, the government has decided to eliminate the US$100/ton export duty, as the local supply and demand were almost balanced, after new plants started production. Additionally, exports will only be allowed as long as the price of cement in Iran does not exceed a maximum of US$65/ton. Concerning Egypt the latest set of regulations were issued by the Minister of Trade and Industry in April 2009, to control local cement prices including, banning cement exports for 4 months, reduction of cement imports clearing period from 30day period to 3-day period, as well as obliging cement producers to print their selling prices on cement bags for all distribution channels, including end-user price. Further details regarding regulations in the cement market will be discussed later under Egypt s cement sector. Supply and Demand Analysis The MENA region s cement industry has been expanding remarkably over the past five years, on the back of the high activity witnessed in the construction sector to undertake large scale real estate and infrastructure developments, including housing, tourism, industrial and public projects. MENA region cement consumption has been expanding at a CAGR of 9.6%, reaching 258.7mn ton in 2008, whereas cement production reached 255.6mn ton in 2008, achieving a CAGR of 7.6% over the same period. Chart 21: MENA cement production and consumption % % Ton mn % 8.0% 6.0% 4.0% 2.0% Consumption Production Consumption growth Production growth Source: Arab union for Cement and Building Material (AUCBM), ICR & Global Research 0.0% 22 Egypt Cement Sector July 2009

26 Turkey is considered the largest cement producer in the region, producing 20.1% of the region s total cement production in Iran produces around 17.4% of the region s cement production and comes in the second place, followed by Egypt, which produced almost 15.5% of MENA cement production in Saudi Arabia and UAE ranked the fourth and fifth biggest cement producers in the region in 2008, manufacturing around 12.9% and 6.3%, respectively. Chart 22: MENA countries cement production and consumption 2008 Ton mn Source: Arab union for Cement and Building Material (AUCBM), ICR & Global Research On the consumption front, Iran is the largest cement consumer in the region, consuming around 17% of the region s cement consumption, followed by Turkey, which consumed 15.7% of the region s cement consumption in Egypt took the third place with approximately 14.8% of MENA cement consumption in In addition, Saudi Arabia and UAE came as the fourth and fifth biggest cement consumers in the region in 2008, consuming around 11.5% and 7.7%, respectively. Chart 23: MENA countries Cement per Capita Consumption (CPCC) Vs. 5 year CPCC CAGR CPCC (kg.) Bahrain 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, (500) Kuwait 9% 1% Oman 16% Qatar Saudi Arabia -1% Bahrain Kuwait Oman Qatar 3% UAE 16% Source: AUCBM, ICR & Global Research Iraq 40% Yemen Production 9% Jordan 13% Saudi Arabia UAE Iraq Yemen Jordan Lebanon 4% Further analysis of the cement consumption data with respect to Cement Per Capita Consumption (CPCC) and its respective CAGR over the past five years reveals that all Arab countries average CPCC stands at 490kg, with a CAGR of 8% over the previous 5-year period, compared to a CPCC of 593kg and a CAGR of 6.3% over the same period in non- Arab countries. Collectively, the MENA region average CPCC recorded 519kg, achieving a CAGR of 7.4% over the past half decade, relative to a world average CPCC of 426kg and a CAGR of 6.1% over the past 5 years Syria Consumption 1% Lebanon Syria Palestine -3% 10% Algeria 7% Egypt 15% Palestine Algeria Egypt Libya Libya 6% Morocco 6% Sudan 3% Tunis 6% Iran 6% Morocco Sudan Tunis Iran Turkey CPCC (kg.) GCC avg. CPCC MENA avg. CPCC 5 year CAGR Turkey 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% -5% July 2009 Egypt Cement Sector 23

27 GCC countries have the highest CPCC figures in the MENA region, recording an average of 1,660kg in 2008, with a CAGR of 7.4% over the period from , resulting from the high level of construction activity experienced in the GCC region. UAE has the highest CPCC in the MENA region, reaching 4,200kg in It is worth mentioning that Libya CPCC is in the same level as some GCC countries. Other countries in the MENA region CPCC figures hover around the region s average CPCC, with the exception of Iraq, Syria, Yemen and Sudan, which are far below the MENA region s average. We believe that countries with a large population base and relatively lower CPCC will have a good potential for cement consumption growth on the long-term. Countries under this category are Sudan, Yemen, Iraq and Syria. On the other hand, GCC countries CPCC is not sustainable on the long term, given their low population base, except for Saudi Arabia, which has a much larger population compared to other GCC countries. Capacities As aforementioned, the strong economic performance witnessed in the MENA countries has encouraged more investments in real estate and infrastructure development projects, which in turn created high demand for building materials. Therefore, cement producers around the MENA region planned to raise their production capacities to meet the growing demand. The MENA region cement production capacity in 2008 is estimated at around 376mn ton, which is forecasted to increase by 40.5%, reaching around 529mn ton in 2012, according to the announced expansion plans. Arab Countries cement annual production capacity stood at 222mn ton, representing 59% of the MENA region s cement annual production capacity. Arab Countries cement annual production capacity is expected to increase by 99mn ton over the next 4 years, reaching 321mn ton. Chart 24: MENA countries current and forecasted annual cement production capacity Ton mn Iran Egypt Saudi Arabia Source: International Cement Review (ICR), MEED, Iran Cement, CemWeek, Zawya, Arab Union for Cement and Building Materials (AUCBM), Cement Companies and Global Research UAE Morocco Algeria Libya Syria Jordan Tunisia Qatar Sudan Oman Yemen Kuwait Bahrain 2008 E 2012 F Egypt, Saudi Arabia and UAE are implementing considerable capacity expansion plan, contributing around 32% of the new capacity expansion in the MENA region, in order to meet the growing local demand. Egypt is projected to add around 18.5mn ton, increasing its annual production capacity from 43mn ton in 2008 to 62mn ton in In addition, Saudi Arabia is expected to increase its cement annual production capacity by 27%, reaching 61mn ton in 2012, compared to 48mn ton in Similarly, UAE is forecasted to lift its annual production capacity by 17mn ton by 2012, representing 56% increase from 2008 production capacity level of 30mn. 24 Egypt Cement Sector July 2009

28 Moreover, other countries are also implementing capacity expansions and establishing Greenfield plants, including Algeria, Morocco, Libya, Jordan, Syria, Yemen, Kuwait, Sudan and Qatar. Syria was expected to be one of the major cement producers in the region, as since 2005 the Syrian government planned to add around 25mn ton, of which only 6mn ton were confirmed. Up to date, no further details were disclosed concerning the start-up dates of the remaining announced capacities. Therefore, we excluded Syria s unconfirmed additional capacities from our calculations. Chart 25: Distribution of capacities additions in MENA countries between Iran, 35.1% Egypt, 12.1% Jordan, 3.5% Kuwait, 1.2% Libya, 4.6% Source: International Cement Review (ICR), MEED, Iran Cement, CemWeek, Zawya, Cement Companies & Global Research Bahrain, 0.2% Algeria, 2.7% Yemen, 2.0% UAE, 11.0% Tunisia, 0.7% Morocco, 6.4% Oman, 1.0% Qatar, 2.0% Saudi Arabia, 8.6% Sudan, 4.7% Syria, 4.2% Iran is expected to have the lion s share with respect to the new capacities additions, where around 35% of the new cement capacities in the MENA region are expected to come from Iran, which is projected to boost its production capacity by 89%, reaching 113.5mn ton in 2012, relative to 60mn ton in It is worth mentioning that the Iran cement annual production capacity reached 64mn ton on March The new capacities additions in the region are expected to come over the course of the next 4 years, where 25% will be added in 2009, whereas the majority of the new capacities expansions of 36% are forecasted to start operations in Afterwards, 23% and 16% of the new capacities are due to be completed in 2011 and 2012, respectively. Moreover, Arab Countries are expected to add 34, 36, 28 and 1mn ton over 2009, 2010, 2011 and 2012, respectively. Chart 26: MENA countries current and forecasted annual cement production capacity Ton mn Source: International Cement Review (ICR), MEED, Iran Cement, CemWeek, Zawya, Cement Companies and Global Research July 2009 Egypt Cement Sector 25

29 Saudi Arabia is expected to add 3mn ton in 2009, 7mn ton in 2010 and 3mn ton in 2011, which will bring Saudi Arabia total cement annual production capacity to 61mn ton by the end of UAE is expected to add 10, 2 and 4mn ton of new cement capacities in 2009, 2010 and 2011, respectively. Chart 27: Capacities additions by country throughout 2009 to Ton mn Iran Egypt UAE Saudi Arabia Morocco Sudan Libya Syria Source: International Cement Review (ICR), MEED, Iran Cement, CemWeek, Zawya, Cement Companies and Global Research Jordan Algeria Qatar Yemen Kuwait Oman Tunisia Bahrain However, the negative effect of the world financial crisis on the construction sector forced some cement producers to revise their expansion plans, either by postponing their projects or by cancelling the entire project. Therefore, some of the announced projects were deferred, especially in UAE and Saudi Arabia. In UAE, Jebel Ali Cement factory, which will have an annual production capacity of 2.5mn ton, completion date were postponed to In addition, JK cement, which is expected to have an annual capacity of 2.2mn ton, was postponed to commence operation in In Saudi Arabia, Arabian Cement Company postponed its 3mn ton cement plant to start operations in 2011, whereas Southern Provence Cement Company freezed its expansion plans, until market conditions improve. These huge cement capacities addition in the MENA region coming on stream over the next years, unluckily coincided with the global economic slowdown and a declining activity in the construction sector. This situation is expected to create an over-supply in the regional cement market and trigger price wars, in addition to possible delays in the planned commissioning dates of the new capacities, shutdowns of some of the inefficient existing capacities and lower utilization rates Therefore, we believe that countries with low cash cost of production per ton will be better positioned to survive the declining global cement prices and export their excess capacities at competitive prices. Pricing and Cost Pricing Based on the fact that most of the region s governments intervened in the cement industries, either by imposing price caps or setting an export duty fee, the cement prices in 2008 were stable to the extent to which the governments were able to enforce the stated regulations. The average retail cement price in the MENA region in 2008 was approximately US$103/ton. 26 Egypt Cement Sector July 2009

30 Chart 28: Cement retail prices in the region US$/ton Sudan Yemen Syria Morocco Jordan Turkey Algeria UAE Egypt Bahrain Kuwait Lebanon Tunis Oman Qatar Saudi Arabia Iran Source: International Cement Review (ICR), Global Cement Magazine, WorldCement, CemWeek and Global Research Cost Cement production cost varied among different MENA countries and some other selected countries, depending on the cost of energy, raw materials and labor. The MENA region average cash cost of production in 2008 reached US$40/ton. It is worth mentioning that Algeria has the lowest cash cost of production of US$15/ton. Chart 29: Selected countries cash cost of production US$/ton Jordan Oman Syria Europe Morocco UAE India Egypt China Qatar Saudi Arbia Iran Algeria Source: International Cement Review (ICR) and Global Research July 2009 Egypt Cement Sector 27

31 Egypt Cement Industry Background Egypt is one of the oldest countries in cement manufacturing in the region, as it started cement production in the early years of the 20th century, specifically in 1927 with the construction of Torah Cement Company. Later in 1929, Helwan Cement Company was established followed by Alexandria Cement Company in 1948 and National Cement Company in In the 70s, the production capacities of the 4 cement companies reached around 4mn tons. The construction boom witnessed in the late 70s and 80s created high demand for cement that was met through imports because of the limited local production capacities, despite the opening of 3 new cement companies, Suez, Assuit and Amiryah, which started production throughout that period. In the mid 80s, Egypt became one of the largest cement importing countries in the world. During the 90s, 6 new cement companies were established to cope with the increasing construction activity and the resulting increasing cement demand, especially with the appearance of new sub-urban cities such as, Al-Sherouq, Al-Obour, 6th of October, 10th of Ramadan and Al-Sadat. However, Egypt s cement net importing position prevailed during the 90s and the early years of the 21st century. Consequently, cement producers in Egypt increased their production capacities and enhanced their production lines to meet the surging local cement demand. In 2002, Egypt turned out to be a net exporter of cement and later in 2004 Egypt stopped importing cement and became one of the largest cement exporting countries in the world. Similarly, cement distribution and pricing evolved over time and went through 3 phases of development. The first phase started in 1932 with the establishment of the cement store by the sole cement producers then, Torah and Helwan, to organize selling their production. Later in 1957, the government replaced the cement store with the cement selling office, which was responsible for marketing cement in the local and export markets. However, the government s centralized management of that office led to price distortions and production bottlenecking in the cement sector. Therefore, the cement selling office was terminated in 1991 and cement producers became free to set their prices based on the market forces. Currently, grey cement manufacturers in Egypt reached 13 players with a total production capacity of 43.3mn ton. Out of the 13 market players, there are 9 cement companies controlled by 6 leading multinational companies, who entered the Egyptian market mainly through the privatization of the state-owned cement companies, which started in The entrance of these multinational companies significantly contributed to enhancing the productivity and efficiency of the local cement industry. Ordinary Portland Cement (OPC) is the most common type of cement produced in Egypt. This type of cement is the most widely used in every aspect of the construction works. In addition, the production mix is not limited to OPC, it also includes, seawater cement, rapid hardening cement, slag cement and white cement. These other types of cement are more specific purpose cement and differ from OPC in their composition. 28 Egypt Cement Sector July 2009

32 Sector Drivers Economic Activity The Egyptian economy continued its robust growth for the third consecutive year, achieving an average GDP growth rate of 7.1% over the past 3 years. The economic growth was broadbased including various sectors. The main sectors that have witnessed the highest growth rate in real term over the past 3 years were construction 14.9%, Suez Canal 14.0%, tourism 13.7% and communication 12.9%. This healthy economic performance came on the back of economic reform policies adopted by the government since 2004, as the government continuously presses on with legislative and administrative efforts to create better business environment. Chart 30: Real GDP growth LE mn % 7.1% 7.2% 5.9% 5.4% 4.6% 4.2% 3.4% 3.2% 3.1% 1998/ / / / / /04 Real GDP 2004/ /06 GDP growth Source: Ministry of Economic development, CBE & Global research 2006/ /08 H1 2007/08 7.1% 5.0% H1 2008/09 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% The government efforts placed Egypt for the third time in 4 years, among the top 10 global reformers and the top regional reformer this year in the «Doing Business 2009» report, which is compiled annually by the World Bank comparing the business environments in 181 economies worldwide. There have been improvements particularly in the areas of starting a business, dealing with construction permits, registering property, getting credit, protecting investors and trading across borders. Chart 31: Total implemented investments LE bn % 20.8% 20.9% 18.9% 17.8% 17.8% 17.9% 18.7% 19.2% 18.5% 16.3% 16.4% / / / / / / / / / /08 H1 2007/08 Public Investment Private Investment Implemented invt./gdp Source: CBE & Global research H1 2008/09 24% 22% 20% 18% 16% 14% 12% 10% This economic growth came on the back of growth in final consumption at a CAGR of 18.3%, which was mainly attributable to the growth in private consumption, over the period from 2004/05 to 2007/08. In addition to the huge investments undertaken by local and foreign investors in almost all the economic sectors, where total investment reached L199.5bn, representing 22.3% of GDP and achieving a CAGR of 27.4% over the same period. July 2009 Egypt Cement Sector 29

33 Moreover, Foreign Direct Investment (FDI) reached US$13.2bn in 2007/08, recording a remarkable CAGR of 50.5% over the past 3 years. It is worth mentioning that FDI represented 8.1% of GDP in 2007/08, compared to 8.5% in 2006/07. Chart 32: Net FDI % US$ bn % % Source: Ministry of Investment & Global research 80.9% 19.4% 2004/ / / /08 H1 2007/08 H1 2008/ % % New Establishments and Expansions Sale of Assets to Non-Residents Real Estate FDI Growth Petroleum Sector % 50.0% 0.0% -50.0% USA and European Union (EU) represent a major source of FDI, where they collectively account for around 65% of total FDI inflows to the Egyptian economy. When we look at the distribution of the total FDI inflows by country, we find that USA is the greatest contributor with a share of 36.1% in 2007/08, followed by the Euro Union with a share of 28.7%. Chart 33: FDI total inflows US$ bn / / / /08 H1 2007/08 H1 2008/09 USA EU Arab Countries Others Source: CBE & Global research Furthermore, higher international food and energy prices prevailed in the international markets, as well as the higher local consumption level resulted in soaring inflation rate, reaching a peak of 23.6% in August 2008, and higher cost of imports, which increased by 37.8% in 2007/08 over the previous year, in addition to higher exports proceeds, which increased by 33.3% in 2007/08. The increase in the cost of imports outweighed the growth in exports, leading to 43.7% increase in the trade deficit in absolute value and as percent of GDP in 2007/08, reaching 14.5% compared to 12.7% in 2006/ Egypt Cement Sector July 2009

34 Chart 34: Development in inflation and the corridor range 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% June 2005 Jun-06 Jun-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Source: CBE & Global research Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 On the other hand, the increase in net services by 30.2%, mainly on the back of the growth in receipts from Suez Canal and tourism, as well as the incline in transfers by 32.3%, compensated to some extent for the increase in trade deficit and resulted in a surplus of US$888mn in the current account balance in 2007/08. Nevertheless, the current account balance declined by 60.9%, compared to the previous year, and represented 0.6% of GDP. Starting from the second half of 2008, the global financial crisis extended its shadows on the Egyptian economy, where GDP growth reached 5% during H1 2008/09, compared to 7.1% in H1 2007/08. Although final consumption kept is momentum during H1 2008/09, growing at 23.7%, total investments were severely hit, achieving a growth rate of 13.8% in H1 2008/09, relative to a growth of 33.2% in H1 2007/08. Moreover, FDI witnessed a sharp decline by 48.2% from in US$7.8bn in H1 2007/08 to US$4.0bn in H1 2008/09, as the majority of FDI inflows were from USA and EU that have been severely hit by the world credit crunch. The current account balance deficit widened to US$2,513mn, representing 2.7% of GDP in H1 2008/09, compared to US$294mn, representing 0.4% of GDP in H1 2007/08. This decline came on the back of deteriorating trade balance position, decreasing by 29.8%, in addition to slower growth in Suez Canal receipts, which recorded a growth rate of 8.1% in H1 2008/09 compared to 24.6% in H1 2007/08, as well as 2.8% growth in tourism receipts in H1 2008/09, as opposed to 30.1% in H1 2007/08. Therefore, the Egyptian government has taken measures to limit the spillover negative effects of the world financial crisis and spur economic growth including: 1. Increasing the infrastructure investment budget, Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 Inflation Rate Deposit Rate at the CBE Lending Rate at the CBE 2. Cancelling taxes on exports and increasing financial support to all exporting sectors benefiting from export support fund to 50%, 3. Postponing plans to cancel subsidies on electricity and natural gas for energy-intensive industries, like cement, fertilizers and petrochemicals, 4. Refraining imports of finished goods and commodities that have a local counterpart. May-09 July 2009 Egypt Cement Sector 31

35 We believe that trade deficit is not expected to worsen dramatically in 2009 as imports decline, as a result of a weaker domestic demand and plunging commodity prices will to some extent offset the expected drop in the country s exports. In addition, the current account deficit is expected to widen as a result of the declining tourism and Suez Canal revenues, as well as the remittances of the expatriate workers. Moreover, The subsidy bill, which surged by almost 50% in 2007/08, is expected to witness a considerable decline as the oil prices dropped severely since June 2008 and the changes made by the Egyptian government to reduce energy subsidy during 2008 are not expected to reverse. This in turn will leave more room for the government to direct this saving in other areas that could bolster the economic growth. Despite the challenges that currently face the Egyptian government to sustain the economic growth, the financial intermediation will not be hampered by the international credit crunch, supported by a strong banking sector with healthy balance sheets and low level of financial integration, thanks to the government reforms. The Egyptian banking sector reforms were mainly attributed to strong supervision and regulation, elimination of nonperforming loans and unadventurous financing and investment practices. In general, Egypt s medium term outlook remains sound with an expected GDP growth of around 4%. We believe that the Egyptian economy is capable of surpassing the current storm that hit the world economy, thanks to the reforms implemented since Most likely, the government will work on targeting inflation rate, maintaining economic growth and balance of payments stability, throughout Egypt Cement Sector July 2009

36 Construction Activity The construction sector is considered one of the important sectors in the Egyptian economy, as it has been expanding remarkably at a CAGR of approximately 15% over the past 3 years and employs approximately 10% of the Egyptian work force. Another sector that is highly interrelated with construction sector is the real estate sector, which achieved a CAGR of around 4% over the same period. Collectively, the two sectors contribution to GDP reached 7.4% in 2007/2008, achieving a CAGR of 10% for the period from 2004/05 to 2007/08. Chart 35: Construction vs. real estate sector macro indicators 40, % 30, % LE mn 20,000 10, % 5.0% - 0.0% (10,000) 1998/ / / / / / / / / /08 H1 2007/08 Construction Real Estate Construction Growth Real Estate growth Source: CBE & Global research H1 2008/09-5.0% The high construction activity witnessed in all the economic sectors whether, residential, recreational, industrial or infrastructure, over the recent past created high demand on all building materials in the local market. This growth was mainly attributable to robust economic performance, as well as the large investments implemented by both the government sector in the field of social services and public utilities, and the private sector in all segments of the real estate sector including, housing, commercial, hospitality and industrial development projects. According to building permits quarterly bulletin published by the Egyptian Cabinet Information and Decision Support Center (IDSC), the composite building and construction index in Egypt maintained its momentum in December2008, increasing by 5.6% on Q-o-Q basis and 18.8% on Y-o-Y basis. The composite building and construction index recorded a healthy CAGR of 9.2% over the last 5 years. Chart 36: Composite building and construction index Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Source: IDSC & Global research July 2009 Egypt Cement Sector 33

37 Moreover, the total number of building permits kept its upside trend in December 2008, reaching 21,905 building permits. The overall building permits index achieved a growth rate of 9.4% in December 2008, compared to the previous quarter, and an impressive 77.6% over December This increase in issued building permits promises a positive outlook in the construction sector. Chart 37: Overall building permits index Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Source: IDSC & Global research It is worth mentioning that the construction activity does not include only the construction of different types of buildings, but also it includes all infrastructure developments, such as roads, electricity and water works. According to the latest data published by CAPMAS, the total value of executed construction work by the private sector in 2007 reached LE8.9bn, against a total value of LE10.6bn executed by the public sector in 2006/07. Although the reporting periods for the private sector and the public sector do not match, we will add the two values up just to find out how the value of executed construction work is distributed among different economic sector during the last available fiscal year. Chart 38: Total value of executed construction work according to economic activity Others, 17% Residential blgs., 17% Electricity stations, 5% Industrial blgs., 5% Healthcare blgs., 4% Educational blgs., 4% Administrative blgs., 1% Water & water-waste projects, 29% Source: IDSC & Global research Roads & bridges 18% Residential buildings share of total value of executed construction works was only 17% and the remaining other types of buildings captured 31% of the total construction works, whereas the remaining 52% was spent on different infrastructure projects. This fact highlights that the demand on building materials depends on the broad construction activity including building construction and infrastructure works. 34 Egypt Cement Sector July 2009

38 Although the construction sector has been negatively affected during the H1 2008/09, achieving a growth rate of 9.4%, compared to 14.9% in H1 2007/08, the real estate sector was able to slightly improve its growth rate from 3.4% in H1 2007/08 to 3.5% in H1 2008/09. This large decline in the construction sector growth came on the back of lower investments, as a result of the global financial crisis. Therefore, the Egyptian government took some measures to stimulate the Egyptian economy, including the construction sector by increasing the public infrastructure investment budget by LE15bn, in addition to the originally planned infrastructure investments of approximately LE418bn in electricity, water, sanitation, transportation and communication sectors throughout the sixth 5-year plan (2007/ /12). The sixth five year plan (2007/ /12) placed an overall investment target of LE1,295bn, of which around LE670bn are planned to be spent on construction activity in general, which includes targeted investments of LE418bn in the infrastructure, LE132bn in construction and real estate, LE76bn in health and education and LE44bn in tourism. Chart 39: Sixth 5-year plan targeted total investments Distribution among economic sectors Distribution by implementing body Education & Health, 6% Tourism, 3% Trade, 3% Financial services, 0% Electricity, 6% Other social services, 6% Construction & real estate, 10% Transportation, 13% Communication, 10% Water, 1% Sanitation, 3% Agriculture & Irrigation, 5% Extractive Industries, 11% Manufacturing, 23% Source: Ministry of Economic Development & Global Research Private sector, 84% Public sector, 16% The government 5-year plan set a target to encourage investment and prioritize development in Upper Egypt, within the context of the government s local development of developing under-developed areas of Egypt. The plan included establishing a holding company for Upper Egypt to identify investment opportunities, providing investment incentives to encourage private sector investment, completing delivery of potable water, electricity and natural gas. The local development plan also included rural development, which include the establishment of 400 villages and reclamation of 1mn acre, as well as slum development project. Moreover, the government announced that it will allocate another LE15bn to be invested in participation with the private sector in infrastructure and industrial development projects within the context of Public-Private Partnership (PPP) strategy, which proved to be a successful alternative to government, as it relief some burden from the state s spending budget, besides benefiting from the private sector technical know-how, as well as better offered services. During the period from 1998 to 2007, the private sector participation in PPP projects reached US$15.3bn in the Energy, Telecom and transportation sectors. July 2009 Egypt Cement Sector 35

39 US$ mn Chart 40: Private sector participation in infrastructure projects By year By sector 4,500 14,000 4,000 12,000 11,895 3,000 3,500 10,000 2,500 8,000 2,000 6,000 1,500 4,000 1, ,000 1,092 1, Electricity Natural Gas Telecom Airports Seaports Energy Telecom Transport Source: PPI World Bank database & Global Research Given the current global economic recession resulted from the credit crunch, the government s total targeted investments throughout the sixth 5-year development plan seem to be optimistic, as we believe that total planned investments should be adjusted downward because total implemented investments, including FDIs will be negatively affected at least during the next one to two years. However, lower international commodities prices, including building materials, which came on the back of declining global demand, presented an opportunity for more infrastructure and building investments at lower cost, mainly in less developed countries with immense society development needs. In addition, the government s plan to boost investments in infrastructure, such as transportation and public utilities, as well as economic housing and industrial development projects, besides prioritizing the development of under-developed areas in Egypt will act as a cushion for the activity in the construction sector. We, therefore, believe that the construction sector is expected to experience slower growth rate during the next one to two years, relative to the booming phase over the last 3 years, yet the decline in growth rate is not expected to be that severe, providing reasonable support for the building materials sector, including cement. In other words, the outlook of the local construction sector is to some extent promising, taking into consideration the concurrent global financial turmoil and liquidity squeeze. US$ mn Population Population is considered one of the main drivers of the economic activity, including the building materials sector, through their demand on housing and different construction activities. Egypt is a population rich country and has the largest population in the MENA region, representing around 15% and 21% of total MENA and Arab countries population, respectively. Egypt s population reached approximately 75mn at the end of June 2008, achieving a CAGR of 2% over the past 10 years. Furthermore, population in Egypt is expected to reach 84.5mn in 2014, growing at its historical annual average growth rate. 36 Egypt Cement Sector July 2009

40 Chart 41: Egypt population People mn Population Growth Source: IMF & Global research 2.2% 2.1% 2.1% 2.0% 2.0% 1.9% Egypt has favorable demographics segmentation with around 33% of its current population is less than 15 years old and 50% falls in age-group. This segmentation guarantees a strong current and future demand on housing and society development projects. It is worth mentioning that it is estimated that around 350,000 housing units are needed annually to meet new housing demand, in addition to 2.5mn housing units to meet accumulated unmet housing demand. Chart 42: Egypt population age-group segmentation years, 12% >65 years, 5% years, 50% <15 years, 33% Source: CAPMAS & Global research Regulations Generally, the cement industry in Egypt received a great deal of the government supervisory authorities attention, because of the increasing local cement selling price, resulting from fake supply shortage existed in the local market, as local production exceeds consumption. This situation emerged because cement producers and traders preferred to direct cement production to the export market, where prices are higher than the local selling prices, in order to achieve higher profits. To ensure local supply of cement at reasonable prices, the Egyptian government imposed an export duty of LE65 (US$12)/ton on exported cement in February Apparently, the export duty was not severe enough to offset cement export price differential. Therefore, the government increased the export duty to LE85 (US$15.5)/ton in August However, local cement prices remained high, as cement producers passed their increased cost to consumers. In an attempt by the government to bring discipline to the local cement market, the Egyptian government imposed a ban on cement exports for 6 months starting from April till the end July 2009 Egypt Cement Sector 37

41 of September 2008, to calm an overheated local cement market. Unfortunately, local cement prices remained high, on the back of high local demand driven by the construction boom, as well as the traders malpractices of maintaining high prices through faking shortage of supply. In addition, the government decision to impose LE27(US$5)/ton of clay extracted from quarries, as resources development fees in May 2008, as well as the liberalization of energy prices for energy intensive industries, will harm the competitive edge of Egyptian cement sector, for its relatively low cost of production. As the government felt that the subsidy that should go to local consumers, is passed to exports and that the producers are making high profit margins. Furthermore, the Minister of Trade and Industry filed a sue case of anti-competitive practice against local cement producers for the period from May 2005 till the end of The local cement producers were accused of forming a cartel to set local cement prices and dividing market shares among them. In August 2008, the court found local cement producers guilty of exercising monopolistic behavior and fined cement manufacturers with a total of LE200mn. However, the emergence of the global financial crisis since mid September 2008 triggered the Egyptian government to take some defensive measures in order to minimize the negative effect of the slowdown in the world economy on Egypt s cement exports. These measures included the removal of the LE85/ton export duty in October 2008, as well as bringing the export ban to an end. Later in February 2009, cement producers voluntary decided to stop cement exports for 3 months in order to satisfy local demand and calm the surging local cement prices, around LE490/ton, which reached more than LE700/ton. The skyrocketing cement price came on the back of two major factors; the first was the significant surge in transportation cost, as truck drivers organized a strike across the governorates to protest the new law that bans the use of trailers. The second was the malpractice of traders, who took advantage of this strike, as well as the surging cement local demand to further raise prices. Consequently, the Minister of Trade and Industry intervened in April 2009, through issuing some regulations to control local cement prices including, assigning the government s anticompetitive supervisory body to investigate local cement market for any dysfunctional during the past 6 months, banning cement exports for 4 months, reduction of cement imports clearing period from 30day period to 3-day period, as well as obliging cement producers to print their selling prices on cement bags for all distribution channels, including end-user price, in order to end the manipulation of cement prices by traders. This new set of regulations is expected to ease some of the upward pressure on local cement price, due to the competition from imported cement. However, the current strong local cement demand will act as a buffer for sharp decline in local cement price and the profitability of cement producers. On the other hand, banning cement exports for 4 months for the second time in less than a year, although it could jeopardize the position of the Egyptian cement in export markets, we believe this negative effect will be marginal, as Egyptian main cement export markets, such as Spain and Italy are facing a severe decline in demand. 38 Egypt Cement Sector July 2009

42 We believe that the new capacities addition will fix the current distortion taking place in local cement price, as new supply will come on stream to meet the soaring local cement consumption. However, regulating cement imports will be a critical issue, especially that Saudi Arabia, where huge new capacities are under their way, removed the export ban. In addition, Saudi Arabia has lower cost of production and could export to Egypt at low prices. This situation will create unfavorable market conditions for all cement producers, in the form of price war, which will lead to lower profitability and extended payback period for new investments. July 2009 Egypt Cement Sector 39

43 Supply/demand analysis The Egyptian cement industry has been growing vigorously over the past 5 years, on the back of the high activity experienced in the construction and real estate sectors. Egypt s cement consumption has been growing at a CAGR of approximately 6% over the past 40 years. In 2008, local cement consumption reached 38.4mn tons, achieving a growth rate of 11.4% over 2007 and recording a CAGR of around 9% since On the other hand, cement production reached 39.8mn tons, compared to 38.4mn tons in 2007, achieving a CAGR of 6.6% over the past 5 years. Chart 43: Egyptian cement industry supply and demand Ton mn % Source: IDSC & Global research 85% % 92% 92% Production Local Consumption Capacity Utilization rate 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Over the past 5 years, the overall cement sector capacity utilization rate kept increasing, with some companies operating over 100% of their installed capacities, driven by the strong growth in cement consumption, which outpaced production growth. Despite the declining global demand, resulting from the global financial crisis, cement demand in Egypt continued its robust growth fueled by lower steel prices, which triggered higher construction activity, as developers used this opportunity to complete their pending and delayed construction works, when steel price was high, in addition to accelerating their projects schedule to benefit from lower development cost. Chart 44: Monthly cement demand Ton mn Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: IDSC & Global research Moreover, individuals who acquired land plots within the context of the national housing program under build your own home scheme, created high demand on building materials 40 Egypt Cement Sector July 2009

44 because they are obliged to get the necessary building permits and finalize the construction of their own homes within a pre-specified time span. In addition, homes construction in villages experienced high activity, as the government is discussing a law that will regulate building in villages and agricultural lands. Accordingly, local cement prices reacted positively to this high demand, surging from around LE420/ton in the beginning of 2008 to more than LE700/ton in February Furthermore, the strike organized by truck drivers in February 2008 to protest the new law that bans the use of trailers also contributed to the rising local cement price. Chart 45: Monthly cement demand vs. cement average retail price in Greater Cairo Ton mn Jan-04 Mar-04 May-04 Jul-04 Sep-04 Nov-04 Jan-05 Mar-05 May-05 Source: IDSC, CBE, Ministry of Investment & Global research Jul-05 Sep-05 Nov-05 Jan-06 Mar-06 May-06 Jul-06 Local demand Sep-06 It is worth mentioning that cement demand in Egypt is seasonal, as it witnesses some decline during the winter months from October to February and the Holy month of Ramadan, while it accelerates throughout the summer months. Nov-06 Jan-07 LE/ton Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar LE/ton Chart 46: Monthly cement demand vs. 3-month moving average Ton mn /01/ /06/ /11/ /04/ /09/ /02/ /07/ /12/ /05/ /10/ /03/ /08/ /01/ /06/ /11/ /04/2009 Local Consumption 3 per. Mov. Avg. (Local Consumption) Source: IDSC, CBE, Ministry of Investment & Global research On the export front, Egypt s cement exports as percentage of total cement production experienced a declining trend over the past 5 years, as cement producers kept directing a greater proportion of their production to the local market in order to meet the increasing local cement consumption. The remarkable decline in 2008 exports came on the back of the Minister of Trade and Industry decision to ban cement exports for a six month period from March to October July 2009 Egypt Cement Sector 41

45 Chart 47: Cement and clinker exports % 15.9% 16.1% % % Cement Exports Clinker Exports Cement exports to total production Source: CBE, Ministry of Investment & Global research Tons mn 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Going down to the companies level, we found that the market share of each company is highly in line with their respective capacity. With respect to total domestic and export cement sales, Italicementi group, including Suez, Helwan and Torah cement companies, has the largest market share of around 28%, followed by Egyptian Cement Company, which is owned by Lafarge, captured approximately 21% market share in Chart 48: Egyptian cement market players market shares in 2008 South Valley Cement, 0.2% Misr Cement Qena, 5.0% Misr Beni Suef Cement, 4.3% Sinai Cement (Vicat), 6.0% National Cement, 7.4% Italcementi (Suez+Helwan +Torah), 27.7% Ameryah Cement (Cimpor), 7.8% Alexandria & Beni Suef Cement (Titan), 8.4% Assuit Cement (Cemex), 12.7% Source: Companies financials & Global research Egyptian Cement Company (lafarge), 20.5% It is worth mentioning that Arabian Cement Company only produces clinker and directs almost all of its production to the export market. Therefore, we excluded Arabian Cement Company from our calculations, in order not to distort our cement capacity, production and consumption figures, besides the scarcity of information about this company specifically. Capacities The Egyptian grey cement sector consists of 13 cement manufacturing companies, of which 9 companies are controlled by 6 multinational companies. Only one company is owned by the Egyptian government that is National Cement Company, while 3 firms are owned by the Egyptian private sector, namely Misr Beni Suef Cement, Misr Cement Qena and South Valley Cement. Multinational companies control 85.5% of Egypt s grey cement manufacturing capacity. 42 Egypt Cement Sector July 2009

46 Chart 49: Egypt current capacity distribution by company National Cement, 8.1% South Valley Cement, 3.5% Misr Cement Qena, 3.5% Misr Beni Suef Cement, 3.5% Sinai Cement (Vicat), 3.5% Italcementi (Suez, Helwan, Torah), 27.3% Ameryah Cement (Cimpor), 8.5% Alexandria & Beni Suef Cement (Titan), 7.6% Source: Global research Assuit Cement (Cemex), 11.5% Egyptian Cement Company (lafarge), 23.1% At the end of 2008, Egypt s cement production capacity reached 43.3mn tons, compared to 41.8mn ton in 2007, recording a growth rate of 3.9%. The increase in the production capacity was attributable to the opening of South Valley Cement new production lines. The distribution of the current cement capacities in Egypt is found to be more concentrated in Suez and Sinai. Chart 50: Egypt current cement capacities distribution by region Suez & Sinai, 36% Lower Egypt, 12% Central Egypt, 26% Upper Egypt, 26% Source: Global research In order to meet the growing local cement consumption, Industrial Development Authority (IDA) held an auction in October 2007 to bid for new cement capacities licenses, either by new entrants or existing players wishing to expand their capacities. The bid resulted in the sale of 8 out of the 10 offered new licenses against a total sum of LE1.14bn, to add 12MTA of cement capacity. Later in January 2008, IDA offered the remaining two licenses in El-Wadi El-Gedid and Sohag governorates for bidding. The bid resulted in the sale of El-Wadi El-Gedid license, whereas Sohag license was postponed, after all the companies applied for the license have been disqualified. Accordingly, total new cement capacities additions resulting from IDA auction summed up to 13.5mn ton tons of cement capacity, which are planned to start production between 2010 and July 2009 Egypt Cement Sector 43

47 Table 05: Cement new capacities licenses winners License cost Capacity Expected Company (LE mn) Governorate (MTA) commencement date Wadi Al-Nil Cement 251 Beni Suef El-Sewedy Cement 201 Suez Arab National Cement 200 El-Menya Al-Nahda for Industries 83 Qena North Sinai Cement 44 North Sinai Construction Material 22 Assuit El-Wadi Cement - El-Wadi El-Gadid Total Greenfield capacities Assuit Cement 202 Assuit Beni Suef Cement 135 Beni Suef Total expansion capacities Total new capacities 1, Source: Industrial Development Authority (IDA) & Global Research It is worth mentioning that 7 out of the 9 new licenses were oriented toward Upper Egypt, where the country is far less developed and needs a lot of infrastructure and public utilities development projects. The concentration of the new licenses in Upper Egypt came in synchronization with the government plan to prioritize and encourage investment in Upper Egypt. Chart 51: Egypt forecasted cement capacity distribution by region in 2011 Suez & Sinai, 32% Al-Wadi Al-Gedid, 2% Lower Egypt, 10% Central Egypt, 20% Upper Egypt, 36% Source: Global research In addition, there are approximately another 5mn ton of additional capacities that were licensed in prior periods to the latest auction. These new capacities are due to come on stream between 2009 and During 2009, Sinai Cement and Misr Beni Suef Cement new production lines will start production with a capacity of 1.5mn ton each, while a new Company called Medcom will start production in Aswan with a capacity of 1mn ton. In addition, Alexandria and Beni Suef Cement plan to increase their annual capacity by 200,000 tons through debottlenecking. Moreover, National Cement will expand its existing lines annual production capacity by 750,000tons on 2 phases, the first phase to be implemented in 2010 and the second phase in Therefore, Egypt cement production capacity is expected to add around 18.5mn tons between 2009 and 2011, growing at a CAGR of 12.6% over the next 3 years. Accordingly, Egypt cement production capacity will come very close to 62mn ton. 44 Egypt Cement Sector July 2009

48 Chart 52: Egypt expected annual capacities additions Ton mn Source: Global research The capacities addition in Egypt coming on stream, along with the new capacities installation in the MENA region over the next 3 years, especially Saudi Arabia and United Arab Emirates, will create an oversupply in the region, where Saudi Arabia is expected to add 13.2mn ton and UAE is forecasted to add 16.8mn ton. Unfortunately, the slowdown in the construction sector, resulting from the world financial crisis will exacerbate the severity of the excess supply situation in the region. However, on the bright side, Egypt is still witnessing a boom in the construction sector, despite the declining demand on building materials in the global markets. Therefore, we believe that the on-going high construction activity will act as a buffer, protecting Egypt s cement industry from the negative consequences of the global financial crisis. Pricing and cost Total 6 62 Pricing Cement price in Egypt has been growing robustly since the start of 2008, driven by high demand resulting from higher construction activity, as explained earlier under supply and demand section. The average retail price of cement in Greater Cairo reached near LE600/ ton in February 2009 from around LE400/ton at the beginning of 2008, recording a growth rate of 50%. Therefore, the government intervened with some measures, as indicated earlier under the regulations section, to bring discipline back to the cement market. However, the imposed government regulations were successful to the extent that cement prices kept growing at a reasonable pace throughout Since the beginning of 2009, high local cement demand caused cement prices to hike again till it reached near the LE600/ton in February July 2009 Egypt Cement Sector 45

49 Chart 53: Average cement retail prices in Greater Cairo LE USD - - Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 LE/ton USD/ton Source: CBE, Ministry of Investment & Global research It is worthy to mention that cement in other governorates is most likely traded at a premium to the average retail price prevailing in Greater Cairo. The highest retail price is found in Upper Egypt, due to transportation cost, where cement is traded on average at a 10%-15% premium compared to those prices in Greater Cairo. Accordingly, when prices in Greater Cairo reached near LE600/ton, prices in Upper Egypt climbed to more than LE700/ton. Cost of production The cost structure of the cement industry has evolved significantly over the past 2 years, on the back of the government decisions to liberalize energy prices for energy intensive industries. Therefore, cement cost of production witnessed a large increase over the course of 2008, where the median cash cost of production reached US$31.5/ton in 2008 from US$23.3/ ton in 2007, recording a growth of 35.2% between 2007 and It is worth mentioning that cash cost of production increased further in Q to reach US$35.2/ton. Chart 54: Cash cost of production per ton in US$ Suez ECC Assuit Alexandria Amiryah National Sinai Median 2008 Median 2007 Source: Companies financials & Global research Misr Beni Suef Misr Qena Initially, the liberalization of energy prices for energy intensive industries, including cement was introduced in mid-2007 to be implemented over 3-year period. The scheme encompassed increasing electricity prices from LE0.134/KWH to LE0.216/KWH for high voltage usages, through increasing electricity price by LE0.0273/KWH annually over 3 years. In addition, natural gas prices were set to increase from USD1.25/MBTU tousd2.65/mbtu, via increasing its price by USD0.47/MBTU annually. The new scheme first phase of the liberalization of energy prices started in the first of September 2007, where electricity and natural gas prices became LE0.1613/KWH and USD1.72/MBTU, respectively. 46 Egypt Cement Sector July 2009

50 Later in May 2008, the government decided to shorten the liberalization of energy prices phase-out period. Consequently, starting from the first of July 2008, electricity prices were raised by approximately 52% from LE0.1613/KWH to LE0.245/KWH. Similarly, natural gas prices increased by 74.4% from USD1.72/MBTU to USD3.0/MBTU and fuel oil price increased by 100% from LE500/ton to LE100/ton. Moreover, the government imposed LE27/ ton of clay extracted as a resources development fees, starting from first of July However, the liberalization of energy prices will jeopardize the competitive edge of the Egyptian cement industry for its relative low cost of production, in favor of other regional competitors, who have lower cost of production and excess capacities, such as Saudi Arabia. Consequently, this will lead to squeezed profit margins for local cement producers, as they will not be able to raise their prices beyond imported cement, which has a lower cost, to compensate for the increasing cost of production. Market Structure Analysis (porter s five competitive forces) Chart 55: Cement market competition analysis Threat of New Entrants Low Bargaining Power of Buyers Low Rivalry among Existing Players High Bargaining Power of Suppliers Low Threat of Substitute Low Source: Global Research Rivalry among Existing Players High Competition among existing players is high, as all cement manufacturers produce similar product mix with almost no differences with respect to the product quality. Therefore, cement producers compete along other dimensions, such as cost optimization, distribution channels and pricing. In addition, customer loyalty is low and creating a brand identity is difficult, as customers will always prefer to buy at lower prices, as long as the product is similar, irrespective of the brand name. Competition among existing cement manufacturers was not fierce over the recent past, as the cement market witnessed a period of high demand, growing at a CAGR of 9% over the past 5-year period, that led some cement manufacturers to operate beyond their nominal capacities. However, the granted new cement capacities licenses besides allowing imports will intensify the competition among the existing players and the new entrants on capturing market share, leading to price wars. July 2009 Egypt Cement Sector 47

51 Threat of New Entrants High The entry barriers to the cement industry are high, as the cement industry is a capital intensive industry and requires a large initial investment cost. In addition, a license is required to be issued by the government to operate a cement plant. Furthermore, economies of scale is important in operating a cement plant, as cement production fixed costs are high. Bargaining Power of Suppliers Low Cement manufacturing raw materials, such as limestone and clay are located abundantly in Egypt. In addition, all cement manufacturers in Egypt have concessions to raw material quarries. Therefore, the bargaining power of suppliers is weak. Bargaining Power of Buyers Low There are two different buyers in the cement market, traders and agents and on the other hand end-users. The majority of cement distribution is controlled by traders, who purchase cement from cement manufacturers and resell it to the end users. The high demand witnessed in the local market gave more power to cement manufacturers and traders, who benefited from the situation by raising cement prices. In other words, cement producers and traders became price makers and end-customers price takers. Therefore, the government intervened with a set of regulations, as mentioned earlier, to regulate the local cement market. However, power is expected to shift to end-users when the new cement capacities come on stream, leading to a balance between the supply and demand forces. Threat of Substitutes Low There is no effective substitute for cement. 48 Egypt Cement Sector July 2009

52 Cement market forecast Supply and Demand As long as cement consumption is heavily dependent on the construction activity, which in turn is highly correlated with the economic performance. We regressed the change in local cement consumption against the change in GDP over the past 12 years, in order to be able to project how local cement consumption will evolve over the coming 5 years, given the change GDP. The resulting regression equation is: %Δ Local cement demand= %Δ GDP This regression equation is found to be statistically significant with a coefficient of determination (R²) of 71.8% and standard error of 4.1%. Table 06: Historical and projected GDP growth vs. local cement consumption growth GDP Growth Local consumption growth 1996/97 5.3% 8.5% 1997/98 4.1% 7.2% 1998/99 5.4% 11.1% 1999/00 5.9% 7.0% 2000/01 3.4% -0.9% 2001/02 3.2% 0.8% 2002/ % -7.1% 2003/ % -2.3% 2004/ % 2.3% 2005/ % 18.8% 2006/ % 8.1% 2007/ % 14.7% 2008/09F 4.0% 1.4% 2009/10F 4.5% 3.5% 2010/11F 6.0% 9.7% 2011/12F 6.5% 11.8% 2012/13F 6.8% 12.9% 2013/14F 7.0% 13.9% Source: Ministry of Economic Development & Global Research The local cement consumption volume resulting from the regression equation represents estimated local consumption for the period from July to June of each year. Therefore, we calculated the average local consumption for each respective year and the year that follows to obtain an annual local consumption forecast for the period from January to December of each year for the coming 5 years. Table 07: Projected local cement consumption Mid-year Tons (mn) Full year Ton (mn) 2008/09F /10F /11F /12F /13F /14F Source: Global Research July 2009 Egypt Cement Sector 49

53 The regression equation estimated that local cement consumption is forecasted to be 37.96mn ton, which is lower than local consumption in Therefore, we adjusted the regression results to cope with the fact that local cement consumption in the first 3 months of 2009 was running at 23% higher than Q According to our analysis, we forecast that local cement consumption will grow at a CAGR of 8.3% over the next 5 year. However, we estimated that local cement consumption will grow at a slower pace in 2010 and 2011 after growing vigorously over the past 3 years. Afterwards, local cement demand will rebound gradually starting from Table 08: Adjusted forecasted local cement consumption Forecasted consumption Adjusted forecasted Annual Year (Ton mn) Premium consumption (Ton mn) growth 2008A F % % 2010F % % 2011F % % 2012F % % 2013F % % Source: Global Research In order to forecast local and export sales for each player in the market, we started with assuming a utilization rate for each market player in the cement industry for the next 5 years, taking into consideration each respective player historical utilization rate and the new capacities additions. Afterward, we multiplied the utilization rate of each cement manufacturer by its annual cement production capacity to obtain each player cement production. By summing up individual cement production, we reached to the total cement production, which is then subtracted from total local consumption to get the total exports sales. Subsequently, we allocated total export sales to each market player based on every player respective historical share in cement exports, taking into consideration the entrance of new competitors in the market. Finally, we subtracted each manufacturer cement production from forecasted exports to get estimated local sales for each market participant. Chart 56: Forecasted cement production capacity, utilization rate, local & exports sales Ton mn % % 84.8% Source: Global research 92.7% We believe that exports sales are expected to witness a slight growth in 2009, before it will start to rebound in 2010 and 2011, as the construction sector in Europe, which represents Egypt s major % % 2008A 2009F 2010F 2011F 2012F 2013F Capacity Local consumption Exports Utilization rate % 94% 92% 90% 88% 86% 84% 82% 80% 50 Egypt Cement Sector July 2009

54 export destination, is expected to recover. Afterwards, exports will decline in 2012 till it reaches 2008 levels in 2013, as local demand is expected to rebound, according to our estimates. We believe that Africa represents a real potential for the Egyptian cement exports, as many African countries are still under developed, besides they do not have the sufficient cement capacity to meet their local demand. The main obstacle to achieve this target is the unavailability of transportation networks. However, Europe is expected to remain a major export destination, due to its proximity to Egyptian ports. On the other hand, the exports to the Arabian Peninsula countries are forecasted to decline considerably, on the back of the new cement production capacity that will come on stream in that region during the next 2 to 3 years, which are expected to cover this region s deficit. Chart 57: Egypt s forecasted major export markets Source: Global research Prices Cement local selling prices is expected to witness some stabilization throughout the remaining months of 2009, resulting from the latest government decisions of banning exports, allowing imports and printing retail price on cement bags. Moreover, cement selling price is not expected to drop notably, as it did not witness the significant surge in its retail price like other building materials prices, such as steel rebars, which increased by around 88%, reaching LE6,630/ton in mid 2008, compared to LE3,530/ ton at the end of Therefore, steel prices witnessed a hard landing, reaching LE3,150/ton in March The following graph emphasis our argument, as it shows the indexed retail local selling prices of cement and steel rebars since the start of July 2009 Egypt Cement Sector 51