Q: How has the revolution affected the supply and demand for building materials such as steel and cement? 
Seddiek: Despite the current economic slowdown, local steel consumption and production figures have remained more or less persistent.

This persistence falls back to the fact that private home builders constitute 65% of total consumption. In addition, local producers started to direct their production to export markets, decreasing local supply in an attempt to maintain their margins.

Total steel production is expected to record approximately 5.8 million tons in 2011 versus the actual figure of 6.3 million tons in 2010. Consumption, on the other hand, is expected to come in at 5.6 million tons for 2011 as apposed to 6.1 million tons in 2010.

With regards to the cement sector, both production and consumption dropped in 2011 by 3% and 2% respectively. The increase in worker’s demands and the suspension of operations in some factories on the back of consecutive strikes were a main contributor to this drop. Also new cement capacities which have commenced production in 2011 led to an over-supplied market alongside the general slowdown in demand and construction activities.

Q: How has this reflected on the prices of steel and cement? Did the spur of illegal building that occurred in the beginning of year push prices up?
Seddiek: The disappearance of regulators and municipals and the consequent acceleration in construction operations in Upper Egypt governorates led to a price hike in both steel and cement. Post-revolution steel prices went up significantly to an average of LE 4,750/ton in March from LE 4,510/ton in January on the back of increased illegal building.

Starting the second quarter of 2011 prices started to plummet due to the political and economic instability, coming down to LE 4,530/ton. This however did not last long as international raw materials prices started to climb in the second half of 2011 and pushed local steel prices to an average of LE 4,788/ton.

In the cement sector, the closure of many warehouses, difficulty of traffic and work stoppage in some factories during the curfew saw prices reach their highest levels of LE 1,000/ton.

Prices currently hover around an average of LE 430/ton which is lower than the official ex-factory prices. There is a stiff conflict currently taking place in the sector between dealers and cement factories as the latter will only sell at official prices while the former are reluctant to sell lower than the factories’ prices due to the recession in the market.

Q: With regards to Ezz Steel, have the recent events — especially those involving Ahmed Ezz [Ahmed Ezz received a 10-year prison sentence and a LE 600 million fine for corruption charges] — had any affect on the company in terms of profitability or market share?
Seddiek: Despite all the negativity and pessimistic sentiment investors have on the stock, the operational performance of the company wasn’t affected by the personal allegations held against Ahmed Ezz himself as much as by the allegations held against the company.

Ezz Steel Company is well positioned in the Egyptian market with a leading market share of approximately 60%, helping maintain the level of the company’s profitability during the revolution. The Egyptian market consumes approximately 98% of the company’s long product output and 41% of its flat products; the remaining capacities are exported.

Q: Do you think the events in Libya could serve as an opportunity for Egyptian steel and cement companies?
Seddiek: Libya will undergo drastic reform measures in terms of infrastructure after the collapse it went through during its revolution.

Opportunities will exist if the Libyan government provides an investment law that encourages foreign investment. They must make economic sense to Egyptian companies in terms of return on investment. 

Q: How did construction firms perform in 2011? Were there any ongoing infrastructure projects that kept them in business or did the market slow down?
Seddiek: Like the majority of other sectors, the construction sector in Egypt has been negatively impacted by the repercussions of the Egyptian revolution, especially with the unprecedented pressures on the public treasury.

Sources with the industry said that the government owes LE 10 billion to contracting companies with no clue as to a solution. This has severely hindered the operations of the affected companies. Meanwhile, some mega projects have been delayed after the revolution such the nuclear power plant project.

It is also noteworthy that in December 2010, the government had announced a plan to invest $17 billion (LE 102.42 billion) in infrastructure over five years; however, the plan is currently on hold.

On the other hand, projects that are financed from international institutions have not been affected. Maybe some minor delays due to the frequent changes in the government and continuous strikes, but no negative impact.

An example of such a project financed by international institutions is the Ministry of Antiquities recently being awarded a $810 million (LE 4.9 billion) for the third phase of the Egyptian Grand Museum. The project is 65% funded by the Japan International Cooperation Agency (JICA).

Another example is the civil works at Assuit’s new barrage which is worth $300 million (LE 1.8 billion). The project is funded by Germany’s Kreditanstalt für Wiederaufbau (KfW), the government-owned development bank. Overall, only companies that have operations outside Egypt like Orascom Construction Industries have been able to reduce the effect of the internal turmoil on their operations.

Q: How do you think the sector will perform in 2012? Do you see a rebound?
Seddiek: The performance of all building materials companies in 2012 will largely depend on the political and economic situation and stability of Egypt. In terms of steel, as mentioned previously the market dynamics for 2011 including consumption and production figures are considered more or less steady if compared to other sectors that have slumped drastically during the revolution.

This was mainly backed by the demand driven by private builders who were still willing to pay and compromise higher selling prices for quality in addition to the illegal building activities that also took place increasing the demand on steel.

We believe that for 2012, the dynamics will remain the same unless going forward improvement and economic reform transforms the negative sentiment into a boom that will in turn help the construction and infrastructure activities flourish, raising the demand for all building materials including steel. However, our future outlook on Egypt’s stability with the prevailing circumstances remains a major concern.

With regards to the cement sector, we believe that cement companies will focus on the export markets to offset the decline in domestic sales and benefit from the depreciation of Egyptian pound against the US dollar. Meanwhile, any further deterioration in the exchange rate should encourage foreign importers to buy Egyptian cement which will be equivalent to approximately $70 (LE 421.6)/ton. Bt