Although the short-term outlook is challenging, investment is planned to meet future demand for steel

Heavy industry has been one of Egypt’s traditional stalwart sectors, with a lineage dating back decades and several large capacity facilities, and nowhere is this more evident than in steel. Egypt produced 6.8m tonnes of steel in 2013, up from 6.6m tonnes in 2012 and 6.5m tonnes in 2011, and nudging it up to the word’s 23rd biggest steel producer, from 24th and overtaking the Netherlands, according to “World Steel in Figures 2014”, published by the World Steel Association. Egypt also produced 3.4m tonnes of pig iron in 2013, up from 3.1m tonnes in 2012. All of its output was semi-finished.

Demand & Trade

Despite its substantial domestic output, Egypt has not been able to meet all its steel needs from local production in recent years. Steel consumption was 7.6m tonnes in 2013, having fluctuated considerably in the past few years due to the global economic crisis and then the revolution and its aftermath. Demand hit a recent peak of 9.4m tonnes in 2009, falling to 8.6m tonnes in 2010, 7.5m tonnes in 2011 and then recovering to 8m tonnes in 2012.

Steel use per capita has fallen from 117.4 kg in 2009 to 88.9 kg in 2013. This is significantly less than half the global average of 225.2 kg (up from 180.9 kg in 2009), despite Egypt’s strong demand for construction steel in particular. This indicates that there is significant scope for steel demand to grow, and for domestic producers to expand to meet it. Egypt is the world’s 10th-biggest net importer of steel, with its imports minus its exports coming to 3.9m tonnes in 2013. By mid-2014, imported steel accounted for 25-30% of sales, against 10-25% previously, Mohamed Hanafi, executive director of the Chamber of Metallurgical Industries, told the local press.

Ezz Steel – the country’s largest manufacturer, with mills in Alexandria and Suez, as well as Sadat and 10th of Ramadan Cities – has been one of the producers suffering from the difficult market conditions. In the first half of 2014, it posted an interim loss of $24.6m, with disrupted utility supply to blame for lower output and margins, its managing director, Paul Checkaiban, told the press. Net sales during the period fell to LE10.26bn ($1.5bn) from LE11.14bn ($1.6bn) in the same period of 2013. While the supply side was affected by Egypt’s internal gas and power supply issues, demand was affected by lower export volumes. Long steel sales fell 8%, while flat steel sales dropped 10%, indicating that demand from manufacturing declined to a greater extent than that from the construction sector.

Import Tariff

This proportion is likely to fall as in October 2014 the Egyptian government imposed temporary tariffs on imported steel to support domestic manufacturers suffering from local energy shortages. The tariffs, levied at 7.3%, would initially run for a maximum of 200 days, but could be made permanent at some stage if necessary, the government said. The tariff move had been suggested for some time, amid ongoing controversy over foreign imports and accusations of dumping, as well as a weak international market with low prices and overcapacity. But the calls for the tariff were also prompted in part by the rising energy prices manufacturers had to face after subsidies were cut (see analysis), intensifying pressure from rebar and wire rod imports from Turkey, China and Ukraine in particular. The 200-day initial period is intended to allow steel importers and exporting countries time to prepare any potential challenges to the tariff, which will later face review by the World Trade Organisation (WTO). If in that period imports are found to be hurting local producers, the tariff could be ramped up to 10-15% and made more permanent. On the other hand, if no such case is made, the tariff will be scrapped and importers reimbursed for the cost they have borne. The tariff will amount to not less than LE290 ($41) per tonne and follows strong lobbying by local steel companies.

Tariff Disagreements

The move has not been universally welcomed. Ahmed El Wakil, head of the Federation of Egyptian Chambers of Commerce, said that the tariff would lead to higher costs for consumers and contactors, while benefitting only a few steel manufacturers. He said that a similar measure in 2012 had driven steel prices up, making the government reverse the decision after 200 days.

The month before the tariff was imposed, Mounir Fakhry Abdel Nour, minister of industry and trade, said that he was unconvinced by arguments for imposing the fee. He said that the figures he had seen did not indicate that local suppliers were badly affected by imports, and that those local producers complaining about dumping accounted for only 10% of the Egyptian steel market in the first six months of 2014.

However, Ezz Steel came out in favour of the decision, saying that it complied with WTO regulations. Local steel producers have warned of insolvency over dumping by other countries looking to sell steel that they have produced at low prices on the depressed global market to ensure cash flow.

Pricing

Soon after the tariff was imposed, Ezz Steel and Suez Steel, another major producer, lowered prices in a move to boost sales on the Egyptian market. Ezz cut prices by LE43 ($6) per tonne and Suez by LE27 ($4) per tonne. At the time of research, steel rebar cost LE5315.50 ($755) per tonne, up 5.9% year-on-year from September 2013 and 0.09% month-on-month from August 2014, according to figures from the Central Agency for Public Mobilisation and Statistics ( CAPMAS). CAPMAS attributed the price rise to a shortage of steel on the market due to a lack of natural gas supply to steel mills. Critics of the tariff regime, such as the chambers of commerce and some steel traders, say that the price cuts imposed by major producers in October 2014 may only be temporary, with the aim of assuaging market concerns, and may be reversed once the tariff starts to take effect and the market recovers. Prices reportedly surged by LE1000 ($142) per tonne in 2012 after import fees were hiked.

New Investments

The difficulties that the market faces are, however, seen as largely short or at most medium term. Long-term investments in steel output are being planned to meet that future demand. In 2013 Ezz Steel announced plans to invest $1bn in two new plants at Ain El Sokhna, near the Suez Canal, once the government’s stimulus package was implemented. Kamel Galal, the company’s investor relations manager, did not give any time frame for the development, but said that one mill would produce up to 1.2m tonnes of flat steel per year, while the other would be a direct reduced iron factory with an annual capacity of 1.85m tonnes. Galal added that Ezz already had the land and the licences to build the new steel plants.

In August 2014 the local press reported that the Ministry of Investment was planning to build a $1bn new steel mill through the state-owned Iron and Steel Company, with a 10% stake taken by a private investor. The plant will have a capacity of 1.5m tonnes.

Despite the difficulties experienced by the sector in recent years, the longer-term future looks positive. The expansion of the construction sector is likely to accelerate as infrastructure projects feed through and demand for property rises. That Egypt remained one of the world’s biggest net importers of steel in 2013 also indicates the potential for domestic production.