Egypt's construction material producers turning to coal

Egypt’s basic building materials producers are expected to benefit from a transition to coal-fired energy going forwards, as well as government efforts to import more liquefied natural gas. However, all materials producers, including the steel and cement industries, have faced significant challenges over the past 24 months in terms of fuel supply and price increases. Contractors will be keeping a close watch on market trends going forwards, given that any price rises are likely to directly affect the cost of construction in the country. “Most of the projects currently being planned now will be completed in 2016 or 2017, resulting in a sustained boom in demand for building materials over the next 2 to 3 years,” Kamal Gabr, managing director of Duravit, told OBG.

Input Shortfall

One of the primary obstacles facing the building materials sector is a shortage of both electricity and gas feedstock. Due to the national grid’s inability to meet peak demand, periodic summer blackouts and a shortage of natural gas, the government decided in 2014 to redirect the supply of natural gas used by the cement and fertiliser industries into power generation.

As a consequence, the amount of natural gas flowing to these two industries was reduced from 940m cu feet per day to 350m cu feet per day. The government has also moved to increase the price at which it supplies fuel to cement factories, from $6 per million British thermal units to $8 for natural gas, and from LE1500 ($204.45) per tonne to LE2250 ($306.68) per tonne for oil.

Given that cement and fertiliser producers account for some 81% of natural gas demand from energy-intensive industries, this marked a massive saving for the government.

For the producers themselves, however, it presented a severe obstacle to operability, let alone profitability. In May 2014, according to the press, 70% of the country’s cement production ground to a complete halt as at least 10 cement plants were temporarily shuttered.

This is particularly problematic as cement demand is expected to soar in the coming years, as major projects roll out. In November 2015, Tarek Qabil, Minister of Industry and Foreign Trade, reported that local cement demand is expected to reach 90.4m tonnes annually by 2022, while current production levels stand at just 60m tonnes.

Pricing

The cost of energy, as a result, has increased. According to the “Egypt Construction Market Report” by Gleeds Construction Consultancy Egypt (Gleeds) for the third quarter of 2014, fuel prices account for almost 40% of the production costs of ordinary Portland cement. As such, operations became more costly, and the price of the product in the market increased dramatically. Between 2013 and 2014, there was a substantial increase in the price of both ordinary Portland cement and ready-mix concrete in the market. The latter increased by approximately 20% year-on-year, while the former increased by more than 35% between the 2H13 and 2H14 period.

In September 2015, Daily News Egypt reported that cement prices at Suez Cement Group stood at LE850 ($115.86) per tonne, and between LE750 ($102.23) and LE770 ($104.95) per tonne at the National Cement Company, while prices at Lafarge were between LE871 ($118.72) and LE893 ($121.72) per tonne — roughly the same levels as in November 2014, but a sharp increase over the average price of LE550 ($74.97) to LE600 ($81.78) per tonne recorded in February 2014.

Steel

The steel industry and other metal producers have also faced issues with gas and fuel supply. As a result of infrastructural bottlenecks, the Suez Steel Company was estimating losses of LE200m ($27.3m) per month in April 2015, according to the media, while the supply for reinforcing iron in the domestic market dropped by 40%.

Many domestic steel producers are facing 65% capacity utilisation rates out of an overall capacity of 10m tonnes, and import prices – as in many other Middle Eastern and African markets – can contribute to price pressures, although this is mitigated by the drop in imports. According to Beltone Financial, domestic steel, at a market price of $560 per tonne, is selling at a premium of at least $70 per tonne compared to imported steel. In April 2015 the government moved to impose an 8% duty on imported steel, which translates into an additional cost of $50 per tonne on top of the market price for foreign steel. Expected to remain in effect for three years, the duties will fall to LE325 ($44.30) per tonne during the second year, and LE175 ($23.85) during the third year. Despite these measures, the industry continues to struggle as a result of high energy costs.

Silver Lining

However, there may be some light at the end of the tunnel. Basic material producers have already weathered the removal of fuel subsidies and are unlikely to face such a major spike in costs in the near future. Many facilities are also converting to coal for power generation which, given the sharp decline in global coal prices since 2011, could help reduce production costs.

In April 2014, Egypt’s Cabinet agreed to allow coal imports for use in electricity generation and cement production, later reporting it expects coal imports will reach 30m tonnes annually in the coming years, with coal now expected to provide between 25% and 30% of the country’s total energy demands by 2030. The feedstock situation is likely to improve as the majority of cement producers transfer to coal-fired plants, a cheaper source of fuel that should be implemented across the industry by 2017, according to Beltone Financial.

A number of facilities have already switched to coal. In June 2014, Arabian Cement announced it would invest LE300m ($40.9m) to convert its existing facilities to run on coal, followed by Sinai Cement, which signed a contract with Danish firm FL Smidth to convert its facilities in July 2014. Suez Cement, a subsidiary of Italy’s Italcementi, converted its Katameya plant to use coal in August of the same year. However, surging coal demand has also created problems for some producers. In November 2015, for example, Egyptian Iron and Steel Company recorded a LE104m ($14.2m) net loss during Q1 2015, which it attributed in part to lack of available coal for production.

Rising Capacity

For steel producers, the natural gas situation is also gradually improving. To help it in meeting its short-term demand, the government began renting two floating storage and regasification units (FSRU) in 2015 to allow imports of liquefied natural gas, which are converted into natural gas for electricity generation. A third FSRU is expected by the end of 2016 or in early 2017, and an additional 6882 MW of capacity was added to the grid last year.

The government announced in December 2015 that the country will add between 2500 MW and 3000 MW of new electricity generation capacity in 2016. In the longer term, recent hydrocarbon finds should help the situation. In November 2015, for example, Royal Dutch Shell announced that it had successfully drilled three exploratory wells.