Bricks from straw: Construction materials are part of a larger story of price hikes

Demand was surprisingly buoyant for construction materials in Egypt in 2011. The revolution that began on January 25 of the year caused multiple delays and cast uncertainty on several major construction projects in the private sector, and across most areas of the economy new ventures were put on hold.

What kept the materials market robust was illegal construction. Poorer Egyptians who cannot afford to buy homes off-plan from a major developer calculated that in the political environment of 2011 the state would be less likely to notice unpermitted structures in the building stages, and less likely to do something about them. This type of illegal building accounts for about 60% of structures in the greater Cairo region and 50% across the country.

RISING HIGH: The impact sent prices higher for some major construction materials: a year after the revolution, for example, the price of steel was up 5.6% and was at about LE4798 ($803) a tonne by January 2012, according to statistics from the Central Agency for Public Mobilisation and Statistics. Portland cement dropped 6.67% in retail, however, with a 50-kg bag costing LE25.48 ($4.26) in January 2012. On a per-tonne basis, cement was at about LE530 ($89) in January 2011, fell to LE420 ($70) by November 2011, and was LE495 ($83) by March 2012, according to data from the Ministry of Housing Utilities and Urban Development. Egypt has emerged as a major cement producer in the region, with a diversified group of producers both domestic and foreign, and a capacity of about 56m tonnes. “The construction and cement industry are very much linked and both have experienced a difficult 2011,” Erdo ğan Pekenç, managing director of Lafarge Cement Egypt, told OBG. “The construction sector used to expand in double-digit figures, but this dropped to about 3.3% growth during the events of 2011.”

COST RISKS: Cost control will be more important than usual for producers of cement, steel and ceramics in Egypt in 2012. While that is true across all sectors for a few key reasons, such as rising labour and electricity costs, there is one unique to those three industries – a hike in the prices that companies are paying for using natural gas. Access to inexpensive energy has long been a comparative advantage in Egypt, and the state has been selling its extracted gas at below-market rates in order to foster industrial development in the country. However industrial policy is evolving. The bill for subsidising energy costs, pegged at between 8% and 12% of GDP, is no longer considered by many to be sustainable.

HEAVY WORK: In its search for elements of the subsidy regime to eliminate, the government first arrived at these heavy industries. It announced a price hike that took effect at the beginning of 2012, with natural gas going from $3 per million British thermal units (mBtu) to $4. The government hopes it will be able to shave some LE20bn ($3.35bn) off the budget deficit under this pricing strategy.

The idea is likely to appeal to the IMF, which has been negotiating with Egypt on the particulars of a substantial aid package. IMF officials have in the past said that aid to Egypt would be contingent on the country addressing its ongoing large budget deficits, estimated at around 10% a year or more, primarily caused by energy subsidies. This new policy seems to be a step in the right direction, and should help shore up confidence among IMF officials.

For materials producers, paying $4 represents a 33% jump in costs for an essential feedstock, but in a global context that price remains a competitive advantage compared to almost any other operating environment. Only in a few Gulf Cooperation Council countries is the resource available for lower prices. For Egypt, $4 is considered the at-cost price for gas. Although rates may vary slightly, the state generally pays upstream producers around $2.65 per mBtu. While the official costs of delivery have not been made public, the new price implies that the delivery costs will now total an estimated $1.40 per mBtu.