EBI – Credit Certificate 2017/2018 Cement Industry Analysis

OVERVIEW of Past Trends & Future Outlook

Egypt’s cement industry started in Egypt in 1927, when
the first factory was established in Maasara, Helwan.
Egypt is now one of the largest cement producers in
the region by 20 companies, multinational companies
representing the lion’s share and most capacities
located in Suez, Greater Cairo, and Upper Egypt.
The cement Industry in Egypt has developed rapidly over the
years owing to strong demand, cheap labor, and supportive
government regulations in the form of subsidized energy prices
and tax exemptions. The aforementioned factors created a
positive investment climate and managed to attract foreign
investors, with a wave of consolidation taking place within the
industry. This transformed the sector from a small one
dominated by local public and private sector companies to an
industry controlled by key multinational players.

Over the six years leading to the 2011 uprising, Egypt now is
one of the greatest cement producers all over the world (The
12th largest in the world - 2016) and the leading country in the
Middle East, Africa, and the Arabian Region with a total
production capacity of 70 million tons last year in compared to
50 million tons in 2010. Cement industry now accounts to
around 3.7% of GDP (around EGP 60 Billion).

While this figure is much higher than current market

consumption, it is anticipated that demand will grow in the
near future as Egypt's economy and construction sector
recovers, according to the Egyptian Environmental Affairs of
the Ministry of Environment. “The industry will have difficulty
reaching full capacity due to ongoing energy supply shortages.
(Fuel cost accounts for 26-34% of Production Cost).

The country’s energy crisis could cap the cement industry’s

growth and delay a number of projects. (The cement industry
accounts for 59% of primary energy consumption and 46% of
natural gas consumption). Egypt cement producers have been
importing coal over the past two years to reduce their
dependence on natural gas. The switch to coal has allowed
cement producers to cut spending.
Over Five-Year forecast horizon, Egypt’s cement industry is set for strong growth. Cement consumption will be driven by
robust housing demand and the resumption of infrastructure and mega residential projects.

PEST Analysis
EBI – Credit Certificate 2017/2018 Cement Industry Analysis
Political & Legal:
Political:
- Egypt is the third-most-populous country in Africa and the 15 th worldwide, according to World Bank figures.
- As of 2017 the number of residents was estimated to have reached 97m. Arabic is the official language.
- Egypt is a presidential republic and the current president is Abdel Fattah El Sisi, who was elected to his first
four-year term in May 2014 following the removal of the previous administration of Mohamed Morsi and
2011 uprising.
- The head of state is elected by absolute majority, over two rounds if necessary.
- The legislative branch is unicameral. The House of Representatives is a 596-seat body.
Legal & Environmental Regulations:
Egypt’s priorities are to reform the regulatory framework, strengthen competition, improve access to finance and
land, strengthen governance, transparency, and accountability of state-owned enterprises, and better integrate
women and youth in the labor market. “IMF “
- In 2014, the constitution introduces major improvements, which ensure equal opportunities for all citizens
without discriminating between men and women.
- A legal framework ensuring freedom of competition was established for the first time in May 2005; new
amendments were undertaken in September 2011 and April 2012.
- Environmental protection is addressed in the 2014 to undertake necessary measures to protect the
environment.
- Factories are obliged to undertake environmental impact assessments before starting production.
Economic:
The Egyptian authorities have embarked on an ambitious reform program and have taken decisive measures aimed
at restoring macroeconomic stability and sustainable public finances. At the same time, by strengthening social
protection measures, they have sought to protect the most vulnerable. With the liberalization of the foreign
exchange market, foreign currency shortages have disappeared. “IMF”
- Egypt has been undergoing a transformation into an increasingly market-oriented economy. It currently holds
lower-middle-income status. While there is substantial potential to push the country towards middle-income
status. The economy has a significant degree of diversification.
- Manufacturing is the biggest industry, accounting for 16.6% in FY 2015/16.
- This is followed by wholesale and retail trade (12.9%) and the extractive industries (12.8%). While the country
has limited arable land, agriculture still comprises a key part of Egypt’s economic make-up. In 2015 it accounted
for 11.2% of GDP.

Real GDP:

Egypt’s reform program is showing

welcome signs of stabilization with GDP
growth recovering, inflation moderating, fiscal
consolidation on track, and international
reserves at the highest level since 2011.

Inflation Rate:

Despite the decrease in economic growth

rate, the inflation rates remained at high
levels because of the rise and scarcity in US
dollars, along with drops in production rates,
which in turn affected goods supply, thus
heightening inflation rates. The CBE has
managed to reverse high inflation.

Exchange Rate:
EBI – Credit Certificate 2017/2018 Cement Industry Analysis
The liberalization of the exchange rate in Nov.
2016 has eased shortages in foreign currency,
eliminated the parallel market and kick-
started an improvement in Egypt’s external
accounts.

Interest Rate:

Egypt Overnight Lending Rate was quoted at

19.75% December 2017. Lending Rate in Egypt
averaged 11.09% from 2005 until 2017,
reaching an all-time high of 19.75% in July of
2017 and a record low of 9.25% in December
of 2013.

Taxes: In March 2016, important changes have been made to the economic, the Egyptian government with a view to
continuing the economic reform programs, with targets for increasing economic growth and promoting employment.
One of the main pillars of this economic reform is fiscal policy, as the Ministry of Finance aims to modernize the tax
system by introducing the value added tax (VAT) in place of the current Sales Tax (EST).
Social:
Egypt had estimated population of 96 million as Nov. 2017 (51.6% Male – 48.8% Female – 61.9% Working Age) and
expected to reach 103 million by 2022. Ailments of Egyptian labor market are:

- High-levels of youth unemployment, especially among educated workers.

- High degrees of employment informality.
- Mismatch between output of education system and needs of labor market.
The reduction in economic growth rate had a
remarkable impact on intensifying rates of
unemployment to the highest levels,
exceeding 13%, after it had been 8% prior to
2011. However, the increase in economic
rates during FY 2014/2015 and the following
quarters had a relatively good impact on the
gradual decrease in unemployment rates to
reach 12.8% in Q2 FY.

Technological:
The Ministry of Communications and Information Technology is working to support an Egyptian ICT sector that plays
an active role in facilitating the achievement of political, social and economic goals during the current stage of
transition in Egypt. Therefore, aims to build on Egyptians’ positive view of ICT tools and systems, adapting and
developing them. This will include the development of applications that support digital citizenship, opening avenues
for community participation in social issues, and protecting freedoms and social justice. Targets include:
- Providing all schools and educational institutions with High-Speed internet access.
- Promoting the use of electronic signature applications in three government agencies.
- Raising the volume of e-commerce by 20% & increasing the proportion of e- banking customers using online or
mobile banking to 30%.
- Improving Egypt’s ranking in the field of Arabic digital content by increasing the number of trusted websites by
8% -10%. With regard to strengthening the economy, the targets are: to maintain ICT sector growth rates of 7-10%
over the next five years, while increasing the sector’s contribution to national income to 5%.
- To raise revenues generated from outsourcing services to $2.5 billion and from intellectual property to $1 billion.
- To expand the volume of investment in the ICT sector by 20% to LE 55 billion; and to boost exports of software
and embedded software within two years to $500 million.
EBI – Credit Certificate 2017/2018 Cement Industry Analysis
Porter’s Five Forces Analysis:

Forces Level Justification

- The cement industry is highly started up costs and the

Barriers to Entry
Bargaining Power Of Suppliers
Bargaining Power Of Buyers
Rivalry Among Existing Competitors
Threats of Substitute Products
economies of scale are high in this industry.
Moderate
- No new licenses are granted for cement industry due to
highly environmental pollution.
- Availability of raw materials such as lime, silica and clay
from natural sources in Egypt is making the bargaining of
High suppliers limited , but gas and energy contribute with 30%
of the main components and the government is the sole
supplier
- Lack of substitutes, the demand exists at all price point
Low and the growing of the real estate and constructions is
making the bargaining of buyers limited.
- The cement industry is oligopolistic nature with few major
Moderate
players.
Low - The cement has no substitutes.

Seven Risks Characteristics:

Risk Risk Level Justification

- The majority of costs are found in the fixed costs rather than
variable cost as it requires high capacity production lines;
Cost Structure High
however, it is a highly operating leverage industry and we must
maintain the economies of scale.
- The cement industry considered a mature industry in Egypt, as
Maturity Moderate its future growth is limited and its profits and sales growth
slowly.

- The cement industry considered a cyclical industry, as the

Cyclicality Moderate demand of the cement products will be affected at the time of
recession but with a reasonable rate
- The cement industry is a profitable business with a slim profit
margin. Mass production allows the industry to benefit from
Profitability Moderate to high economies of scales due to high operating leverage but the
overall profits will decline and can be negative in the recession
time .

Substitutes Low - The cement has no available substitutes.

- The cement industry mainly depends on natural resources such
as lime, silica and clay which are available in the local market in
addition to its heavily gas consumption .
Dependence Moderate - The cement is a necessity product for constructions and real
estate which is increasing with resumption of infrastructure and
mega residential projects which mean that the demand on the
cement is fragmented and not concentrated
EBI – Credit Certificate 2017/2018
Regulations
Cement Industry Analysis
- The cement industry is one of the most environment polluting
industries with negative effect on human health, so it is highly
High regulated.
- For health reasons, the government has issued pollution control
regulations.

Sources:
- IMF – Egypt.
- World Bank – Egypt.
- BMI Research.
- Beltone Securities Brokerage S.A.E.
- Egyptian Regulations for Coal Related Activities and Cement Industries in Egypt - Ministry of Environment - April 2015.
- Ministry of Trade and Industry (Development Strategy 2016-2017).
- Ministry of communication & Technology (National ICT Strategy 2012-2017).
- The Egyptian Center for Economic Studies.