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Impact of an Uprising

World Cement,

The past six months has been a time of political turbulence across many countries in the Middle East, making it difficult to provide a comprehensive overview of the cement industry in the Mashreq countries. This article will provide some insight into recent developments in the Egyptian cement industry.

Egypt’s uprising

The events that took place in Egypt between the ‘Day of Revolt’ on 25 January and the day President Hosni Mubarak agreed to step aside, almost three weeks later, have been widely reported by the world’s media. Following Tunisia’s comparatively quiet revolution, the Egyptian people took to the streets in a series of protests that ultimately resulted in the end of Mubarak’s 30-year presidency. At the time of writing, the Egyptian people had recently approved constitutional changes that reduce a presidential term from six years to four, restrict any president to two terms in office and require the president to have a vice president, among other conditions. The general election is set for September 2011. On 23 March, the Egyptian stock exchange was re-opened, and to the outsider, the country appears to have returned if not to normalcy, at least to relative stability.

First quarter results have clearly been affected by the three weeks of turmoil that saw many businesses close temporarily, and it is unknown how the change in leadership will affect the economy in the long-term. This year, the IMF is predicting economic growth will fall to just 1%, having hit 5.1% in 2010. Meanwhile, Egypt’s funding deficit has been estimated at between US$10 – US$12 billion, which will be met by loans from international financiers and rich nations. However, some analysts have predicted a return to steady growth of about 5% pa for the next 40 years. This will, of course, be dependent on the direction of the new government.

Cement market trends

In terms of the cement industry, 2010 saw growth of 7%, which was expected to fall to 3 – 5% this year regardless of the political upheaval. In light of recent events, a drastic drop in demand – potentially by up to 10%, according to some analyst reports – is anticipated. Having imported over 1 million t of cement in 2010, the decline in demand this year will likely put an end to imports, especially given that up to 5 million t of new capacity is expected to come online. Further capacity expansions are scheduled for completion in 2012, but projects may be delayed or postponed if the market situation does not warrant such expansion.

Prior to the revolution, the cement industry in Egypt continued to benefit from the numerous construction projects that are both maker and marker of this growth. In addition, tax reforms boosted returns for the cement sector, as referenced in some of the financial reports released in March of this year. There are currently 13 cement producers in Egypt; Italcementi is the largest, followed by Lafarge, Cemex, then Titan.

Further afield

While Egypt seems to be on track for a slow return to growth, the revolutionary wave is continuing to impact its fellow Mashreq countries. At the time of writing, Syria’s uprising is threatening to destabilise Lebanon, and protests continue in Yemen. Should Lebanon manage to avoid engagement in Syria’s uprising and the fallout thereof, it ought to be able to maintain its current growth path.

Of the major players, probably the most affected by the instability across the Mashreq region will be Lafarge, which acquired numerous assets in North Africa and the Middle East when it purchased Orascom’s cement division in January 2008. The company has recently commissioned a 3 million tpa plant in Syria, which may well be affected by the uprising there depending on how things pan out; at this point it is difficult to comment. However, Lafarge has a history of tackling projects in challenging environments and coming off well. In Iraq, the group has two plants producing a combined 4.8 million t, making up a 21% market share. Its 2010 annual report showed domestic sales in Iraq increased by 14% amid strong demand, and with the population predicted to swell to 40 million by 2025, cement demand will continue to grow. Furthermore, new restrictions on imports will place renewed emphasis on local supplies.

Jordan is keeping relatively quiet while all this goes on. It has seen its own protests, some violent, but not to the extent of those in Syria or Egypt. The King has replaced the Prime Minister in an effort to appease his people, but this move has not been welcomed by all. In 2010, the cement industry experienced increased direct costs as a result of the hike in oil prices. The impact of this was particularly felt by Lafarge-subsidiary Jordan Cement Factories Company, which reportedly complained of unfair competition from cement producers that are importing clinker from countries where fuel costs are subsidised. The company’s volumes decreased by 46% in 2010 according to Lafarge’s annual report for the same year.

The housing market in Jordan remained relatively stable in the first quarter despite some political unrest. Last year, property prices in some parts of the country grew 20% and the economy as a whole grew 4.15% according to the IMF, with further growth anticipated this year. Tourism is a major contributor to this, and related construction contracts continue to be announced. Undoubtedly this would be affected by further unrest.

Meanwhile, Yemen is experiencing decreased foreign investment as it suffers its own political crisis. Figures from the government’s General Investment Authority report show that, in 2010, Arab and international investment fell by YR185 billion from 2009 figures. Increased violence in the country has created an inhospitable investment environment, as a result of which two cement plant projects have reportedly been delayed, in Marib and Mukala. Clearly, without stability infrastructure development is impossible and further foreign investment is unlikely.

This is an abridged version of the full article from Katherine Markham, the editor of WORLD CEMENT, which was published in the June 2011 issue, available for subscribers to download now.

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