Can a governmental intervention bring cement prices down? Sherine Abdel-Razek explores the economics of reality Going against its own lofty free market pronouncements about prices being strictly determined by supply and demand, the government is trying to step in to officially cap rapidly rising cement prices. At LE400, the price of a tonne of cement had gone up by some 35 per cent in just 18 months. Now, factories are being told to sell their cement to traders at no more than LE290 per tonne, with the traders' retail cap subsequently set at LE330. The governmental intervention followed a meeting between Trade and Industry Minister Rachid Mohamed Rachid and a group of cement producers and traders. The latter are being the brunt of the blame for the recent rise in prices, and as a result have also been banned from exporting cement, which usually takes place at a rate that is $15-20 per tonne compared to local prices. The decision also obliges cement producers to report prices and sale volumes on a weekly basis. At a press conference the next day, cement producers vowed to abide by the new ceiling within 10 days, or as soon as they finished delivering on contracts signed before the new regulations came into play. But while the 10-day grace period ended on Saturday, cement prices remain above the LE290 threshold. An Egyptian Cement Company (ECC) ad on Sunday, for instance, put the tonne price at LE315. Even the state-owned National Cement Company is selling at LE300. In fact, it seems as though no one is fully complying with the new regulations. "You can't interfere this way in an open market with big international players," said George Bishara, an investment analyst and cement sector expert at Prime Securities. Eight of Egypt's 12 cement companies are owned by multinational cement heavyweights like Lafarge (France), Italcementi (Italy), and Cemex (Mexico). Bishara also echoed reservations raised by cement traders about the restrictions on exports as cement exports are sold 30 per cent higher than that in the local market. "Much money can be made from exporting to the Gulf market where an increasing demand is creating a thriving black market". At the same time, the pressure on exports looks likely to increase in tandem with an upsurge in local demand. According to an HC Securities report, local demand will probably rise by 11.4 per cent to reach 30.9 million tonnes in 2006. The surge is being driven by an improving macro-economic picture, a speed-up in the privatisation process, tax cuts, and banking, customs and tariff reforms. The real estate and housing sector boom expected to take place with the activation of the mortgage law will also boost demand. Rachid thinks cement companies are raising prices unjustifiably, jacking up their margins to more than LE150/tonne, or a gross margin higher than 50 per cent. The minister threatened to stop supplying subsidised production inputs to companies that raise prices, accusing them of unfairly taking advantage of a 1958 quarries and mines law that helps provide clinker, gypsum and other inputs at very low prices. The companies themselves, however, claim that several factors have been eating into their margins. Salaries are on the rise, as are transportation costs, said a sales manager at one firm. While admitting that profits were currently good, the source said that by summer 2007 the entire industry would have to face much more strenuous competition once new cement producing entities in the Gulf begin providing the market with 60 million tonnes per year. New North African firms will be churning out an additional 25 million tonnes. This has meant that companies are trying to raise profits this year as a way of hedging against expected losses in the future. HC Securites has argued that the price rises are more the result of the industry being controlled by a cartel of companies that have the ultimate ability to set local selling prices, despite the fact that it is illegal for competing players to agree to raise, lower, or stabilise their rates. International players controlled 85 per cent of the industry in 2005, a dynamic that did not necessarily signify a monopoly over market share as much as a dilemma over business practice ethics, argued Investment Minister Mahmoud Mohieddin at a parliamentary session that took place on this issue earlier in the year. The industry, meanwhile, has defended itself by saying that the increase in its prices was still lower than concurrent increases that have also taken place with fuel prices (60 per cent) and construction costs (40 per cent), both of which have a profound effect on their businesses.
