Swamped in cement

By Sherine Abdel-Razek
Once again the Egyptian cement sector has captured the limelight. The excitement began last February when fierce battles raged over the acquisitions of majority stakes in five cement companies which resulted in giving four multinational cement companies a significant foothold in the sector which is now 30 per cent foreign-owned.
One month later, things calmed down when the government announced that it would put on ice further privatisations in a sector that it considers "strategic." But things may heat up again following the government's reversal of this decision in late December.
At that time, the Ministerial Committee for Privatisation approved the expansion of the ownership base of Helwan Cement through the sale of 48.7 per cent of its shares: 20 per cent on the stock market, and 27.8 per cent to a strategic investor. This move came after a Saudi investor expressed interest in buying the state's 47 per cent stake.
As of press time, only Suez Cement had made an offer to buy the stake and the amount of its offer has not been made public. Following its acquisition of Torah Cement last year, Suez Cement became the biggest company in the sector with a market share of 30 per cent.
But experts are sceptical that an acquisition deal now would be as attractive to investors as it was last year. A year ago, the economy was in better shape and the cement sector itself appeared more promising. Amidst a flurry of activity for infrastructure and mega-projects in 1998-1999, demand for cement increased dramatically. And, at the time, the fledgling Egyptian Cement Company (ECC) -- a joint venture between Orascom and the Swiss Holderbank -- seemed not to pose a threat to state-owned companies. Added to this, environmental restrictions on the expansion of cement factories were much less stringent.
Since then, the recession has cast a shadow over the sector. A report by Flemings-CIIC says that the growth rate for the demand of the product declined to 1 per cent over the nine month period ending in March 2000. In contrast, during 1998-1999, this grew by 14 per cent. It also points out that while cement wholesalers formerly paid for the product two to three months in advance, they no longer do this. The chronic supply deficit which motivated this practice no longer exists due to the increase in productive capacities and a slow down in construction activities.
Taher Gargour, senior analyst at HSBC says that while things improved marginally for the sector during the second half of last year, overall demand for cement during the year 2000 declined by 2 per cent compared to 1999.
In spite of limited demand, productive capacity is growing by leaps and bounds. In less than twelve months since the inception of its operations, ECC added 2.9 million tons to Egypt's annual cement production and cornered a 12 per cent market share. The British Blue Circle cement company is investing heavily to increase the capacity of Alexandria Cement, in which it had acquired a 76 per cent stake in late 1999. And a handful of private companies are expected to add to this within the next two years.
Flemings-CIIC's report predicts that the productive capacity of seven factories currently under construction, in addition to those in the pilot phase, will be approximately seven million tons annually. Thus, during fiscal year 2001-2002, Egypt's cement surplus is predicted to reach 4.2 million tons.
The impact of such a surplus is not hard to fathom. "We may soon see an oversupply which will make current prices even lower," says Ignacio Madridijos, president and chief executive officer of the Mexican company Cemex, which invested $372 million last year to acquire 90 per cent of Assiut Cement. Madridijos pointed out that the cost of Egyptian cement is already 50 per cent less than the international price.
In spite of its grim predictions, Flemings-CIIC's report still offers some hope. If the draft mortgage law is passed, this will likely reinvigourate the construction industry and thus jump-start the demand for cement. The report also cited the government's plan to repay its debts as a factor which would improve the economic outlook and thus ultimately improve the situation for cement producers.
But what about the Helwan Portland Cement (HPC) offering in particular? "It will not attract investors. This is due to the small size of the offering and the low quality of Helwan Portland assets," says Gargour.
All of the cement company offerings last year were for majority stakes. For factories in Beni Suef, Assiut and Alexandria, offerings were for 95, 90 and 76 per cent stakes, respectively, while for those in Amiriya and Torah they were 91 and 65 per cent, respectively. Gargour suggested that no local or foreign investor would be interested in buying a stake of 50 per cent.
And HPC's performance does little to sweeten its appeal. Its profits declined by 10.6 per cent during 1999 compared to 1998. It had a price earning ratio of 4.73 compared to a market average of 6.29 in October. On the last day of trading for 2000, the company's share went for LE39.
And HPC's potential for improvement would seem to be hampered by the quality of its assets. According to a report issued by the Commercial International Brokerage Company (CIBC), HPC suffers from production inefficiencies as well as having the highest emission levels among cement companies. Added to this, environmental protection laws limit its options for horizontal expansion because of its location in an urban area.
But the company's vision is more optimistic, as evidenced by its Web page. Located in Helwan, a Cairo suburb to the south of the city, on approximately 890,000 square metres, HPC has 10 production lines and produces a variety of grades of cement. Its assets also include a factory in Samalout, in the upper Egyptian governorate Minya, located near limestone quarries providing the raw material for the white cement it produces. This factory is Egypt's sole producer of this higher-priced fine grade of cement used for finishing. This position as the only producer of white cement is a factor that HPC views as giving it a competitive advantage.
But so far, HPC has attracted little interest beyond Suez Cement. Madridijos said that Cemex might consider bidding for the offering pending the outcome of its research.
Ultimately, the cost of the stake may prove the determining factor. HPC's stake is expected to be offered for much less than the stakes of peers sold last year. A ratio for the enterprise's value compared to its capacity (EV/Cap) is used by those in the industry to assess its productivity. This ratio compares assets against number of tons produced. For HPC this is expected to fall within a range of $80-100. Worth mentioning is that the lowest of last year's sales was that of Torah cement at $124, while the highest -- at $257 -- was paid by Lafarge to acquire Beni Suef cement company.
The experience of last year's cement privatisations is expected to push the government to adopt an approach towards foreign investment in this sector that is both more cautious and more pragmatic. During this process it created Al-Ahram Cement to bid for Amiriya Cement in an attempt to avert foreign dominance of the sector. As Al-Ahram Cement was owned by several public sector companies, its establishment was viewed as a kind of backtracking by the government on its privatisation plans.
Related stories:
Cementing a trend 24 Feb. - 1 March 2000
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