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Egypt's cement sector volume recovers in 3Q19, increasing by 6.3% QoQ Naeem expects producer margins to have remained steady as cost savings from the decline in coal prices are estimated to have been offset
Latest industry dispatch indications suggest utilisation rates for companies under coverage averaged 73% in 3Q19 vs. 69% in 2Q19 Financial services firm Naeem Holding's research sees that cement industry volumes improve QoQ, but with prices remaining weak amid market oversupply. As per latest industry dispatch indications during 3Q19, total cement volumes for the 20 producers increased by c.6.3% QoQ. The total cement volumes for companies under their coverage universe grew by c.5% QoQ, while utilization rates reached 73% vs. 69% in 2Q19 and 75% in 1Q19. According to their research, the companies that witnessed improved utilisation rates are Arabian Cement (ARCC), Misr Beni-Suef (MBSC), and Suez Cement (SUCE) with rates of 85%, 98%, and 67%, respectively. For South Valley Cement (SVCE), utilisation rate dropped to 41% from 50% in 2Q19. On the other hand, prices are likely to have remained under pressure during 3Q19, impacted by continued market oversupplies. Currently, the army's new plant contributes close to 8% of total industry volumes sold, with cement utilization rates likely to have amounted to c.24%. 3Q19 margins to remain steady despite coal price decline. Despite the recent drop in coal prices, they believe that margins would remain flattish on the back of the offsetting decline in cement prices, accompanied by cost increases associated with the latest round of energy subsidy cuts (impacting energy and utility costs) that took place in July 2019. It is also worth mentioning that average prices for coal dropped to $83/tonne during 3Q19 vs. $89/ton in 2Q19 and c.$91/tonne in 4Q18. Over the short-to-medium-term, prices and margins are expected to remain pressured, due to the significant demand-supply gap of c. 21m tonnes as of 7M19. A rapid resolution of the current situation would require drastic measures in the form of temporary or permanent closures of production lines, mergers, and acquisitions. In the meantime, however, some cement producers are expected to be less impacted on account of restructuring/cost- cutting measures including securing cost inputs at cheaper rates. For instance, both SUCE and ARCC signed agreements with Qalaa Holdings (CCAP), flagship refinery Egyptian Refining Company (ERC) to procure pet coke at a discount to imported coal, with pet coke users expected to enjoy cost benefits. Volume and utilization update/indications for companies under coverage For ARCC, there is QoQ improvement in cement sales volumes and clinker production. In the 3Q19, cement utilization rates improved to 85% vs. 82% in 2Q19. However, YoY sales volumes dropped by c. 6%. On the other hand, clinker production rate picked up by 5.6pps QoQ. Exports amounted to close to 15% of total sales, as per Nadeem Holding's calculations. SUCE witnessed sequential increase in cement volumes and clinker production rates. Cement volumes increased by c.10% QoQ, with utilisation rates standing at 67% in 3Q19. Clinker production rate increased to 51% from 43% in 2Q19. For MBSC company, the cement utilisation rate surged, yet clinker production dropped QoQ. Cement utilisation rates improved to 98% in 3Q19 vs. 95% in 2Q19. Clinker production rate increased to 51% from 43% in 2Q19. Their utilisation rate surged, yet clinker production dropped QoQ. Cement utilisation rates improved to 98% in 3Q19 vs. 95% in 2Q19. Clinker production rate, however, dropped QoQ by 10pps to 71%. The proportion of exports amounted to 10.6% during the quarter. With regards to Sinai Cement company (SCEM), there is a QoQ improvement in cement utilization and clinker production rates, yet it is still operating at very low utilization rates of below 50%. 3Q19 cement utilisation rates improved QoQ to 46% from 30% in 2Q19. Furthermore, clinker production rate improved sequentially by almost 4pps. For Misr cement Qena (MCQE), sales volumes are almost flat but with clinker production dropping QoQ. However, clinker production rate significantly dropped by 25pps to 80% in 3Q19. On the other hand, South Valley Cement company recorded the poorest performance among peers on a QoQ based on both cement utilization and clinker production rates. Cement sales volumes dropped by c.18% QoQ as utilization rate declined to 41% (vs. 50% in 2Q19). Furthermore, clinker production rate dropped to 11% in 3Q19 vs. 44% in 2Q19.
