In an attempt to contain a surge in local cement and steel prices caused by a surging export market, the Ministry of Trade and Industry (MTI) issued a decree at the end of February imposing new duties on the products. One of the measures raised export duties on cement by $11.50 per ton and on steel by just over $28 per ton. At the start of April, the export duties on steel were raised almost $32 per ton.
As a result, the price per ton of cement fell from $67.37 to $60.28 on the local market and that of steel from $656 to $594.
In the days following the announcement, the price of both commodities dropped on the Cairo and Alexandria Stock Exchanges (CASE), but rebounded a week later.
The new export duties motivated the Egyptian Holding Company for Metallurgical Industries to extend by two weeks its period for accepting proposals on its 83.1% stake in the Arab Company for Special Steel. Concerned about the effect the tariffs might have on the company’s cash flow, bidders requested a reappraisal of the due diligence assessment.
At the end of March, Rachid Mohamed Rachid, the minister of trade and industry, summoned a roundtable meeting with local media and analysts to allay fears the measures could have possible negative effects on the construction materials industry. He said he believed the media had misunderstood the duties. The temporary and flexible measures were introduced to increase competition in the domestic market and avert an anticipated rise in prices.
Rachid explained that, while 10 years ago, Egypt imported 10 million tons of cement and 2 million tons of steel, it is now one of the world’s top cement exporters, exporting 2 million tons of cement in 2006. This has been partly due to the boom in construction, fuelled by the growth in construction in the tourism sector. Exports of both materials have risen rapidly over recent years to meet high international demand.
The cost of production is much lower in Egypt than elsewhere, due in part to the $1.24 billion in energy subsidies the industrial sector receives from the government. The MTI explained that the benefits of cheap production costs achieved through government-subsidized energy were being passed on to foreigners in the form of cheaper cement and steel prices. The rise in export duties was designed to redress this balance and negate the effects such subsidies play in the production process. However, why the government did not simply raise the price producers pay for energy instead of imposing tariffs was not explained.
Confidence in new tariffs
Rachid said he was confident the new tariffs would not affect investment in the industries, and stated that the government was issuing 25 cement licenses and 3 steel licenses to local and international companies. In the days following the roundtable, the ministry announced that two porous iron plants, each with an annual capacity of 1.6 million tons would be built in Suez and the Sadat industrial city. At the start of April, the National Cement Company, the largest public sector producer of cement, announced plans to invest $88.6 million to raise production levels.
Duties only temporary
Simon Kitchen, a senior economist at investment and financial services company, CI Capital, agreed that the tariffs would not jeopardize investment in the industries.
“The export tariffs will be temporary, and there are many other factors, such as proximity to major markets, cheap energy and relatively light environmental regulation, that make Egypt attractive for these industries,” he said.
He said steel prices were likely to remain high due to strong demand and the rising prices of key inputs. The recent rise in the cost of pellets, one of the raw materials for steel production, rose from $420 per ton in August 2006 to $520 per ton in February.
Kitchen also predicted, “Cement prices may come down at the end of this year or in 2008. New capacity will come online in Egypt and the Gulf, which should push prices down. However, local demand will remain strong as the construction boom continues.”
Rachid was at pains to explain that the measures were compatible with World Trade Organization (WTO) standards and compared the policy to India’s recent introduction of similar tariffs on iron exports and EU efforts to cap mobile phone tariffs. He said the measures would not cause cement and steel industries to stop exporting and reported that the government is anticipating at least $4.4 billion total investment in industrial projects in the fiscal year 2006-07, up from $2.8 billion last year.
