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Egypt: Steel Industry Overview (2001)

Typically, Egyptian industrial sectors are dominated by a handful of public and semi-private companies locked in a sluggish struggle to come out on top if and when they are fully exposed to the vicissitudes of the free market and foreign competition. Several smaller ventures may act as window-dressing to give the impression of competition, but by and large, slow responses to changes in the economy and an insular view of the market are the rule.

In many ways, then, the steel sector is atypical. After private juggernaut Ezz Steel Rebars (ESR) acquired a 28 percent share of government controlled Alexandria National Iron and Steel Company (ANSDK), the two companies consolidated their marketing operations under the name Ezz-Dekheila Steel (EZDK), of which Ahmed Ezz was appointed chairman in March 2000. The marketing alliance of ESR and EZDK also goes by the name Ezz-Dekheila (EZDK). EZDK has maintained a dominant position, and the company now controls around 54 percent of the total market capacity and 67 percent of the market share. Other significant private producers are the Kouta Steel Group, Suez Steel, Aswan for Iron, and the Arab Steel Factory, which account for around 26 percent of the market. Public sector companies such as the famously bloated Helwan Steel make up about 7 percent of the market. Thus, it is fair to say that the steel sector is dominated by one overridingly private concern, with some private competition. State owned enterprises, while employing a large chunk of the sectorís workers, have become even more untenable than in other industries.

The Egyptian steel sector relies heavily on rebar, which account for around four fifths of all steel sales in Egypt. Because this type of steel is used mainly in construction projects, the recession and accompanying downturn in the real estate market has resulted in weak demand. Total domestic sales in 2000 stood at 3.22 million tons, expected to rise only slightly to 3.28 million tons by the end of 2001. Because of low demand, even private sector steel companies in Egypt are hamstrung by low capacity utilization in reconditioned plants. Further, only EZDK, which runs fully integrated plants, has serious international certification of its products. Since a large portion of the steel produced in Egypt is not up to international standards, imports have traditionally played an important in the domestic market. According to the US Foreign Commercial Service, such imports, mainly from Libya, Saudi Arabia, and Eastern Europe, rose steadily to account for 21 percent of total demand in 1998. Though steel from Libya is of poor quality and poses little threat to Egyptian producers, steel from Saudi Arabia, especially, has concerned protectionists in the Egyptian government. Fearing massive growth in demand for below-market-price Saudi steel, Egypt several years ago did not renew the free trade agreement with Saudi Arabia that granted duty-free access to the Egyptian market. Indeed, steel imports have decreased sharply from 594,000 tons in 1998 to 260,000 in 2001. Industry sources have indicated that this yearís dramatic drop in imports is due in part to a significant increase in production capacity at Egyptian plants, but added that weak demand is the most important factor for lower import figures.

For its part, Egypt exports very little steel. EZDK would like to see this change, and in July 2000, the companyís European marketing branch was incorporated in Duisburg, Germany. As the major steel producer in the Middle East, EZDK recognizes the value of deriving a significant amount of its earnings from sales abroad, especially in European and Asian markets where demand is more constant. In 2002, EZDK projects exports of around 800,000 tons of flat and long steel, expected to bring in around US $300 million. The company also expects this figure to rise to US $400 million in 2003.

The same shrinkage in the real estate market that has ended the freewheeling heyday of the cement sector has also had serious ramifications for steel producers. Starting from negative growth in the early 1990s, steel production growth increased to 8 percent in 1998, while sales climbed at an even higher rate. After construction in Egypt took a nosedive at the turn of the century, production growth leveled out and, while capacity has increased recently, this has not yet been reflected in actual production levels because of low demand. Most experts believe that growth will shrink slowly through about 2003. For now, sales are holding steady, and current rebar sales stand at around 250,000 tons per month, according to the Ministry of Public Enterprise.

Reliable sources in the private sector put domestic production capacity at 4.6 million tons in 2000 and 5.4 million tons in 2001. Actual production, however, has hovered at 3.2 million tons and 3.4 million tons for the same years. Thus, despite a large increase in capacity, these figures reflect the unfortunate reality that steel producers are still losing over 30 percent of their potential production. A report by the Egyptian State Information Service (SIS) puts much of the blame for this phenomenon on a weak industrial infrastructure, which suffers from frequent power outages. However, sources in the private sector point out that with several brand new production facilities around Egypt, the problem is not infrastructure, but, once again, weak demand. Foreign competition brought on by Egyptís entrance into the WTO will make a tight market tighter, and will force all of Egyptís steel producers to get their products certified to international standards or lose much of their business. Nevertheless, the problem of increasing production to keep up with higher demand, when it recovers, is still a major concern. As Egyptís steel companies themselves acknowledge, the way forward is still to get their plants up to date technologically.

One way of doing this is to build large production facilities in new industrial zones like the one being set up around Suez. The Ezz Group is taking advantage of the new industrial zone there to attract foreign investors, and has worked with consultants such as Booz Allen & Hamilton and engineers WS Atkins to design facilities in Suez that are modern, efficient, and attractive to foreign capital. Now undergoing a three month test run, the new US $700 million Ezz Flat Steel (EFS) plant will be capable of producing 1.2 million tons of hot rolled coils annually, using state-of-the-art technology. Italian steel giant Danieli has an equity stake in the plant, and is acting as a technology supplier.
Easy and cheap access to power sources and ports and an advanced industrial infrastructure should help companies setting up plants in Suez to keep up with demand towards the end of this decade, when it is expected to be healthy again. EZDKís plant in El Dekheila, completed by SMS Demag AG in 2000, and EFSís new plant in Suez show that the sector is keenly aware of the need to modernize production.

There are also signs that increased local private competition is having a stabilizing effect on the Egyptian steel market. EZDKís market share grew immensely from 53 percent in 1998 to 60 percent in 1999, and up to 70 percent in 2000. However, in 2001 it has shrunk back slightly to 67 percent. According to a June report by EFG Hermes, EZDK has faced lower cash flow expectations recently, and the report added that ďan unclear strategy has caused analysts to predict a string of losses in the bottom line over the next few years that could consume much of the companyís net worthĒ. Sources in EZDK, however, say that such an analysis is shortsighted, adding that the companyís strategy of investing heavily in the plant at Dekheila to produce steel for export is both clear and very promising. Furthermore, this may be the only way to truly protect the company from the restrictions of the Egyptian market and ensure long-term growth.
In any case, it seems likely that private sector companies will continue to dominate Egyptís steel sector. If demand recovers and local companies can then live up to their capacity figures while keeping prices down, they could edge out imports permanently and maintain a profitable market balance within five to eight years. The effect that WTO membership and the EU partnership agreement will have on the Egyptian steel sector, however, is unknown at this point. Exports of Egyptian steel could increase steadily as their access to European markets grows. Increased foreign investment would lead, and already has led, to more efficient production. On the other hand, if reasonably priced, high-standard imports flood the market before the bulk of Egyptian companies have the chance to build up their operations and get their products certified during these crucial next few years, it could prove far more difficult for companies besides EZDK to remain competitive.

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2001 - Egypt Steel Industry Overview

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