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Egypt cements quarterly update | Demand weakness, inventory pile-up continue into 2Q19

Demand falls 3.2% y-o-y in 2Q19; Full year 2019 demand likely to miss our estimate. Local cement demand dropped by 3.2% y-o-y (-7.4% q-o-q) to 11.3mn tonnes, putting 1H19 local cement demand at 23.5mn tonnes (-6.3% y-o-y). This comes against our expectation of flattish cement demand, meaning full year 2019 cement demand is likely to miss our 50mn tonne estimate. Arabian Cement Company (ACC) [Underweight | TP EGP3.2]’s current share price is in line with our TP. However, there could be more downside if demand weakness sustains beyond 2019. Alone, every 5% p.a. lower-than-expected volume eats 18.8% off ACC’s TP.

Capacity utilisation at all-time low; Inventory up by 0.9mn tonnes to 10.1mn tonnes, c25% of sales. Average cement capacity utilisation registered 55.7% in 2Q19, an all-time low for the industry. Meanwhile, clinker capacity utilisation was 61.2%. Inventory added 0.9mn tonnes in 2Q19, putting total stock in the system at c10mn tonnes, enough to cover 90 days of demand. We expect industry capacity utilisation to sustain at c65% over 2020-24e

Retail prices drop 1.5% q-o-q, mainly driven by strengthening EGP. Average retail prices weakened by 1.5% to EGP842/t in 2Q19, mainly reflecting a similar reduction in cash production costs, due to cheaper coal prices (down c7% q-o-q) and 2.9% q-o-q EGP appreciation in 2Q19. At the current price, we continue to estimate cost-efficient cement players (ACC included) to be marginally loss-making, and cost-inefficient players to incur heavy losses. We expect retail prices to remain dictated by cash costs over 2019-24e, keeping margins pressured.

Nahda Cement temporarily halts plant; Expect more exits amid bleak dynamics. Non-listed player, Nahda Cement, decided to temporarily halt its 1.5mn tpa cement plant (c2% of industry capacity) in Jul-19 for six months, until it draws down on its inventory. We look for permanent shutdowns in the short to medium-term, starting with Titan Cement (4.5mn tpa, 5.6% of industry capacity), which is currently loss-making at the EBITDA levels. However, this is unlikely to alleviate industry pressures, in our view. We believe capacity shutdowns of >10mn tpa are needed before a material impact can be seen on industry margins.