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Egypt cements quarterly update | Further demand deterioration; Distressed Torah Cement to shut down

Demand continues falling, against our estimates. Local cement demand fell by 9% y-o-y (-8.5% q-o-q) to 12.2mn tonnes in 1Q19, coming against our expectation of the start of gradual recovery in 2019 (thanks to improving top down dynamics, the resumption of monetary easing and purchasing power recovery). The drop in 1Q19 demand signifies continued weakness throughout 2019. Our Overweight call on Arabian Cement [Overweight | TP EGP8.30] assumes industry demand should gradually recover over the long run, steadily reducing the industry’s oversupply. Further demand weakness means a worse-than-expected supply/demand imbalance over the next five years, further eroding cement stocks’ valuations. This is the main downside to our industry assessment.

Inventory adds 1.2mn tonnes in 1Q19; Total stock stands at 9.2mn tonnes, c20% of sales. Average cement capacity utilisation amounted to c64% in 1Q19 vs. 73.3% in 1Q18 and c66% in 4Q18. Waning local demand, marginal export activity, and tough competition led the industry to add 1.2mn tonnes to clinker inventory, bringing total inventory in the system to 9.2mn tonnes. This is equivalent to an inventory to sales ratio of c20%, at the current levels. 

Retail prices down c4% q-o-q; Cost efficient plants loss making at the current prices. Tough dynamics and inventory pile-up kept prices under pressure in 1Q19. Retail price averaged EGP855/t, down c4% q-o-q, reflecting a similar drop in cash costs (due to an 11% q-o-q drop in global coal prices). At the current prices, we calculate cost efficient players to be marginally loss making and cost inefficient players to be elbow-deep in losses.

Torah Cement plans to shut down its distressed plant to limit losses, unlikely to ease the industry strains. Torah Cement will hold an EGM on 10 June, to decide on shutting down its 3.3mn tpa distressed plant to limit losses. We do not expect Torah Cement’s exit to alleviate industry pressures, given idle capacity would still stand north of 35% post Torah Cement’s exit.