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Egypt cements quarterly update | Further demand weakness in 3Q19

Demand down 7.9% y-o-y in 3Q19; Full year 2019 demand highly likely to miss our c51mn tonne estimate. Local cement demand continued to deteriorate in 3Q19, falling by 7.9% y-o-y to 11.9mn tonnes. We assume flattish cement demand over 2019-22e at c51mn tonnes, but the weakness seen in 9M19 (-6.7% y-o-y) implies that our numbers for full year 2019 and beyond are likely to miss. For our valuation of Arabian Cement Company (ACC) [Underweight | TP EGP3.20], we assume a cement capacity utilisation of 92.5% over 2020-24e (vs. the industry’s current c60%), but there could be further downside to our numbers if demand continues to worsen.

Cement capacity utilisation at c60%; Inventory level at 9.3mn tonnes, 22% of demand at current levels. Average cement capacity utilisation was c60% in 3Q19 vs. c64% in 3Q18 and c56% in 2Q19. Meanwhile, the industry’s accumulated clinker inventory stood at 9.1mn tonnes (+36.1% y-o-y, -7.1% q-o-q), on our estimate, representing c22% of demand at current levels. Total exports registered 0.55mn tonnes (+41% y-o-y, +44.7% q-o-q), sold at nearly nil margin.

Retail prices nearly flattish q-o-q; Cost-efficient cement players remain under pressure. Retail cement prices was almost flattish q-o-q at EGP837/t (-4.2% y-o-y), as challenging dynamics kept contained on pricing, in line with our pricing estimates. At current prices, we estimate cost-efficient players to be marginally loss-making and less efficient players to be heavily suffering. ACC reported an EBITDA margin of 12% and recurring losses of EGP7mn in 3Q19.

At least 10mn tpa of further capacity shutdowns needed for industry margins to start improving. We expect industry margins to remain under pressure over the short to medium-term, amid heavy oversupply. We estimate that for industry margins to start improving, at least 10mn tpa of cement capacity should permanently shut down, which would bring industry capacity utilisation to c70%.