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Egypt cements quarterly update | Demand down 12% in 2Q20; Cement operating rate at all-time low

Demand plummets as building permits halt takes its toll. Domestic cement sales fell by 11.7% y-o-y, which we mainly attribute to falling small and medium income construction activity. This, in our view, reflects the impact of the recent decision to halt construction activity and building permit issuances for six months to counter building code violations, and the impact of COVID-19 starting to reflect negatively on demand. Anecdotal evidence suggests such heavy demand pressures should continue in 2H20, adding further strains to the heavily oversupplied cement market.

Cement capacity utilisation plunges to 48.5%, all-time low; Inventory levels at 8.5mn tonnes. This comes due to weak demand and compares to 55.7% cement capacity utilisation in 2Q19 and 63.5% in 1Q20. Meanwhile, clinker inventory recorded 8.5mn tonnes in 2Q20, on our estimate, reflecting c24% of demand at current levels. Total exports were 0.24mn tonnes in 1Q20 (-37.3% y-o-y, +1.7% q-o-q), at negligible export margins on unsupportive regional markets.

Retail prices continue to weaken amid falling demand. Egypt’s retail cement prices fell 1% q-o-q in 2Q20 to EGP782/t, falling by a further 4.5% in 3Q20 to the spot EGP747/t, reflecting the weak demand dynamics, keeping industry margins under pressure. We calculate cost-efficient cement players to be generating an EBITDA margin of 10-13% at current levels, while inefficient players should generate -5-5%.

Arabian Cement Company (ACC) [Underweight | TP EGP3.20]’s downsides outweigh its upsides. ACC trades on a 2020e EV/EBITDA of 5.8x, slightly above our valuation. However, we already assume 92.5% capacity utilisation in 2020e and beyond, almost double the industry average levels, meaning lower-than-expected demand could be a major downside risk. Possible natural gas price reductions could push the industry and ACC to return to natural gas, but are unlikely to raise the industry’s profitability, as we expect cement price to fall following energy prices.