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Egypt cements quarterly update | Demand down 1.3% y-o-y in 4Q20; Profitability continues to deteriorate

4Q20 demand down 1.3% y-o-y, up 24.6% q-o-q, from low base in 3Q20. Domestic cement sales came in at 12.8mn tonnes in 4Q20. The q-o-q jump reflects the low base of 3Q20, on the impact of the government’s decision, on 25 March, to halt construction activity and building permit issuances for six months, in order to counter building code violations, in addition to the impact of COVID-19. This puts 2020 domestic cement sales at 46mn tonnes, down 4.9% y-o-y, and 9.3% below our 50.7mn tonne estimate.

Cement capacity utilisation registers 63.8% in 4Q20; Inventory estimated at 8.4mn tonnes, 18.9% of demand. This continues to mirror the industry’s major supply/demand imbalance and compares to 63% in 4Q19 and 50.5% in 3Q20. The industry reduced clinker inventory in 4Q20 by 1mn tonnes (10.4%), leaving total accumulated inventory at 8.4mn tonnes (flattish y-o-y), 18.9% of demand, on our numbers. Total exports totaled 0.62mn tonnes (+82.6% y-o-y, +66.7% q-o-q), at negligible export margins, due to the strong regional competition.

Retail prices flattish q-o-q; Industry margins continue to deteriorate. Egypt’s retail cement prices were flattish q-o-q in 4Q20, at EGP735/t. However, average cash costs for cost-efficient producers increased c8% q-o-q, reflecting the rise in global coal prices. This put more pressure on industry margins, with cost-efficient cement players generating an EBITDA margin of 2-10% at current levels, while inefficient players should generate -8% to 5%, on our figures.

Production rationalisation remains key industry upside. Talks about government’s likely intervention to balance supply/demand forces remain in circulation, as loss-making players continue to lobby for support from the government, with no seeming willingness to exit the industry. We view the government imposing a production quota, based on demand levels, as the main upside risk to the negative industry backdrop. However, such talks have been in the market since 2018, with no evidence of eventual materialisation.