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Egypt cements quarterly update | Demand up c7% y-o-y in 1Q20; Retail prices plummet following energy prices

A healthy kick-off for the year, but unlikely to sustain, in our view. Egypt’s 1Q20 cement demand came in at 13mn tonnes, up c7% y-o-y (flattish q-o-q), mainly driven by an uptick in small and medium income housing construction (the main driver of cement demand in Egypt), in our view. The increase in demand in 1Q20 does not necessarily imply demand recovery, we believe, as demand slowdown has yet to be seen starting 2Q20, amid COVID-19 related restrictions. Moreover, the government decided on 25 May to impose a six-month ban on construction permits, in response to increased building code violations, and halt construction of private houses until owners prove the buildings meet regulatory requirements. While building permit data is limited, anecdotal observations suggest that such restrictions could lead to up to 20% demand drop from current levels in the short run.

Cement capacity utilisation at 63.5%; Inventory levels at 8.1mn tonnes. This is in contrast to 63.9% cement capacity utilisation in 1Q19 and 63% in 4Q19. Meanwhile, clinker inventory recorded 8.1mn tonnes in 1Q20, on our estimate, reflecting c18% of demand at current levels. Total exports were 0.23mn tonnes in 1Q20 (-38% y-o-y, -32% q-o-q), at feeble export margins on unsupportive regional markets.

Retail cement prices down c10% q-o-q following global coal prices, keeping margins at bay. Egypt’s retail cement prices dropped c3% q-o-q in 1Q20 to EGP790/t, falling by a further 7.6% in 2Q20 to the spot EGP730/t, offsetting an equivalent drop in global coal prices, keeping industry margins under pressure. We calculate cost-efficient cement players to be generating an EBITDA margin of 10-13% at the current levels, while inefficient players should generate an EBITDA margin of -5-5%.

Arabian Cement Company (ACC) [Underweight | TP EGP3.20] carries downside if demand weakens further. ACC trades on a 2020e EV/EBITDA of 5.8x, in line with our valuation. However, we assume 92.5% capacity utilisation in 2020e, meaning lower-than-expected demand could be a major downside risk.