Abstract
In H109, Egyptian crude steel output fell by 20% year-on-year (y-o-y) to 2.65mn tonnes. In Q2 the
decline was 13% y-o-y, compared with 26% in Q1. Output in Q2 was also up 7.4% over Q1. However,
production peaked in April and fell in the two subsequent months, indicating that any recovery is tenuous
and uncertain. Steel output has been dragged down by poor performance in flat products, which are more
exposed to export markets than longs. Long products have benefited from continued growth in the
domestic construction industry. Overall, BMI believes that the steel industry is in a trough and will only
experience a recovery when external demand shows strong growth. Our infrastructure team has radically
revised the forecast for construction sector growth from 4.0% to 0.1%, warning that despite the Mubarak
administration's EGP15bn stimulus package there could be a sizeable time lag between the allocation of
money to an infrastructure project and the commencement of work on it. Additionally, rising cement
prices are increasing the cost of construction. This poses a threat to longs, which had enjoyed relatively
strong sales.
BMI forecasts a 10% decline in crude steel output to 5.58mn tonnes in 2009, followed by 6.6% growth in
2010 to 5.95mn tonnes. However, a recovery in flats from 2011 should assist in the Egyptian steel
industry's recovery over the rest of the forecast period, with crude output reaching 9.9mn tonnes in 2013.
Although this represents a 77% increase over 2009 estimates, it will still not be enough to cover domestic
demand which is set to grow by 69% to 11.73mn tonnes.
Growth in demand may not necessarily lead to concurrent growth in output. Domestic producers are
struggling to keep up with the competition from cheaper imports and their market share is set to shrink in
2009. BMI expects the demand for rebar to drop off further in H209 as construction activity, fuelled by
government incentives, moderates. Consequently, BMI forecasts that hot rolled product output will fall
7.1% to 6.14mn tonnes, with growth in consumption partly served by imports. However, over the rest of
the forecast period, imports will benefit from the failure of production to match the pace of consumption.
Despite uncertainties in the Egyptian steel industries, the country's leading steelmaker Ezz Steel
remained profitable in Q109 and outperformed many of its peers, despite the impact of low steel prices
and export weaknesses. Healthy domestic demand helped sustain earnings in the quarter. Its longs
production is highly oriented towards the domestic market, while its flats production is more exposed to
global markets, thereby influencing the company's sales. Consolidated net sales were EGP3.4bn, down
32% y-o-y compared with EGP5.0bn during Q108, representing a 33% decline as a result of lower sales
and prices, particularly in the flat steel market, and the shutdown at Ezz Flat Steel. Long steel sales
volume rose 8% y-o-y to 84,700 tonnes during Q1, while flat steel volumes fell 58% y-o-y to 20,900
tonnes as a result of the EFS shutdown. Consequently, the proportion of longs to total sales rose from
60% in Q108 to 81% in Q109. However, exports accounted for less than 1% of total longs sales due to the
strength of the domestic market against external markets.
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