Abstract
Egypt continues to win financial backing for petrochemicals projects against
the odds, but BMI' s latest
Egypt Petrochemicals Report outlines its
reservations over the timing of capacity expansion during a
global
economic downturn and the growing problem of over-capacity in areas where the
local industry
intends to expand.
The completion of full financial
arrangements for TCI Sanmar Chemicals' US$868mn chloralkali
project in
March suggested the Egyptian petrochemicals industry still retained the
confidence of the
financial sector and the industry is continuing to grow.
This came despite the global financial crisis, the
negative impact of
cancellation of the EAgrium project in mid-2008 and the effective abandonment
of
free trade zones. The TCU Sanmar complex is due to add capacities of
400,000 tonnes per annum (tpa) of
VCM and 200,000tpa of PVC. However, this
coincides with growing over-capacity in China that is
undermining PVC
prices. Overall petrochemicals prices had already fallen by over 50%
year-on-year (yo-
y) in Q109, while volumes could fall by a further 20%,
according to the government. At the same time,
the industry is forecasting
a 40% fall in exports in 2009.
Egypt' s US$20bn petrochemical masterplan
could still be derailed by the international financial crisis and
the
global economic downturn. Progress on petrochemical projects depends on
securing investment,
which will be harder to find at a time of
significantly tighter lending standards and higher borrowing
costs. At the
same time, the Egyptian government has made investment unattractive by
imposing a 20%
profit tax on petrochemicals operators, including those
located in the ' free zones' . Industry players are
now calling for the
industry tax breaks to be re-instated and also for the Egyptian government to
lower the
price of feedstock. Projects are already delayed.
BMI
believes ethylene capacity will double to 600,000tpa and PE capacity should
rise from 225,000tpa to
525,000tpa in 2009. We expect PP capacity to rise
to 820,000 by the end of the forecast period. We do
not believe EHC' s
proposed complex near Suez will come online by 2013, even if it does manage
to
secure financing by 2010. Similarly, it is doubtful that GAFI' s bid for
foreign investment in a US$200mn
PVC plant with a capacity of 120,000tpa
and a US$150mn PS plant with a capacity of 200,000 tpa will
materialise in
time for them to come onstream by the end of the forecast period.
In the
Middle Eastern Petrochemicals Business Environment Rankings matrix, Egypt is
ranked eighth
with 47.2 points. The country is 6.1 points behind South
Africa and 0.6 points ahead of Turkey. The score
has considerable downside
risk due to declining scores for external risk and financial markets,
compounding problems arising from government policy in the petrochemicals
industry, specifically the
imposition of tax on companies operating in
free zones. The Egyptian petrochemicals sector represents
about 12% of
total industrial production and is worth around US$7bn, or just 3% of total
GDP. The
business environment is obviously not as strong as Middle Eastern
rivals, such as Saudi Arabia with its
well-developed existing capacity and
the ability to attract foreign investment. However, it ranks above
Algeria
because of higher production and a significantly better national (as opposed
to sector-specific)
business environment. The government will need to
convince petrochemicals producers that their
investments are safe and will
not be jeopardised by arbitrary government intervention, as has been the
case recently in the fertiliser sector. Without greater transparency and
consistency in government policy,
Egypt will find it difficult to meet the
ambitious targets under its petrochemical industry plan.
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