VZCZCXYZ0009
RR RUEHWEB

DE RUEHEG #0673/01 0711358
ZNR UUUUU ZZH
R 121358Z MAR 07
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC 3954
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC 0261

UNCLAS CAIRO 000673 
 
SIPDIS 
 
STATE FOR NEA/ELA, NEA/RA, AND EB/IDF 
USAID FOR ANE/MEA MCCLOUD 
USTR FOR SAUMS 
TREASURY FOR NUGENT/HIRSON 
COMMERCE FOR 4520/ITA/ANESA/OBERG 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD EINV ENRG EG
SUBJECT: GOE IMPOSES EXPORT FEES ON STEEL AND CEMENT 
 
REF:  06 Cairo 6636 
 
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Summary 
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¶1. (SBU) Minister of Trade and Industry Rachid recently imposed 
export fees on cement and steel, carrying out earlier threats of 
harsh measures if industry did not observe voluntary domestic price 
caps.  Rachid also told the press that the GOE will eliminate energy 
subsidies for industry within five years.  The export fees had the 
intended effect, bringing down domestic prices of cement and steel 
by 1.5% and 11% respectively.  Industry leaders were angered, 
however, and Nassef Sawiris resigned as Chairman of the Construction 
Materials Export Council, claiming Rachid's decision was made 
without consulting industry.  The Egyptian Competition Authority is 
investigating the cement and steel industries for anti-competitive 
practices, and expects preliminary results in the next few months. 
Rachid's actions are a direct challenge to the interests of some NDP 
insiders, indicating the seriousness of the GOE economic reforms' 
efforts to level the playing field for the private sector. 
 
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Ministry of Trade Imposes Export Fees 
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¶2.  (U) In an effort to control renewed inflation in the 
construction sector, Minister of Trade and Industry Rashid recently 
acted on his threat to impose export fees on construction materials 
if producers did not adhere to voluntary domestic price caps 
(reftel).  Despite some initial success controlling cement prices 
through the voluntary cap of LE330($57)/ton imposed in August 2006, 
domestic prices of cement climbed from LE300($52)/ton to 
LE350($60)/ton over a two-week span in late February.  Steel prices 
also rose from an average of LE3,150($547)/ton in January to 
LE3,650($634)/ton by the end of February.  The domestic price 
increases - fueled in part by Egypt's current construction boom - 
led Rachid to impose fees of LE65($11)/ton on cement and 
LE160($27)/ton on steel exports on February 27.  Egyptian producers 
export 30-40% of the country's total cement and steel production to 
take advantage of higher international prices (e.g., the current 
world steel price is approximately $600/ton).  Producers normally 
keep their domestic prices lower than world averages in recognition 
of the benefits the GOE provides through energy subsidies and 
maintaining labor costs low. 
 
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Subsidies Won't Last Forever 
---------------------------- 
 
¶3.  (U) In statements to the press, Rachid made it clear that the 
export fees were intended in large part to recoup the cost of the 
subsidized energy provided to industry.  He acknowledged that prices 
of raw material inputs for cement and steel had increased in recent 
months, but pointed out that manufacturers were still obtaining 
energy at prices well below world market levels, implying that it 
was mainly greed driving up domestic prices.  Rachid further noted - 
or perhaps warned - that potential investors looking at the Egyptian 
cement and steel industries should rethink their business plans. 
The GOE intends to liberalize energy prices for industry over the 
next five years, allowing domestic energy prices to fall in line 
with world market prices, according to Rachid. 
 
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Industry Reaction 
----------------- 
 
¶4.  (U) Reaction to the export fees was swift.  By March 7 domestic 
prices of cement fell to LE345($60)/ton and steel prices dropped to 
LE3,250($565)/ton.  Industry leaders were not pleased with Rachid's 
actions, however, and Nassef Sawiris, Chairman of Orascom 
Construction Industries and brother of Orascom Telecoms Chairman 
Naguib Sawiris, resigned as Chairman of the Construction Materials 
Exports Council.  In press statements, Sawiris noted that Egyptian 
cement and steel manufacturers were charged more by the GOE for 
natural gas than foreign companies operating in Egypt, including 
Spain's Union Fenosa and EMG, an Egyptian/Israeli joint venture that 
provides gas to Israel.  Sawiris claimed that the Exports Council 
had suggested a gradual price increase for natural gas, but that 
Rachid had rejected the suggestion and imposed export fees without 
consulting the Council.  Hassan Rateb, President of the Arab Cement 
Association, replaced Sawiris as Chairman of the Exports Council. 
 
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Anti-Competitive Practices? 
 
--------------------------- 
 
¶5.  (SBU) After imposition of the voluntary price caps last August, 
the Ministry of Trade and Industry also asked the newly-formed 
Egyptian Competition Authority (ECA) to investigate the cement and 
steel sector for anti-competitive practices.  ECA head Mona Yassin 
told econoff the investigation is progressing slowly, due to 
difficulties obtaining accurate market information for both the 
cement and steel industries.  Preliminary results could be ready for 
the steel industry by June, and for the cement industry by August, 
almost a year after the investigation began.  Yassin indicated that 
any finding of anti-competitive practices by the ECA will produce 
non-binding recommendations for the relevant industries.  The GOE 
will have the option, however, to bring a court case against 
companies that don't comply with the recommendation. 
 
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Comment 
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¶6.  (SBU) Rachid's statement regarding liberalization of energy 
prices is the first indication the GOE has given of its timeline for 
eliminating the costly fuel subsidy for industry.  It is also 
indicative of changes in the unspoken pricing agreement between 
industry and the GOE.  In the case of steel, for example, Egypt's 
industry is dominated by Ezz Steel, whose chairman Ahmed Ezz holds 
the position of NDP Assistant Secretary General, and is a close 
associate of Gamal Mubarak.  As the leader in the field, Ezz could 
have kept domestic steel prices stable.  His willingness to increase 
his company's profit margin, however, was met by an equal 
willingness on Rachid's part to recoup GOE expenditures from which 
Ezz directly benefits.  Rachid's actions indicate the GOE is making 
serious efforts to rationalize the economy and level the playing 
field for the private sector, even if it means going against the 
interests of powerful figures in the ruling elite. 
RICCIARDONE