VZCZCXYZ0014
RR RUEHWEB

DE RUEHEG #0714/01 0991615
ZNR UUUUU ZZH
R 081615Z APR 08
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC 8852
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC 0397

UNCLAS CAIRO 000714 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR NEA/ELA, NEA/RA AND EEB 
USAID FOR ANE/MEA MCCLOUD AND DUNN 
TREASURY FOR MATHIASON AND CONNOLLY 
COMMERCE FOR 4520/ITA/ANESA/OBERG 
 
E.O. 12958:  N/A 
TAGS: ECON EAID EINV EG
SUBJECT:  RISING CONSTRUCTION COSTS PROMPT GOE ACTION 
 
Sensitive but Unclassified.  Not for Internet distribution. 
 
REF: CAIRO 396 
 
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Summary 
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¶1.  (U) In late March the Ministry of Trade and Industry (MOTI) 
announced a six-month ban on cement exports, beginning April 1.  The 
ban is the latest in a series of steps by MOTI to control rising 
construction prices.  Industry analysts predict the ban will not 
bring cement prices down, as demand will remain high as Egypt's 
construction boom continues.  Mona Yassin, head of the Egyptian 
Competition Authority (ECA), said that MOTI's collusion case against 
cement producers is not likely to bring down prices either, as 
penalties under the Competition Law are not high enough to act as a 
deterrent.  Jaime Muguiro of Cemex (protect) told us that the 
collusion case was mostly political, and wouldn't affect 
construction prices at all, as cement accounts for only 8% of 
average construction costs, while steel constitutes 30%.  The GOE 
has taken some measures to control steel rebar prices, including 
referring steel traders to court for violating marketing 
regulations.  ECA will also issue the results of an investigation of 
anti-competitive behavior among steelmakers later this month. 
 
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Ban on Cement Exports 
--------------------- 
 
¶2.  (U) On March 27 MOTI announced a six-month ban on cement exports 
beginning April 1.  This is the latest step by MOTI to control local 
cement prices, which reached LE450 ($81)/ton in March, ex-factory 
(from producer to trader), up 11% from LE400 ($73) in February.  In 
August 2006 MOTI imposed a voluntary domestic price cap of LE290 
($52)/ton ex-factory, reasoning that producers enjoyed subsidized 
energy and should therefore keep local prices low.  Producers turned 
to exporting, however, taking advantage of higher, market-driven 
international prices (regional prices are currently averaging 
$90/ton).  With domestic supply limited due to exporting, and demand 
strong because of a construction boom in Egypt, producers ignored 
the voluntary price cap, prompting MOTI to impose export tariffs of 
LE60 ($11)/ton in February 2007.  In August 2007, MOTI increased the 
tariff to LE85 ($15)/ton, announced plans to remove energy subsidies 
by 2010, and issued 9 new cement production licenses.  Despite these 
measures, local prices continued to rise, prompting MOTI to refer 
cement producers for prosecution in October 2007, after ECA found 
evidence of collusion among producers to keep prices high. 
 
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Prices Expected to Remain High 
------------------------------ 
 
¶3.  (SBU) Analysts predict the export ban, coupled with new 
production facilities coming on line this summer, will increase 
domestic supply by about 3 million tons.  But strong domestic demand 
fueled by the continuing construction boom will keep prices steady, 
or could even push them higher, though not as rapidly as in the last 
few months.  Mona Yassin, head of ECA, told us that even the 
Prosecutor General's decision to press charges against the cement 
companies named in the collusion case is unlikely to have an effect 
on prices.  The Competition Law allows for a maximum penalty of LE 
10 million ($1.8 million) if companies are found in violation of the 
law.  Some of the companies make more than this in profit in one 
month, according to Yassin, who told us she would like to see the 
law amended to make fines dependent on a company's profits.  A 
verdict in the collusion case is expected by May, Yassin said. 
 
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Competition Case Political, Not Economic 
---------------------------------------- 
 
¶4.  (SBU) Jaime Muguiro, President of Assiut Cement, a subsidiary of 
Mexico's Cemex (protect), said he understood the GOE's efforts to 
keep construction prices low, but felt the collusion case was more 
political than economic.  MOTI wants to make an example of the 
cement industry, which is now dominated by multinational 
corporations such as Cemex and Italy's Italocimente.  The GOE wants 
the public to believe it is protecting consumers from big business 
interests.  Construction costs are especially important in Egypt, as 
families from all classes construct houses themselves, buying 
building materials as their cash flow permits.  A steep rise in 
construction material prices from one month to the next has a 
pronounced effect on consumers' ability to continue or complete 
construction projects. 
¶5.  (SBU) Muguiro claimed the Prosecutor General's office found no 
evidence of collusion among cement companies, but MOTI pressed for 
prosecution of the case.  The verdict is a foregone conclusion, 
Muguiro believes, and will send a bad signal to potential investors. 
 The irony is that cement constitutes only 8% of average 
construction costs.  The real drivers of inflation in the 
construction sector, according to Muguiro, are rising land and steel 
prices.  Land sales constitute direct revenue for the GOE, so land 
prices are likely to continue rising as long as demand remains high. 
 Steel, on the other hand, is a sacred cow for the GOE, as prominent 
NDP member Ahmed Ezz owns Egypt's largest steelmaker, Ezz Steel. 
The GOE will not take aggressive measures to control steel prices, 
Muguiro believes, even though steel constitutes around 30% of 
average construction costs. 
 
-------------------------------- 
Measures to Control Steel Prices 
-------------------------------- 
 
¶6.  (U) Muguiro's prediction of leniency for the steel sector 
notwithstanding, the GOE has taken some measures to control prices 
of rebar, the steel most often used in construction.  In early March 
MOTI inspectors discovered 11 steel traders (middlemen who buy steel 
from producers and sell to construction firms and retailers) 
withholding supplies of rebar from the market in anticipation of 
price increases.  MOTI referred the traders to the Prosecutor 
General for violation of MOTI marketing regulations for construction 
material.  Steel traders told the press the case would not dampen 
prices, as many steelmakers, among them Ezz Steel, have reduced 
production by up to 25% to keep prices high.  MOTI also issued a 
decree in late March prohibiting steelmakers from reducing 
production levels or suspending sales without MOTI's approval.  The 
decree authorized 1-5 year prison terms and fines ranging from 
LE300-1,000 ($54-181) for executives of companies found in violation 
of the decree.  Despite these measures, rebar prices jumped 11% to 
LE6,000 ($1,090)/ton in March, up 11% from LE5,400 ($981)/ton in 
February. 
 
¶7.  (SBU) ECA's Yassin told us that the results of an investigation 
into anti-competitive behavior of steelmakers, including Ezz Steel, 
will be released this month.  She noted that the steel investigation 
took longer than the investigation of the cement sector because MOTI 
wanted "strong evidence" against any steelmakers (read:  Ezz Steel) 
found in violation of the Competition Law. 
 
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Comment 
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¶8.  (SBU) An ECA finding of collusion among steelmakers is not 
likely to have much impact on steel prices, just as the collusion 
case against cement producers did not bring down cement prices.  But 
a case against steelmakers, unlike cement producers, would resonate 
among Egyptians, as it would demonstrate willingness to challenge 
NDP insiders such as Ezz.  The message both the cement and steel 
cases send to investors, however, could be more mixed, potentially 
causing some to pause as they consider expanding or entering Egypt's 
steel and cement sectors. 
RICCIARDONE