Why is the steel industry in Egypt declining?

Egypt's steel industry has generally been lowering prices as a result of an oversupply in inventories and lower raw material prices just as a new steel factory comes online.

al-monitor An engineer watches during the pouring of molten iron into a container at a factory belonging to Ezz Steel, Egypt's largest steel producer, at an industrial complex in Sadat City, Egypt, April 17, 2013. Photo by REUTERS/Amr Abdallah Dalsh.

مار 4, 2020

CAIRO — The prices of reinforcing bar, also known as rebar, have been generally falling on the Egyptian market since the last quarter of 2019, hitting a low point in February before moving up again. 

The largest rebar companies in Egypt had been repeatedly reducing their prices, which dropped to as low as 9,300 pounds ($598) in February, said Mohammad Hanafi, director general of the Chamber of Metallurgical Industries of the Federation of Egypt Industries. 

“The decline in steel prices in the market is due to the low prices of raw materials globally — pallet, iron ore and scrap — in addition to the reduced price of the dollar against the pound,” Hanafi told Al-Monitor. Another factor has been an oversupply of steel. Also hurting Egypt's steel industry is that it pays above-average energy prices while trying to cope with other market forces.

The Egyptian pound has been trading strong against the dollar for the first time since the liberalization of the exchange rate at the end of 2016 within the framework of an economic reform plan supported by the International Monetary Fund. At that time, the exchange rate for the Egyptian currency went from roughly 9 pounds to the dollar to roughly 18.

This year, the pound has strengthened. On March 3, the pound was trading at around 15.65 to the dollar; it is expected to strengthen to 15 pounds to the dollar by the end of 2020. 

In October 2016, a month before the Egyptian pound was floated against the US dollar, the price of a ton of steel was about 6,300 pounds ($715 at the exchange rate then). 

In the first quarter of 2018, the price of rebar stood at 13,000 pounds ($839) per ton in the wake of the high prices of raw materials resulting from the trade war between the United States and China and the US decision to impose 25% tariffs on all imports of steel products, Hanafi said. 

But by the beginning of this year, the price of a ton of rebar had fallen to 10,450 pounds ($674), before its even further decline in February.

The price of steel in Egypt is linked to the prices of raw materials on international exchanges. And in the second week of February, scrap prices had fallen to $260 per ton, compared with $310 at the end of 2019, while the international price of iron ore had dropped to around $81 a ton, down from around $93 in December 2019.

The dwindling prices were the result of the decrease in demand for steel by manufacturers in China against the background of the coronavirus outbreak. 

China is a major source of iron ore and steel precursor products for Egypt. From January to May 2019, the iron ore import bill from China reached nearly $270 million, compared with $168 million during the same period of 2018. 

Hanafi said some Egyptian companies reduced their prices in a bid to increase their sales, given the increase in supply and the accumulation in inventories. Other companies offered incentives to sales agents to encourage them to market larger quantities at prices that were lower than the declared ones.

However, a number of major steel companies increased their prices as of Feb. 23, with prices ranging between 9,900 pounds ($639) and 10,250 pounds ($661) per ton.

Steel traders who spoke to Al-Monitor said companies linked their move to the increase in global prices of raw materials since mid-February. For example, in the third week of February, global scrap prices rose to $275 per ton, while the global price of iron ore rose to over $90 a ton.

Ahmed Al Zaini, head of the General Division of Building Materials at the Federation of Chambers of Commerce, was surprised that prices of steel had gone up again and accused steel companies of trying to manipulate market prices. In a Feb. 23 press statement, Zaini warned against increasing prices, saying such a move could backfire since there is an oversupply in the market. He expected the companies to rescind their decisions to raise prices because of low sales.

During the period from January through November 2019, Egypt produced more than 6.6 million tons of rebar, which is a 10.5% decline compared with the same period of 2018, which had a production of more than 7.4 million tons.

Egyptian steel factories consume 7.9 million tons of iron ore pellets per year, 4.4 million tons of which are provided locally and 3.5 million are imported mainly from China, Turkey, and Germany, according to the Central Agency for Public Mobilization and Statistics.

In a bid to protect the iron industry, in October the Ministry of Trade and Industry imposed progressive duties on imports of some iron and steel products, with 25% duties on rebar and 16% on iron ore that are to be lifted by April 2022.

On Oct. 11, the ministry said in a statement that the decision came as a result “of investigation showing a significant increase in imports, which caused great damage to the local industry.”

The iron market in Egypt suffers from stagnation, with surplus production ranging between 600,000 to 1 million tons annually. Egypt's iron and steel exports fell by 34%, recording $635 million in sales from January to November 2019, compared with $968 million in the same period of 2018.

Still, Egypt's iron production is expected to increase in 2020 after the opening of a new factory in November 2019 affiliated with Suez Steel; the state owns 82% of the company's shares. The factory has a production capacity of 1.4 million tons annually.

Zaini praised the state’s intervention in the iron industry to prevent what he called monopolistic practices.

He told Al-Monitor that the state's national projects and infrastructure projects, which consume at least 30% of the country’s iron production, saved iron factories from closure.

Zaini called on the government to reduce the prices of natural gas for steel factories. He told Al-Monitor that because the government sells natural gas to steel companies at high prices, the cost of production is high, and thus these local companies have difficulty competing with imports from foreign companies that have lower energy costs.

The government sells gas to iron and steel factories at a price of $5.50 per million British thermal units. But the price of natural gas in Egypt is twice as high as global prices (on average) that dropped to less than $2 per million British thermal units at the end of January. In 2019, the global price of gas was around $2.57 per million BTU.

The Egyptian government issued a decision in October to form a committee to review the prices of natural gas in Egypt every six months and take into account global prices.

Zaini said he believes that the overall decline in iron prices, while it may ensure that real estate prices do not rise, won't be enough of a factor to reduce the prices of housing units.

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