GOE IMPOSES EXPORT FEES ON STEEL AND CEMENT

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 -------------- Summary -------------- ¶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. -------------- Ministry of Trade Imposes Export Fees -------------- ¶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. -------------- 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. -------------- 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. -------------- 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. -------------- Comment -------------- ¶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