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Cablegate: Prosecutor General Presses Charges Against Cement

VZCZCXYZ0002
RR RUEHWEB

DE RUEHEG #0396 0581556
ZNR UUUUU ZZH
R 271556Z FEB 08
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC 8305
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC 0389

UNCLAS CAIRO 000396

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: PROSECUTOR GENERAL PRESSES CHARGES AGAINST CEMENT
MANUFACTURERS

Sensitive but Unclassified. Not for Internet distribution.

REF: 07 Cairo 3097

1. (U) The trial of 12 cement companies accused of collusion under
Egypt's 2005 Competition Law begins this week, amidst calls for
prosecution of steel manufacturers under the same law. As reported
in reftel, in October 2007 the Egyptian Competition Authority (ECA)
announced that its 14-month investigation of the cement industry
found evidence of collusion among cement companies to control supply
and fix prices from May 2005 to December 2006. Based on ECA's
findings, the Minister of Trade and Industry referred the companies
to the Prosecutor General, who decided in January to prosecute the
case, the first under the Competition Law. The companies could be
fined up to LE 10 million ($1.8 million) each if found guilty. The
ECA is still investigating the steel industry for evidence of
collusion.

2. (SBU) Eric Holard, Managing Director of Sinai Cement, one of the
companies named in the case, told us that collusion to fix prices
makes sense only when demand is low. The period for which the
companies are accused of colluding coincided with the start of
Egypt's construction boom, when demand increased significantly.
Holard believes the case is really intended to demonstrate
government action to control consumer prices. Cement prices affect
Egyptian consumers directly because of the prevalence of
"do-it-yourself" home construction, especially in poor areas. In
developed markets, producers sell cement by the ton, mostly to
construction companies, and deliver it in large mixing trucks. In
Egypt, producers sell cement by the bag to traders licensed by the
Ministry of Trade and Industry. The traders re-sell the bags, often
at a significant mark up, to construction companies and individuals
building their own houses. So traders, not producers, determine the
consumer price of cement, according to Holard.

3. (SBU) Holard warned that the court case would send a negative
signal to potential investors in the cement sector, and would have
no effect at all on prices. In fact, the real cause of rising
prices is lack of capacity in the cement industry. Producers can
not keep up with the demands of the construction boom. The GOE's
recent issuance of 6 licenses for new cement factories should ease
the problem, but not until the factories come online, which could
take 2-3 years. In the meantime, prices will continue to rise as
the construction sector flourishes with abundant foreign
investment.

4. (SBU) Comment: Although the cement case is not likely to lower
prices, it will provide a bellwether of how the legal system will
deal with commercial cases, as increased foreign investment is
likely to result in more commercial cases. If the government's aim
in bringing the case is to control prices, a much more effective way
would be to eliminate licensed traders as middlepersons in the
distribution chain, or at a minimum allow greater competition among
traders. Simplifying the supply chain would not only eliminate the
mark up taken by traders but would put to rest claims, particularly
in the local press, that suppliers withhold supplies in anticipation
of price increases.
RICCIARDONE

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