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Cablegate: Rising Construction Costs Prompt Goe Action

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.

---------------------
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.

------------------------------
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.

----------------------------------------
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
-------

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

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