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Cablegate: Egyptian Court Blames Firms for Cement Inflation

VZCZCXYZ0000
RR RUEHWEB

DE RUEHEG #1932/01 2451548
ZNR UUUUU ZZH
R 011548Z SEP 08
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC 0365
INFO RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS CAIRO 001932

SENSITIVE, SIPDIS

STATE FOR NEA/ELA, NEA/RA AND EEB
USAID FOR ANE/MEA MCCLOUD AND DUNN
TREASURY FOR BAUKAL AND MORAVEC
COMMERCE FOR 4520/ITA/ANESA

E.O. 12958: N/A
TAGS: ECON EAID EINV PGOV EG
SUBJECT: EGYPTIAN COURT BLAMES FIRMS FOR CEMENT INFLATION

REF: A) CAIRO 396
B) CAIRO 1352

Sensitive but Unclassified, not for Internet Distribution

1. (SBU) SUMMARY: A Cairo court fined 20 cement
executives including Amcham President Omar Mohanna USD
$1.9 million each for collusion to fix cement prices,
blaming the companies for contributing to soaring
inflation and in particular the rising cost of much-
needed housing. While Trade Minister Rachid Rachid
claimed the convictions would encourage more competition
and transparency in the market, business leaders said it
was another worrying indication of the government making
the private sector a scapegoat for its political woes.
END SUMMARY.

2. (U) A Cairo court fined 20 cement executives 10
million Egyptian pounds ($1.9 million) each, personally,
and their companies another 10 million pounds ($1.9
million) each on August 25 for conspiring to increase
cement prices. The Ministry of Trade and Industry had
accused the companies and executives of anti-competitive
practices in October 2007 after a 14-month investigation
by the ministry's Egyptian Competition Authority (ECA).
Among the convicted companies are Suez Cement, Egypt's
largest cement producer, as well as Misr Beni Suef
Cement, Misr Qena Cement, and Tora Cement.

3. (SBU) The Sinai Cement managing director told us
previously that soaring demand is responsible for the
increased prices, arguing that collusion to fix prices
would only make sense when demand is low (ref A). He
noted that the period in which the companies are accused
of colluding coincided with the start of Egypt's
construction boom.

4. (SBU) Omar Mohanna, president of the American Chamber
of Commerce in Egypt and chairman of Suez Cement, told
the press that the executives and companies would be
exonerated on appeal, now scheduled to be heard Nov. 4.
Privately, he had shrugged off the charges as politically
motivated and a cost of doing business in Egypt, and
indeed the fines pale in comparison to recent profits.
Suez Cement reported a 29-percent increase in profits in
the first half of 2008 to LE 768.99 million ($145
million).

5. (U) The trial is the first under Egypt's three-year-
old anti-monopoly law designed to bring Egyptian
competition policy into line with international practice,
efforts supported by USAID. The GOE amended the law in
June 2008 to increase maximum fines 10-fold to LE 100
million ($19 million).

6. (SBU) Minister of Trade and Industry Rachid Mohamed
Rachid said in a press statement that the ruling would
not only protect customers but also enhance the
investment climate by increasing competition. In
response to public criticism of rising cement prices,
Rachid levied an export duty on cement in February 2007
and a ban on cement exports altogether in March 2008.
Prices have since fallen to LE 485 per ton from their
peak of LE 550 a ton earlier this year. (Comment: Many
Egyptians track the politically sensitive price of
cement. Just as subsidized bread prices are a barometer
of the government's commitment to the poor, cement prices
indicate to average Egyptians their ability to get ahead
by building, or expanding, homes for themselves and their
extended family. End comment.)

7. (U) Meanwhile, steel prices have nearly doubled since
last year, and the competition authority is investigating
Egypt's steel sector, dominated by senior ruling National
Democratic Party official Ahmed Ezz. According to press
accounts, the results of the steel investigation will be
announced in September. Higher steel as well as cement
prices have contributed to an inflation rate that hit 22
percent year-on-year in July.

8. (SBU) An EFG Hermes analyst told us that in the case
of steel, rising costs for raw materials -- rather than
illegal price collusion -- appear to be responsible for
rising prices. The explanation for rising cement prices
is less clear, however. Analysts think the cement price
increase was primarily the result of increased demand and
hoarding by wholesalers. In addition, in an oligopoly
like the cement industry, the small number of producers
that dominate the market are often able to follow a
similar pricing strategy. Some speculate that cement
producers agreed among themselves to export surplus
production and not compete for domestic market share.
Regardless, it is clear that cement profits increased as
prices rose while costs remained low.

9. (SBU) Comment: Egypt has a tradition of collusion
among the cozy class of industrialists and government
officials. Thus, we welcomed the passage of the anti-
monopoly law and the creation of the Competition
Authority as an important part of Egypt's development
from a planned economy to one which supports market
practices and private sector development, but which
regulates private sector responsibly. As a first test of
the new law, the Competition Authority has taken on some
of Egypt's wealthiest and most powerful industrialists.
Proving price fixing and monopolistic behavior is
difficult in any country, and as revealed by this first
test, the capacity of the authority is unclear. The
argument that the prices are rising as a result of
increasing demand and regulatory burdens that limit
supply, rather than anti-competitive business practices,
is compelling, although without seeing the evidence which
has been presented, we do not know the actual degree of
price fixing taking place. The ECA began and finished
its analysis before the current round of high inflation
hit, but as the government comes under fire for not
adequately controlling prices (as was routinely expected
in years gone by), it is possible that this court
decision may have been rendered for political reasons to
satisfy the frustrated masses. Rather than encourage
investment, this case -- like the recent troubles of
Canadian chemical company Agrium (ref B) -- may
discourage the investment that Egypt needs to create jobs
and continue its recent trend of solid economic growth.

SCOBEY

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