Boston, MA -- (SBWIRE) -- 06/02/2012 -- The Egyptian steel industry is faced with major challenges over 2012 with political instability, a removal of energy subsidies, a poorer export environment and an expected collapse in construction activity, according to BMI's latest Egypt Metals Report.
The post-Mubarak government is seeking to bring down the fiscal deficit by retroactively charging steelmakers for an increase in energy prices from January 1 2012. It is applying a 33% hike in electricity prices. The move has been strongly opposed by the steel industry, which will increase production costs by EGP50-70/tonne. In response, steelmakers have raised prices by EGP100/tonne to an average of EGP4,560/tonne, although the cost increases are not thought to have significantly affected profitability.
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Egypt's near-term growth outlook remains weak, with real GDP forecast to expand by only 2.1% in FY2011/12. The political uncertainties will undermine fixed investment and the global economic downturn will weigh on exports, but household and government spending are expected to outperform, helping to sustain domestic petrochemicals consumption. However, we see little prospects for a swift economic recovery in Egypt heading into 2012 and there is very little to suggest that growth will be able to return to the 5-7% area witnessed in the years leading up to the crisis. Much of the growth will come from an improvement in the country's export position as well as household spending. As such, growth in domestic metals consumption will be constrained, although we do not believe there is a risk of contraction.
BMI estimates that finished steel consumption grew 1% to 8.7mn tonnes in 2011, but anticipates 3% growth to just under 9mn tonnes in 2012 as the market stabilises. The key risk factor will be the construction sector, with a 6% decline in activity likely to hit rebar. On the upside, flat steel will be supported by robust household consumption. While the devaluation of the Egyptian pound meant that imports fell drastically, the resumption of port operations meant that exports were quickly returning to normal, helping to restore sales.
The country has been operating well under full capacity, with a utilisation rate of just 78% of its 8.8mn tpa (tonnes per annum) potential. Even without further capacity expansion, Egypt has the potential to grow over 30% from 2010 levels using currently operating plants. Despite the effects of political instability in the short term, BMI still expects annual crude output to reach 11.09mn tonnes by 2016. Although this represents a 72% increase over 2011 levels, it will be just enough to keep up with domestic requirements, which is set to grow by 27% to around 11.09mn tonnes in 2016.
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