Flash Report /

Egypt Industrials: Gas prices reduced; cost savings do not warrant shift in profitability

    Mark Adeeb
    Mai Ayoub
    Al Ahly Pharos Securities Brokerage
    3 October 2019

    Government reduces natural gas prices against our expectations

    The government will reduce natural gas prices for steel players to US$5.5/mmbtu. The decision will be reviewed every six months in light of local and global developments. The move comes completely against our expectations, as we previously stated that protectionism measures such as import tariffs on finished steel and semi-finished products are 1) more effective, 2) less costly for the government, and 3) equally protects all players.

    Winners: Steel and tiles

    The main beneficiary is ESRS. The US$1.5/mmbtu reduction will result in savings of roughly US$72mn/annum, which translates into EGP1,173mn. Nevertheless, we strongly believe that the government still needs to impose a hefty tariff on billets and finished steel imports north of 42% to maintain current prices and as high as 53% to improve margins, taking into account both the natural gas price reduction and the recent cut in local steel prices. If we took, as an example, the latest EGP600/ton steel price reduction, this will result in revenue reduction by roughly EGP2,400mn, which is higher than the cost savings we noted above from gas price reduction. That is exactly why we believe that the government should impose a flexible tariff pricing scheme that follows global prices.

    While the reduction will result in cost savings for tiles, the impact on the industry might be diluted by oversupply issues, which could possibly result in selling price reductions across the board. 

    No impact on cement

    The natural gas reduction will have no impact on cement since the blended energy cost ranges between US$3.5-5.0/mmbtu, depending on the energy mix. The only company that could benefit from the reduction is SVCE. However, the company will continue generating negative margins.