CAIRO: The recently-established Egyptian Competition Authority will begin investigating whether cement and steel producers have violated anti-trust laws.
The authority announced its intention to launch an investigation this week in response to a referral from Minister of Trade and Industry Rachid Mohamed Rachid, but the latest actions by the government have not come soon enough for many observers and market participants.
I think this decision was necessary a long time ago, says opposition member of parliament Mustafa Bakry. Many groups have complained about the increase in prices.
The domestic steel market has been dominated by El-Ezz Steel Rebars, owned by businessman and politician Ahmed Ezz.
Ezz is believed to be a close associate of Gamal Mubarak, head of the ruling National Democratic Party s (NDP) influential Policy Secretariat and son of President Hosni Mubarak.
There is definitely a fundamental power in the market represented by Ahmed Ezz causing market prices to be high, says Bakry.
Ezz himself is a senior member of the NDP. He was appointed as the party s secretary for organizational affairs earlier this year and he chairs the planning and budget committee of the People s Assembly.
Some officials, including Minister of Investment Mahmoud Mohieddin, believe that Ezz s dominance of the steel market does not constitute a monopoly because local buyers have unrestricted access to the international market.
However, the international market may not be easily accessible despite the absence of any legal restrictions.
On the one hand, the fact is that someone has major production facilities. On the other, there are no barriers on imports … Nevertheless logistical barriers to importation when demand-supply gaps develop could in effect hinder importation in practice, says Yasser Ibrahim, an analyst at HC Brokerage.
In addition to logistical obstacles, the high startup costs of steel production make it difficult for new players to enter the market.
It’s the nature of the industry that it requires substantial initial investment. People aren t willing to invest and this may be considered a barrier. There is also slight overcapacity [and] this discourages people from investing, says Ibrahim.
The situation with cement is different. Rather than being dominated by a single producer, the cement market is controlled by 11 companies that coordinate production.
In 2003, the nation s main cement providers concluded an agreement to divide the market relative to each company s production capacity and investment costs and in accordance with the geographical location of operations. The agreement also set a minimum and maximum selling price.
This effectively created a cartel, but whether the business practices of cement producers should be considered anti-competitive under the law is subject to debate.
Our view is that the law is subject to varying interpretations. We can consider cement companies monopolistic because they are operating in a cartel and controlling local selling prices … however, on the other hand, cement imports are not banned and hence cement can be subject to the same treatment as El-Ezz Steel Rebars, says HC Brokerage in its latest cement sector report.
The cement sector was privatized in 1999, when a number of foreign investors, primarily from Italy and Palestine, bought major stakes in former state-owned companies.
Bakry says that the privatization process resulted in higher cement prices in contradiction to its objective, and that the prices of cement and steel have reached a level that jeopardizes the Egyptian economy.
The private sector has increased prices in a manner that has threatened the construction and real estate market in Egypt, says Bakry.
Domestic steel prices have increased almost three-fold since 2003, but this increase is in line with global trends resulting in comparable domestic and foreign prices.
Domestic prices are linked to the international market. There is a minor discrepancy between international and domestic prices but it is not substantial, because if it were buyers would instead import from the international market, says Ibrahim.
Meanwhile, the price of cement in Egypt is nearly 30 percent below the international market.
However, notwithstanding the comparisons with international prices, the cost of production for both steel and cement are much lower in Egypt than elsewhere.
Our cost of labor is nearly one-thirtieth that of Europe … and the government sells the raw material [for cement] at token prices, says economist Ahmed El-Naggar of the Al-Ahram Center for Political and Strategic Studies. There is therefore no justification for the current level of prices. For steel, a portion of the raw material is imported, but El-Naggar still believes that the price of steel is unreasonable high.
Prices should be proportionate to the cost of production, says El-Naggar.
Many consumers, businesses, economists and politicians have been complaining about the high cost of construction materials for some time.
While such costs have been on the rise as a result of the global economic recovery and high international demand, domestic prices do not reflect domestic conditions and producers are doubtlessly benefiting from this inconsistency.
The competition authority will be responsible for determining whether this gain is being achieved at the expense of consumers, and this case will be the first real test of the competition law and of the authority.
But Bakry remains pessimistic.
I am not enthusiastic. I think this was done only in response to public opinion and the majority of those involved have significant political influence, says Bakry.