CAIRO: At the start of the month, Ezz Steel raised steel prices for the month by LE 820, which brings the cost of each ton to LE 4,100, on the back of higher raw material costs and much to the discontent of the public.
Although the record 25 percent price hike drove up the company’s stock, steel magnate and head of the company Ahmed Ezz has received complaints from the group Citizens Against High Prices, who argue that the price violates Egyptian law to prevent monopolistic practices.
Al-Masry Al-Youm newspaper reported that the group has termed the increase “an extreme form of opportunism and calls Ahmed Ezz “the consumers’ first enemy in an appeal to the Egyptian Competition Authority.
While Ezz Steel holds 60 percent of the market share for steel production in Egypt, competitors Beshai Steel and Suez Steel had slightly higher prices at LE 4,150 per ton and LE 4,125 per ton, respectively, leaving the group with little evidence of price gouging.
Ismail Sadek, construction analyst at investment bank Beltone Financial laughed that the group “has no argument.
“Look at steel prices in the rest of the world, he chuckled. “The steel industry is affected by large amounts of variables in the global economy. Ezz prices were actually lagging behind the major producers both locally and abroad.
Given the rising cost of raw materials, Ezz Steel’s decision came as no surprise to Sadek and other analysts.
Ahmed Shams El Din, vice president of research at investment bank EFG-Hermes, explained that Ezz Steel had surprised him last month by maintaining their lower prices for the month of March, despite steep hikes in production costs.
“We’ve seen global inflation for all raw materials, including iron ore and scrap. Egypt buys most of its iron ore from Vale, which increase prices by 90 percent year on year from 2009 to 2010. Ezz now purchases scrap at around $400 a ton.
He explained that even Russia and Ukraine, the world’s most integrated steel producers have faced sharp jumps in production costs. However, while prices may continue to climb, he did not foresee another price hike as significant as Ezz’s most recent increase.
Sadek of Beltone, pointed to on-going demand from China as the primary engine driving up the cost of raw construction materials.
“Global economic performance is seeing bipolarity in growth wherein China is leading while the US and Europe are lagging, while previously the US and Europe drove demand. Cycles are shortening because of alternating growth between the poles; when the US is slowing down, China is sustainable. [But there is a] big question mark on the sustainability of an increase in price, if China finds there is not enough demand for its exports, demand could collapse, he mused.
In addition to Vale, Australia, Brazil and India are the world’s key producers of iron ore.
Shams El Din of EFG-Hermes clarified the factors behind the price increase for the ore: “Historically, ore was sold through annual contracts. This is now shifting from a yearly to a quarterly pricing mechanism, in order to better follow stock prices.
Last month, Financial Times quoted Melinda Moore, a commodities analyst at Credit Suisse in London, as saying, “The industry is revolutionizing the way iron ore is priced.
Again, Chinese demand for the past decade is largely responsible for altering the landscape of construction commodities, although the change in the pricing system has only recently emerged.
Asked to comment on the impact of steel increases on Egypt’s construction sector, Sadek said, “I don’t think the construction industry will be massively affected by the price increase, though there might be a sudden destocking of inventory of [steel] rebars. On the longer term we might see a slight slowdown in construction sector, but not to the extent that growth will be impaired.
Shams El Din stated, “Yes definitely, any increase in raw materials will have a negative effect in terms of construction activity. However, in my opinion there is pent up demand for construction. We won’t be seeing prices like we did in 2009.
He added that Ezz El Dekheila had barely broken even last year, calling the recent increase in price “necessary to save their margins.