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Cement industry tackles energy issue

Interview - May 15, 2015

Egypt's cement industry has traditionally battled energy shortages as the main impediment to the sector's growth.  With the government of Egypt finally addressing the energy mix, the sector is positioned for take-off.  Additionally, construction will be the first industry affected by the series of mega projects launched by President Al-Sisi.  Omar Mohanna, Chairman of Suez Cement, one of the largest cement producers in the country, shares his firm's strategy for the anticipated remunerative times ahead, including the conversion of two plants to coal power, vertical investments and preparations for expansion.


The world is beginning to notice a recovery in Egypt and its growing potential.  As one of the leading businessmen in the country, how optimistic are you at the moment regarding Egypt’s potential and the future in the short term?

I am extremely optimistic. Egypt had a momentary hiccup in its political and economic outlook, but we have extricated ourselves out of this nightmare and are seeing progress at a rate that is much faster than expected. People are very enthusiastic, and there is a real appetite and dynamic that we have not seen before.  People are willing to change, and people are willing to accept change. One indication that shows we are on the right track is the fact that the oil subsidy was removed and there was no public outcry in response. This was a real indicator that the people are buying into this administration. 

During the Egypt Economic Development Conference, Egypt signed MOUs for projects amounting to over $130 billion.  In your opinion, how prepared is Egypt for this type of investment?

In real terms, we are not prepared. I do not think we could handle this magnitude of investment in one burst, but it will come gradually. For example, energy is a prerequisite and without it, we cannot achieve much. The 2 main deals, in my eyes, were the GE and Siemens deal. To be able to increase the electricity capacity of Egypt by 50 percent in over a year and a half was a major breakthrough. The immediate upgrading of existing power stations by GE was really terrific. I met Jeff Immelt right after he met with President Al Sisi, and Jess Immelt was enthusiastic and energized. GE operates in 180 countries. The presence of people like Jeff Immelt and the CEO of Siemens, Joe Kaeser, along with Christine Lagarde and the rest of the world’s leaders is the real success of the conference. Politicians do come and go. Egypt has its regional importance, so I’m not surprised to see political dignitaries come here. Top businessmen at this level committed their time as most of them stayed more than one day. This was truly exceptional, and we only heard positive things from them.

There is going to be a change of pace and a change in gear. Things are going to be very demanding and very challenging, but Egyptians have always delivered under pressure. Egyptians always surprise when least expected.

For a follow-up to the conference, what do you think are the most important steps to be taken in order to make sure that the goals of the government are realized?

There is still immense room for improvement in regards to cleaning up our logistical framework. There is so much to be done in terms of streamlining operations and cutting red tape. The government has to resort to employing the best people. Eventually, we will see that happening and people will be challenged. The government will start investing in better quality people. We also need to adopt private sector techniques, ethics and principles, and those who will not be able to perform at that standard will not be around. However, we also need to discriminate between criminal mistakes and normal professional mistakes. The system will start to develop and mature, and we’ll manage it.  We’ve accumulated many problems over the past 6 years- the previous regime was suffering from atrophy. We had good people, but the government was akin to a car with 2 wheels moving forward and 2 wheels pulling it back.

Our economic identity has been declared. This was very important because during the last 4 years, we were waffling about the identity confusing social justice with the kind of economic identity we should have. It is clear now, and we will proceed with private sector initiatives, which are the engine of growth, but this does not mean that the private sector cannot have measures of social justice and a social safety net. This will have to be developed further and corporate Egypt is starting to realize this. The last 4 years were extremely important in opening people’s eyes to realize how important this balance is. The economic identity of the country has been declared.

With all of these investments projected to come in, estimated over 100 billion USD over the next few years, this is certainly going to impact the demand on the cement sector. What are your expectations there?

We have a historic capacity of cement in Egypt of somewhere between 65 to 68 million pounds. Due to the energy shortages, we were operating at a much lower capacity. Last year, we only produced 50 to 51 million pounds. We still have about 15 million of capacity that can easily be on the market, and it’s starting to come onto the market because of the energy mix that the government has adopted.

This has had a very positive impact on the cement sector. Two of your cement plants have been converted over to coal already. What has been the impact for your company in terms of profitability?

It’s very frustrating to be operating at 50 percent capacity. It’s frustrating for the investors and for the workers themselves because the profitability affects the workers’ earnings. You have billions of dollars that are not being properly utilized. Egypt cannot afford that, which is why I started by addressing energy as the major problem in Egypt. In his short concluding remarks, President Al Sisi really singled out these 2 deals because they are the ones that pave the way for any proper development. It remains to be seen how soon these projects will take place, but demand creates its own supply.

The main problem facing the cement industry was the energy mix, and now with the right energy mix, people will proceed. Egypt was also quite lucky with the reduction of energy prices because this has helped us a great deal. When you realize that the energy subsidy bill went down from 140 billion EGP to 100 billion EGP because of the subsidy removal and then a further 25 billion EGP because of the impact of prices, all totaled, it went down from 140 billion EGP to 75 billion EGP. I’m quite confident that the 75 billion will be reduced to 0 percent.

The cost of fuel nearly doubled overnight, and the Egyptian people just swallowed and said, “Ok, this is what we need to do to move forward.” This is very commendable and positive, although I’m sure that some people were unhappy with it.

It has happened and it will continue to happen. The subsidy is no longer a taboo subject. People have started to realize that they need to deal with the issues. Look at the management of the bread solution by the government with the use of smart cards. This will be replicated for gasoline and will solve a great deal of problems. If it worked in bread, it will work in anything else. The smart card had a tremendous impact on the people. Some, of course, resorted to cashing it in for cash and shifting it for other products, but it has reduced the consumption of bread substantially. The waste of bread that we had was unbelievable. We had a consumption of about 180 kilograms of bread per person. It was the highest consumption of bread in the world. Of course, some of it went to feed animals on the farms because of the extortion, but still, it was unbelievable.

Now I think we have also gone beyond the Suez Canal euphoria. That project was a great national project that we needed to rally people. They raised 8.5 billion EGP in 8 days and the bulk of the funding came from households. This was remarkable and again another vote of confidence. That is why Egypt cannot live without FDI; it is next to the Nile for us.

With all of these projects in place, you would think that the demand for cement is going to soar. There was 15M tons produced, but is that going to be enough for what is to come?

You can develop a project in 2 years- especially an expansion. We are definitely looking into that. We have put every expansion project aside for some time. We will have vertical investment because we invested substantially in converting to coal. This is costing us something like 10M per 1M pounds. We are also heavily invested in environmental related investments, which is costing us something like 8M dollars per 1M pounds. We believe that things will have to take off again. We are gradually working toward European standards in terms of handling, transporting and storage.

Since the merger acquisition with Italcementi Group, how has this impacted your company?

The advantage of a venture with a multinational group is that you acquire the expertise, R&D, technical support and managerial support. This enabled us to be the top tier of the field in terms of quality of production, safety, etc, which was not the case before. You cannot survive in a world with such competition unless you are producing at the top standard. Now in all of our factories, we’ve have zero accidents over the last year because we adhere to international safety measures. When these measures are introduced, the workforce reacts and can see the advantages. We really feel that this investment and the partnership were worthwhile.

In the next few years, what are your personal goals and what would you like to achieve with your company?

I’m chairman of Suez Cement and also chairman of Pirelli Tire Manufacturing and ACE Insurance. Cement is the backbone of any production, and for a country like Egypt that is on the verge of taking off, you will find that the construction business is the first one that starts on the ground and shows the first results. We took advantage of the “dormant” period to equip ourselves for better days, and now the better days are coming. Presently, the responsibility is to meet the market demands and to expand. We are adhering to international environmental standards, which gives us a considerable sense of pride. New projects will resort to new construction techniques and the shift will eventually happen, so we are expanding our Redi-mix production. New developers will use more modern building techniques, and we will adapt to that as well.

On the Pirelli side, we export 60 percent of our production. We are embarking on an expansion to meet not only the exports but also local demand. Our production is competitive to European standards.

On the ACE Insurance side, there is tremendous room in Egypt for an “insurance culture”. Today, insurance has 1 percent market saturation. With all the new developments in Egypt, there is no longer a lease base but ownership, which is a very important component of wealth. Yet very few Egyptians have their homes insured. The only compulsory insurance is automobile insurance, so there is tremendous room for growth in the sector. The insurance sector reminds me of the banking sector in Egypt in the 1970s, which just shows the amount of potential there is. Sometimes problems offer the opportunity. Why did energy become the big investment target in Egypt recently? As it was a major problem, it became the major source of opportunity.