Announcements this week have highlighted the situation in the Egyptian cement industry, which has been bearing the brunt of increasing fuel scarcity for a while now. At first glance this appears bizzare in what is an oil-rich country but a government drive to make revenue from exports has constricted supply and led to a massive increase in fuel costs. Since the middle of 2012 Egyptian cement producers have faced a gradual decline in supplies, massive hikes in price due to the curtailment of subsidiaries and a scramble for 'alternative fuels'.... like coal!

While heavy fuel oil prices were on the rise as early as 2012, it is in 2014 that the cement industry has really begun to feel the brunt of supply cuts. January and February saw the Egyptian Natural Gas Holding Company (EGAS) cut its allocation of gas to cement producers by 35%, enough to significantly raise competition for the remaining allocation. By May 2013 this has resulted in interruptions to gas supply that closed some plants and slowed down many more. Producers were trumpeting coal as the big new 'alternative' fuel and conversion projects were announced in quick succession. Worse was to come. In June 2014 saw EGAS cut its supply to cement producers by a further 61%.

This relatively rapid turn around in fortunes has been highlighted by two announcements from the industry this week, both from the Italcementi subsidiary Suez Cement. Firstly, Suez updated the industry on its coal conversion project at its Kattameya plant. Both the timescale (completion by September 2015) and the price tag (US$23m) demonstrate the scale of the upset caused by the strangling of the gas supply. The cost implications of this investment and similar investments at three other Suez Cement plants are significant.

Secondly, Suez has announced that ItalGen (another Italcementi subsidiary) has secured a loan to construct a 200MW wind farm at Gabel El Zeit, near Hurghada, to supply its production sites with electricity. With a future target to produce 400MW (40% of Suez's electrical energy needs), this project (mooted since 2008) is a huge departure from established electrical energy sources in Egypt. It is an even larger project, estimated at US$220m. Assuming a ~US$25m price-tag for each of the four coal conversion projects, this brings Italcementi's total current Egypt 'energy stability spend' to a whopping US$320m. It is betting that the oil price trend is not going to reverse any time soon. As prices continue to rise it will be interesting to see what other solutions Egpytian cement producers come up with. The conversion of plants to take alternative or waste-derived fuels and the use of solar installations for plant electrical needs are other ways forward.

All the while, it is important to remember that Suez's projects (and those of other producers) will not be ready for several months at least. It is also important to remember that the same cement producers that are 'suffering' now have enjoyed the subsidies for many years. This makes casualties as the producers adjust to the new market realities a distinct possibility.