The Egyptian metals industry is likely to be less affected by the global economic downturn than many other producers, but a decline in output is inevitable, according to BMI's Egypt Metals Report. Egypt's metals industry includes the 245,000tpa aluminium smelter operated by the Aluminium Company of Egypt (Egyptalum) in Nag Hammadi and the steelmaking facilities under the control of Ezz Steel, the largest steel producer in the Middle East and North Africa. Ezz Steel is the market leader in Egypt's steel industry with a market share of over 60%, producing long and flat products at its manufacturing facilities located at Alexandria, Suez, Sadat City and 10th of Ramadan City. Ezz Steel's long products consist of rebars and wire rods, while its flat products mainly consist of hot-rolled coil. Current capacity is 5.3mn tpa, of which 3.1mn tpa is in longs and 2.2mn tpa is in flats. Egyptian steel production has increased over recent years due to projects like Al Ezz Flat Steel in Suez, which was commissioned in 2002 with capacity of 1.2mn tpa. The Egyptian economy has grown fast and with it has come increasing demand for metals products for use in construction, automotive and appliance industries. A relatively small amount of steel output, amounting to 18% of the total in 2008, is exported with the majority consumed domestically. As such, the performance of the Egyptian steel industry depends on the strength of the domestic economy. In 2008, Egyptian steel production fell 0.4% to 6.2mn tonnes. In Q408, steel production fell 15.7% y-o-y, mirroring trends seen throughout the world, although by no means the worst performance. The Egyptian economy will continue to grow in real terms, but at a much slower pace than over the last few years. We are expecting GDP growth of 3.7% in 2009 and 3.0% in 2010, with growth of 4-5% thereafter. There will be a negative impact on unemployment, which BMI believes could exceed 10% by 2010, and in turn consumer spending. Meanwhile, investment in capacity expansion and consumer loans will dry up as liquidity - which is reliant on inflows from the GCC states - diminishes. On the upside, Egypt's population is growing and the country suffers from a housing shortage. Demand for residential property is likely to stimulate construction activity and therefore increase longs production. Housing minister Ahmed al-Maghraby said in November that 99% of the market is driven by real demand, and this is mostly financed by cash and not mortgages. BMI forecasts a 15% fall in steel output in 2009 to 5.28mn tonnes, with a recovery in 2010 to 5.45mn tonnes. The momentum should pick up from 2011, with Egypt still representing great potential for expansion. The key issue is the industry's ability to compete in terms of prices and trade liberalisation represents a significant threat if producers do not improve production processes and achieve leverage over raw materials costs. Throughout the world, smaller producers have succeeded when they have shown significant adaptability and flexibility in a market that is dominated by global majors such as ArcelorMittal.
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