Arab Finance Interview
Interview with Solomon Baumgartner Aviles, CEO of Lafarge Egypt
ArabFinance: Egypt's cement industry is one of the oldest industries in the country, with the first cement plant constructed around 1911. The cement industry is a main pillar of the highly labor-intensive construction materials industry, which accounts for a large share of the Egyptian economy estimated between 5.8%–8.8% annually, according to the IMF and Mordor Research. The local cement industry alone contributes nearly 1% of GDP and 10% of the gross national product of the Egyptian industry. There are a total of 18 companies operating in the sector, with capacity distributed as follows: state-owned capacity at 18.5 metric tons with 10 production lines and privately-owned capacity at 64 metric tons with 37 production lines. Multinational companies represent 57% of total production capacity, with total production capacity in 2020 standing at 82.5 million tons, according to data available on cement companies' websites and UNIDO. Cement consumption in the Egyptian market during 2019 stood at 48.7 million tons, and at 44.9 million tons during 2020, according to the Ministry of Trade and Industry. Due to the sharp decrease in demand, idle capacity stands at around 30 million tons.
Arab Finance sat down with Solomon Baumgartner Aviles, CEO of Lafarge Egypt, to discuss the market, the company's performance, the recent government decision to set production quotas to aid the struggling sector, as well as how Lafarge Egypt is innovating and joining the digital transformation movement to offset its carbon footprint and reduce gas emissions as it participates in various projects across the country.
We you please tell us about Lafarge Egypt's operations in the country?
Lafarge Egypt is one of the 70 members of globally-reputed Holcim Group, a Swiss-based global building materials and aggregates company, established in the MENA region. One of Holcim's largest cement plants is Lafarge Egypt at Ain Sokhna, which was constructed in 1997 and acquired from the Egyptian Cement Company from Orascom in 2008. Our plant has five production lines with an overall capacity of 9.5 metric tons. Besides cement production, Lafarge Egypt also has a Ready-Mix business that can generate roughly 2 million cubic meters a year of concrete. We launched in 2011 Geocycle Egypt, which feeds Lafarge's cement plant with refuse-derived fuel (RDF), an alternative to fossil fuel. Strictly complying with the ecological standards in Egypt, Geocycle has meticulously chosen RDF waste management solutions for their economical- and environmental-friendly nature supporting green building. Lafarge Egypt also owns a cement bag plant that competently serves the entire cement industry along with other sectors in Egypt, producing roughly 330 million bags a year. Our overall operations are run by 1,500 well-trained, highly qualified employees.
What is your analysis of Egypt's cement market?
Egypt's cement industry is one of the oldest industries in Egypt, where the first cement plant was constructed in the early 1900s. In a developing country like Egypt, the construction and construction materials industry accounts for a large share of the Egyptian Economy, estimated to be 5.9% of the total. It is a labor-intensive industry, and cement manufacturing is one of its foundations. The cement industry alone accounts for almost 1% of Egypt's GDP (almost 10% of Egypt's manufacturing GDP). It employs more than 50,000 employees directly, and 200,000 indirectly, with a total investment of almost $9 billion (LE 162 billion).
Since 2011, the cement industry's economics have been dramatically transformed. New production capacities were built, while market demand shrank. At the same time, some structural changes like the shift from natural gas to coal, new taxes, reducing the subsidies on other fuels and electricity, and the depreciation of the Egyptian pound have increased the variable costs of production triple-fold.
At the end of 2018, the total installed production capacity was 83.5 million tons of cement, exceeding considerably the market consumption. Estimated market demand in 2018 was 51.0 million tons, meaning that there are 32.5 million tons of production capacity idle. Later in 2020, market demand declined a further 44.9%, aggravating the market.
Consequently, the cement market has been suffering for the last five years, with demand for cement in the local market in Egypt further decreasing. This has resulted in great losses and debt accumulation to producers in general.
Recently, the decrease in demand was due to consumer behavior during the COVID-19 pandemic, in addition to the suspension of building permits, which led to an increase in supply and negatively affected sales. Although state mega infrastructure projects continued, we all know that retailers are the largest purchasers of cement, and individual construction consumes the largest proportion of production.
Do you see an opportunity for new players entering the market, or mergers and acquisitions by bigger players, or the possibility of smaller players existing in the market entirely?
It is difficult — or even impossible — for the market to absorb new players during the coming period due to the severe suffering of the sector for years from excess production, then the decision to stop building permits, and the COVID-19 pandemic, as difficulties have accumulated in front of the cement industry. It needs time and ongoing decisions to recover and reach profitability again. As any investor targets profitability from any investment opportunity, this makes investors refrain from entering the industry in the current period due to the losses it incurs. Those who will be able to survive are those who are adopting a different set of effective resilient policies. Egypt is a huge market and worth patience so long as we see corrective actions from the government side, which we do.
How has Egypt's recent decision regarding quotas affected the business?
So far, the decision issued by the Competition Protection and Anti-Monopoly Authority has not achieved its expected results. The gap between supply and demand is still large and the sector is still suffering, but it is too early to assess the effectiveness.
The decision was issued in the middle of July, followed by a period of national vacation. It will take further time to fully work, and we are in continuous dialogue with the Egyptian government on the developments.
We are hopeful that this decision will be successfully implemented by the authorities so that the sector will return to prosperity.
Bottom line, producers and the authorities are aware that the successful implementation of this resolution is in the interest of all stakeholders concerned. We are also aware that the sector needs time to recover, balance supply and demand, and restore profitability.
What are the measures that Lafarge Egypt applies to limit its carbon foot print?
Carbon foot print and climate change are crucial not only for cement manufacturers, but for the whole planet. The largest driver of global warming is gas emissions, of which more than 90% are carbon dioxide and methane. Lafarge Egypt is passionately committed to sharing with Holcim Group in building a net zero future as climate action is at the heart of our strategy.
We are fully committed to contributing to Holcim's 2030 goals of lowering its target for carbon dioxide intensity in cement production to 475 kg net CO2 per ton of cementitious material (net CO2/t.cem) and partnering with Science Based Targets initiative (SBTi) of "Business Ambition for 1.5°C” to become the first global building materials company to sign the pledge with intermediate targets for 2030. This is validated by SBTi to develop a roadmap for aligning climate targets to a 1.5°C future in the cement sector, pushing the boundaries of green construction.
As a member of Holcim, we hold our parent company's principles of building a world that works for people and the planet. That's why we are sharing in reinventing how the world builds today to make it greener with low-carbon and circular solutions.
Lafarge Egypt has been working on many aspects to share in accelerating the transition to net zero by developing green building solutions like ECOPlanet and ECOPlanet Prime green cement that decarbonizes the construction process as having 50-60% less in CO2 Emissions in addition to producing Pozzolanic Cement branded El Momtaz with 10% less in CO2 emissions.
We are driving the circular economy across everything it does to keep materials in use for as long as possible, giving them a second life — and a third and fourth — and using only what is needed to preserve nature to build a greener future in a nature-positive way.
Digitalization is a major tool that we use to increase our sustainable development efforts at Lafarge Egypt.
Within that target, we launched a virtual media training program to journalists from various media outlets, raising awareness on sustainable practices and systems. In that program, we joined forces with prominent professionals in the field of sustainable development from Engineering at Consultations Group (ECG), Plastic Bank, and the European Bank for Reconstruction and Development (EBRD) who voluntarily welcomed collaborating efforts with us in that training program on green building.
Our corporate social responsibility efforts also have an eye on supporting curbing climate change. We invest our CSR efforts in projects such as the plastic beach cleaning that took place at Baltim Beach, and green materials paving roads of the villages of Kafr El Sheikh, where we constructed more with less.
What does innovation look like in your industry?
In addition to our innovative products of ECOPlanet and ECOPlanet Prime green cement that decarbonizes the construction process as having 50-60% less CO2 emissions, we are also focusing on digitalization.
Via digitalization, we are focusing on transforming the way we produce cement and use digitalization as a tool to become more efficient and environmentally fit.
We worked through digitalization to improve the logistics network to increase efficiency through the Transportation Analytics Center (TAC), which collects through tracking devices all data related to trucks, roads, and driver behavior, to be processed through artificial intelligence techniques and advanced analytics systems with the aim of guiding the optimal route, which increases predictability of cement delivery times, improved customer service, better road use, and better driver safety, thus reducing transportation carbon emissions as well.
We also use digital apps for sales, which has been instrumental in helping to satisfy the demand that is being driven by our customers, while maintaining social distancing and guaranteeing safety standards.
Inovative solutions were also provided in our corporate social responsibility efforts. Lafarge Egypt used green materials for paving the roads of a village in Kafr el Sheikh. In Mustaqbal Village in Baltim, soil samples were collected from the site and sent to the lab to identify its suitability of treatment, and manufacturing the optimum mixture of HRB. We implemented the needed on site preliminary road leveling and grading for accurate depth and width of the designed road. HRB was distributed on the road, based on the characteristics of soil. Finally, leveling and compaction were implemented to achieve road design requirements.
The innovative produced paving material is cost-effective and eco-friendly, allowing to comply with the rural nature and needs while swiftly paving the internal roads, building a better world for a better future.
What role does Lafarge Egypt play in the construction of Egypt's projects?
Lafarge Egypt has a historic relationship with Egypt's national infrastructure development projects since the 18th century, specifically in 1864, as Lafarge contributed in the construction of the Suez Canal delivering Hydraulic lime stone.
Lafarge Egypt's products are used in all constructions sectors in the economy. In tourism, our products were and are being used in the construction of the main touristic locations such as Marrassi, Pyramiza Sahl Hashish, CFC Mall, and El Gouna, in addition to the Egyptian Grand Museum, which will open soon.
In the transportation sector, Lafarge Egypt's extensive road expertise and integrated solutions allowed us to complete the 170 km long Cairo–Alexandria Desert Road in 2012, optimizing construction costs, while augmenting road service life. We have also supplied the 45 km long Shoubra–Banha Highway.
We are also contributing to one of the most technically challenging projects in Africa, the Cairo Metro project, supplying over 900,000 cubic meters of various concrete types, and we took part in the construction of airports across the country such as Cairo International Airport Terminal 2, Borg el Arab Airport, Sharm El Sheikh International Airport, and further connecting the world through roads such as the Cairo-Alexandria Desert road, the Metro stations in Egypt, and the Suez Tunnel.
We also participated in building power stations, such as the New Cairo Power Station, Ain Sokhna Power Plant, and the Kuraimat Power Plant, among others, while our products were widely used in the construction of the American University in Cairo and El Galala University.
Last but not least, we participated in the healthcare sector with the 57357 hospital, which is dedicated for children afflicted with cancer.
In the New Administrative Capital project, we played a key role in many infrastructure projects within the capital, including the 1,266 foot, 80-floor Iconic Tower, the tallest skyscraper in Africa.
A further vital project in which we were involved is the New Administrative Capital power plant, which is built on an area of ??175 acres, producing 4,800 MW of electrical energy. Our products are also used in the roads, bridges, tunnels, and the Green River recreational project of the new capital.