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Viewing cable 08CAIRO1932, EGYPTIAN COURT BLAMES FIRMS FOR CEMENT INFLATION

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Reference ID Created Released Classification Origin
08CAIRO1932 2008-09-01 15:48 2011-08-24 16:30 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Cairo
VZCZCXYZ0000
RR RUEHWEB

DE RUEHEG #1932/01 2451548
ZNR UUUUU ZZH
R 011548Z SEP 08
FM AMEMBASSY CAIRO
TO RUEHC/SECSTATE WASHDC 0365
INFO RUCPDOC/DEPT OF COMMERCE WASHDC
UNCLAS CAIRO 001932 
 
SENSITIVE, SIPDIS 
 
STATE FOR NEA/ELA, NEA/RA AND EEB 
USAID FOR ANE/MEA MCCLOUD AND DUNN 
TREASURY FOR BAUKAL AND MORAVEC 
COMMERCE FOR 4520/ITA/ANESA 
 
E.O. 12958:  N/A 
TAGS: ECON EAID EINV PGOV EG
SUBJECT: EGYPTIAN COURT BLAMES FIRMS FOR CEMENT INFLATION 
 
REF: A) CAIRO 396 
     B) CAIRO 1352 
 
Sensitive but Unclassified, not for Internet Distribution 
 
1. (SBU) SUMMARY: A Cairo court fined 20 cement 
executives including Amcham President Omar Mohanna USD 
$1.9 million each for collusion to fix cement prices, 
blaming the companies for contributing to soaring 
inflation and in particular the rising cost of much- 
needed housing.  While Trade Minister Rachid Rachid 
claimed the convictions would encourage more competition 
and transparency in the market, business leaders said it 
was another worrying indication of the government making 
the private sector a scapegoat for its political woes. 
END SUMMARY. 
 
2. (U) A Cairo court fined 20 cement executives 10 
million Egyptian pounds ($1.9 million) each, personally, 
and their companies another 10 million pounds ($1.9 
million) each on August 25 for conspiring to increase 
cement prices. The Ministry of Trade and Industry had 
accused the companies and executives of anti-competitive 
practices in October 2007 after a 14-month investigation 
by the ministry's Egyptian Competition Authority (ECA). 
Among the convicted companies are Suez Cement, Egypt's 
largest cement producer, as well as Misr Beni Suef 
Cement, Misr Qena Cement, and Tora Cement. 
 
3.  (SBU) The Sinai Cement managing director told us 
previously that soaring demand is responsible for the 
increased prices, arguing that collusion to fix prices 
would only make sense when demand is low (ref A).  He 
noted that the period in which the companies are accused 
of colluding coincided with the start of Egypt's 
construction boom. 
 
4.  (SBU) Omar Mohanna, president of the American Chamber 
of Commerce in Egypt and chairman of Suez Cement, told 
the press that the executives and companies would be 
exonerated on appeal, now scheduled to be heard Nov. 4. 
Privately, he had shrugged off the charges as politically 
motivated and a cost of doing business in Egypt, and 
indeed the fines pale in comparison to recent profits. 
Suez Cement reported a 29-percent increase in profits in 
the first half of 2008 to LE 768.99 million ($145 
million). 
 
5.  (U) The trial is the first under Egypt's three-year- 
old anti-monopoly law designed to bring Egyptian 
competition policy into line with international practice, 
efforts supported by USAID.  The GOE amended the law in 
June 2008 to increase maximum fines 10-fold to LE 100 
million ($19 million). 
 
6.  (SBU) Minister of Trade and Industry Rachid Mohamed 
Rachid said in a press statement that the ruling would 
not only protect customers but also enhance the 
investment climate by increasing competition.  In 
response to public criticism of rising cement prices, 
Rachid levied an export duty on cement in February 2007 
and a ban on cement exports altogether in March 2008. 
Prices have since fallen to LE 485 per ton from their 
peak of LE 550 a ton earlier this year.  (Comment: Many 
Egyptians track the politically sensitive price of 
cement.  Just as subsidized bread prices are a barometer 
of the government's commitment to the poor, cement prices 
indicate to average Egyptians their ability to get ahead 
by building, or expanding, homes for themselves and their 
extended family. End comment.) 
 
7.  (U) Meanwhile, steel prices have nearly doubled since 
last year, and the competition authority is investigating 
Egypt's steel sector, dominated by senior ruling National 
Democratic Party official Ahmed Ezz.  According to press 
accounts, the results of the steel investigation will be 
announced in September. Higher steel as well as cement 
prices have contributed to an inflation rate that hit 22 
percent year-on-year in July. 
 
8.  (SBU) An EFG Hermes analyst told us that in the case 
of steel, rising costs for raw materials -- rather than 
illegal price collusion -- appear to be responsible for 
rising prices.  The explanation for rising cement prices 
is less clear, however.  Analysts think the cement price 
increase was primarily the result of increased demand and 
hoarding by wholesalers.  In addition, in an oligopoly 
like the cement industry, the small number of producers 
that dominate the market are often able to follow a 
similar pricing strategy.  Some speculate that cement 
producers agreed among themselves to export surplus 
production and not compete for domestic market share. 
Regardless, it is clear that cement profits increased as 
prices rose while costs remained low. 
 
9.  (SBU) Comment: Egypt has a tradition of collusion 
among the cozy class of industrialists and government 
officials.  Thus, we welcomed the passage of the anti- 
monopoly law and the creation of the Competition 
Authority as an important part of Egypt's development 
from a planned economy to one which supports market 
practices and private sector development, but which 
regulates private sector responsibly. As a first test of 
the new law, the Competition Authority has taken on some 
of Egypt's wealthiest and most powerful industrialists. 
Proving price fixing and monopolistic behavior is 
difficult in any country, and as revealed by this first 
test, the capacity of the authority is unclear.  The 
argument that the prices are rising as a result of 
increasing demand and regulatory burdens that limit 
supply, rather than anti-competitive business practices, 
is compelling, although without seeing the evidence which 
has been presented, we do not know the actual degree of 
price fixing taking place.  The ECA began and finished 
its analysis before the current round of high inflation 
hit, but as the government comes under fire for not 
adequately controlling prices (as was routinely expected 
in years gone by), it is possible that this court 
decision may have been rendered for political reasons to 
satisfy the frustrated masses.  Rather than encourage 
investment, this case -- like the recent troubles of 
Canadian chemical company Agrium (ref B) -- may 
discourage the investment that Egypt needs to create jobs 
and continue its recent trend of solid economic growth. 
 
SCOBEY