Egypt’s Orascom Construction positive about future

In line with equities in most markets, shares in Orascom Construction Industries, the Egypt-based regional giant, have taken a battering in recent weeks, losing 58 per cent of their value since their peak in April.

Not only that but, having spun off its cement business to Lafarge Group at the end of last year to set itself up as a global fertiliser producer with plants in Egypt, Algeria and Nigeria, OCI has now seen the prices of urea fertiliser collapse from a peak of $800-$900 in July to $350 on the back of tight credit to traders as well as falling grain prices.

Even so, Nassef Sawiris, the chief executive of OCI, as well as independent analysts, insist that prospects for growth in the company’s two main lines of business, infrastructure construction and fertilisers, remain strong in spite of the adverse global situation.

“We’re in a very good position,” says Mr Sawiris. “The company will continue to grow in 2009 even at current depressed prices [for fertiliser]. We are one of the few companies with more than a billion dollars in cash as a war chest . . . earmarked for acquisitions. We also have great visibility on our construction order book, which is in excess of $7bn.”

OCI specialises in building high-margin infrastructure projects such as power stations, LNG terminals and metro systems for hydrocarbon-rich clients such as Algeria and Gulf Co-operation Council states. “We believe infrastructure spending in the GCC and in Algeria, which together contribute [about] 70 per cent of OCI’s current backlog, will remain relatively high,” said a report issued last week by EFG-Hermes, the Cairo-based private investment bank. “Our economists see little risk to cancellation of government projects as long as oil prices remain around $55 per barrel.”

Even if prices were to fall below that level, the bank says, GCC countries would “dip into fiscal surpluses accumulated over the years” in order to ensure the completion of projects deemed important to their economies.

Mr Sawiris says that, around the region, governments are now making clear that they are looking to launch infrastructure projects to stimulate their economies.

“Saudi Arabia had power shortages this summer and that’s not acceptable for a country that has the largest energy reserves,” says Mr Sawiris.

“Definitely, this sector’s plans are being accelerated. It is a good time to spend on infrastructure when basic commodities prices are down.”

OCI’s fertiliser business is expected to remain profitable even with the current low international prices, which have forced producers to shut down plants in Italy, Ukraine and Romania.

Mr Sawiris says his company has modern facilities that use less natural gas, the main ingredient in fertiliser manufacture. Analysts say that OCI also benefits from gas supply contracts in Egypt and Algeria at low prices, which allow it to realise robust profits even in an atmosphere of depressed prices. “By securing long-term gas supply contracts at competitive prices, OCI is among the lowest-cost producers in the world,” says Beltone Financial, another Cairo-based private investment bank.

There is also consensus that fertiliser prices will edge up – although probably not to their level earlier this year. “In November, a lot of buyers came back to the market,” says Mr Sawiris. “Canada and Latin America came back. The United States season starts in January. Our view is that, with corn prices making a small recovery recently, we are predicting stronger fertiliser prices in the coming months.”

Analysts also argue that the departure of higher-cost European producers from the market should reduce global supply and eventually push prices up.

“Nothing will destroy demand in 2009 and there will be a significant pick-up in 2010,” says Ahmed Shams El Din, who wrote the EFG-Hermes report.

“The main determinant of demand is the level of wheat inventory. At the moment, global grain stockpiles cover two months of consumption only. If they fall below that level it will mean a global food security crisis.”

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