As I’m sure you are well aware, our operational footprint has an abundance of challenges. The countries in which we operate have, for the past three years, faced tremendous political and structural problems and 2013 has proven to be no exception. As a leading regional cement group that invests in the high-growth markets of Africa and the Middle East, we have become accustomed to circumventing daunting constraints to achieve the best possible results. Dealing with unexpected scenarios that are beyond our control has necessitated the formulation of an agile strategy that can minimize the negative impact of complications in our region. Take the following into consideration.
In Egypt we had a second revolution that took place at the end of June, followed by a period of protracted violence and confrontation between opposing groups. As a consequence, security was once again a very serious concern particularly in Upper Egypt where we had to deal with waves of violence that often led to operational disruptions.
The unrest coupled with acute fuel shortages and rising energy prices took its toll on the Egyptian cement industry as a whole. Despite the increase in fuel prices, the availability of heavy fuel, gas and diesel continued to be a problem and a new quota system failed to allocate the limited quantities of fuel in an efficient manner.
Obtaining permits and authorizations from Egyptian government officials, who have essentially been in crisis management mode for the better part of three years, has been a lengthy and drawn-out process that required stamina and perseverance.
In Sudan another round of domestic problems occurred at the end of the summer. Faced with a rising budget deficit, the Sudanese government increased fuel prices by 75 % putting a further strain on the already high levels inflation and reducing purchasing power. The political situation in the South continues to be tense with the ongoing civil war, which has also affected the southeastern and western regions of the country while the international community continues to impose sanctions.
The internal conflict in Syria has escalated to extremely high levels and an end to hostilities seems unlikely in the near future. The consequences of the ongoing crisis have of course had a tragic impact on civil society in the country.
Although Algeria remained relatively stable, uncertainties about a future after Bouteflika are on the rise. Southern Algeria is also an area of concern because of its close proximity to the war in Mali and the potential threat of spillovers on Algerian territory.
Within this highly volatile environment, we have still managed to move our business forward. The most notable achievement of the year for ASEC Cement was the completion of our 2.0 mpta greenfield cement plant in Minya, Upper Egypt and its entry into production. Despite the obstacles, we began cold run testing at the beginning of 2013 with first clinker and cement production starting in June 2013. All PGT have been completed and the plant has been running smoothly ever since. Completing a project of this nature in 30 months is commendable per se but when you factor in situation that we were faced with on the ground, getting the plant up and running within the aforementioned timeframe was miraculous.
ASEC Minya is a state-of-the-art plant capable of producing about 6,000 tons of clinker per day and more than 7,000 tons of cement. In the short time that the plant has been operational we have also been able to build a solid commercial network that has allowed us to sell 100 percent of our production capacity and compete effectively with a top-quality product line.
Today we find ourselves faced with a new challenge to secure a sufficient supply of energy for the plant. If not addressed, the lack of fuel could jeopardize our entire operation in Minya. During our first year of operation we had to build and operate a captive power plant to supply electricity to the plant. We are now focusing our efforts on securing connections to the national electrical grid and gas pipeline. We will also be putting into effect cost-cutting measures that will help to offset the rising cost of energy and enhance profitability. Despite the challenges, the company has already been able to generate remarkable EBITDA margins in excess of 25%.
Misr Qena Cement, our first cement plant in Egypt, operational since 2002, continues to perform well and has not been negatively impacted by the political unrest to the same extent as Minya. As a well-established cement plant, Qena also has the advantage of being connected to the national electricity grid.
In 2013 turnover at Misr Qena Cement reached a record EGP 956 million with EBITDA exceeding 2012 levels by 25% reaching EGP 373 million. The company continues to operate above nominal capacity with significant reserves of liquidity. With the launch of production at ASEC Minya this year we will be prioritizing the development of synergies between the two companies.
ASEC Ready Mix reported remarkably strong results despite the political unrest that the country experienced around mid-year. Production volumes reached 188 thousand m3 at a value of EGP 63 million, while EBITDA reached EGP 6.4 million. The company was also able to post a first-time net profit of c. EGP 1 million and reduce outstanding debt by more than 60%.
Important achievements also took place at Takamol Cement in Sudan. For the first time since it became operational in 2010, the company posted significant EBITA of SDG 16 million, equivalent to 4% of sales. A number of important measures were taken over the course of the past two years which led to the improvement in EBITDA margins, the most significant of which is the purchase of Berber for Electricity which has allowed us to obtain electricity at cost rather than paying a third party through expensive contracts.
Moreover, we have gradually undertaken a process to replace expatriates with local Sudanese workers whenever possible resulting in significantly reduced labor costs. General expenses have also been cut and we have moved to a system that allows us to directly manage our quarries to reduce the cost of the extraction of raw material. Last but not least, Takamol’s debt was reduced by more than 70%, down to SDG 43 million at the end of 2013.
Zahana Cement in Algeria also had a good year although results did not meet expectations due to unforeseen circumstances. The company was negatively impacted by heavy flooding that took place at the end of April in western Algeria. Additionally, Zahana Cement was not allowed to use explosives at limestone quarries leading to a deterioration in the homogeneity of the raw mix which negatively affected production volumes. On the positive side, we introduced a higher quality 42.5 cement verses the old 32.5 . Finally, works on Zahana’s new raw mill are almost complete and we expect to put it into production by March 2014.
We are still working very hard to finalize the approval of a loan that will allow us to move ahead with our greenfield cement plant in Djelfa. In Syria, we have maintained our license while we await conditions in the country to improve.
Overall, we have witnessed a marked in improvement with all our operations in 2013. ASEC Cement now has an influenced capacity that is close to 7 mtpa. On a consolidated level, our Group had a total turnover of EGP 1.0 billion with EBITDA of 140 million, taking into account the fact that Qena is consolidated with the equity method.
Our performance for 2014 should further improve with the first full year of production at ASEC Minya and additional upgrades at Zahana, Takamol and ASEC Ready Mix. However, the extent to which we can produce positive results will of course be conditional upon political developments and the availability of fuel at reasonable prices. We will continue to reduce costs and expedite connectivity to the electrical grid for ASEC Minya and Takamol, and to the gas pipeline in Minya. Further investments may be required to switch to solid fuels and introduce waste recovery systems to generate electricity.
With my best personal regards,
Chairman of the Board & Chief Executive Officer