Egypt Market Report 1Q 2023
Construction market overview
Introduction
Construction costs in recent months have shown high volatility due to the continued effect of Egyptian currency devaluation and supply chain shortages. While Egypt has recently moved towards self-sufficiency in the production of major construction materials, it remains dependent on imported raw materials and fuel, most of which are from Europe.
Market fluctuations are causing challenges for contractors. Cost escalations are putting some projects on an uncertain footing, which could deter foreign investment, put developments on hold or result in protracted value engineering processes.
Gleeds insights and analytics specialists have been closely monitoring the situation and have collected data over the course of this period. This report aims to give the best possible forecast of construction materials cost inflation in the immediate and medium term, based on the data currently available and the experience of our resident experts.
Construction materials represent the main portion of the bid and tender price submission. By examining changes in construction materials prices, Gleeds has provided a forecast of the inflation impacting the market. Compiled with key construction materials data from January 2008 until March 2023, the inflation forecast is based on indices compared to our starting baseline.
Construction materials inflation history/forecast
Data informed by Gleeds experts and CAPMAS indices.
Values for January, February and March are estimated based on Gleeds view of the market since the CAPMAS indices had not been issued at the date of publishing the report.
Figure 09
Construction materials inflation rate
Historic inflation overview
At the beginning of 2014, the devaluation of EGP and an increase in industrial fuel prices, coupled with fuel shortages, caused a sudden rise of nearly 12% in the cost of construction materials. Though 2015 saw some stabilisation, a shortage of foreign currency at the beginning of 2016 led to higher construction material prices throughout the year, with an annual inflation rate reached of nearly 17%. In November 2016, the Egyptian government experienced another wave of devaluation when the exchange rate doubled overnight, leading to materials prices jumping to 30%.
Inflation rates slowed down in 2018, recording an average rate of 9%, due to construction activity driven by the government’s launch of mega projects including the New Administrative Capital and New Alamain City. In 2019, inflation rates further reduced as a result of continued market stability and renewed activity in the public and private sectors.
In 2020, the start of the pandemic and the supply chain disruptions it triggered, elevated inflation rates once again, increasing to almost 14% during 2021.
Inflation in 2022
The slowdown of production and construction activity internationally led to increased shipping costs, delays in procurement lead times, and eventually, higher international construction materials costs. Prices of construction materials in Egypt have been affected indirectly, due to reliance on imported components used in the production of construction materials such as reinforcement steel, cement, cables, etc.
In addition, other categories of construction materials including MEP equipment and materials have been affected, leading to an overall inflation rate of between 7–10 % in this period.
Marassi Resort, Alamein, Egypt: Gleeds provided Quantity Surveying/Cost Management services
Current situation
International crude oil prices rose by almost 70% at the beginning of 2022. Although the Egyptian government subsidises fuel prices, energy-intensive industries were affected. Gradually, the price of fuel rose throughout the year, impacting local transportation, as well as affecting the production costs of materials containing petrochemicals, such as waterproofing materials and plastics.
Locally manufactured construction materials that are highly reliant on imported raw materials were also hit by this inflationary wave. The continued effects of supply chain disruption negatively impacted the prices of iron ore, steel billets, copper and aluminium throughout the year. Reinforcement steel has seen a price increase of 25–30% and cement prices have risen by 35–45%. These form a considerable share of the concrete works in building projects, constituting 15–20% of the total project cost.
On 21 March 2022, the CBE devalued the Egyptian pound by nearly 17%, increasing the USD exchange rate from EGP 15.75 to 18.15 for 1 USD. In addition, CBE introduced a regulation that LC must be covered 100% in cash by the importer, with the exception of some items, to limit demand on the USD. This replaced the previous procedure whereby banks and their clients reached their own agreements and usually covered 10–30% of an LC’s value. As a result, commodity prices rose in ways incompatible with local purchasing capabilities and added pressures to supply chains already suffering from shortages, through reduction in the liquidity available for local importers.
In October 2022, the government devalued the Egyptian pound by close to 28%, reaching nearly USD 1 : EGP 24.5. It also eased the LC regulations on imports, ultimately removing them in December 2022 and reenergising the industry. However, this may place further pressure on the Egyptian pound and international exchange rates, potentially leading to further devaluation.
In January 2023, the CBE further devalued the Egyptian pound by an additional 20%, reaching close to USD 1 : EGP 29.7. As of the beginning of March 2023, the exchange rate is at an all-time high of USD 1: EGP 31.
Recommendations and outlook
Considering the current situation, the inflationary wave is expected to ease through the remainder of this year. The high inflation trends of 2008, 2013 and 2016 suggest that 2023 is expected to have a higher-than-normal construction inflation rate, depending on the proportion of imported materials required in current and potential projects. Inflation rates are expected to stabilise by the beginning of next year.
It is recommended that clients reassess their financial models to accommodate current inflation rates and perform sensitivity analyses for different inflation scenarios expected during 2023. It should be noted that most construction materials will be affected by this wave, either directly or indirectly, and detailed risk assessments should be carried out according to project requirements. Clients should examine their use of imported materials within projects, to avoid delays or shortages. It is also recommended that inflation risk is shared between clients and contractors to avoid any high premiums by contractors during this period of market volatility. Establishing an ongoing discussion is advised, to ensure that these unstable times do not burden contractors to the extent where existing projects ultimately suffer.
The construction market in Egypt is currently witnessing a surge of activity, reflecting its ability to rapidly recover from unpredictable events. However, unforeseeable external factors present risks that may affect current forecasts and data; developers and clients are advised to make adequate contingency to accommodate these risks.
Bupa, Cairo, Egypt: Gleeds provided Project and Programme Control, Project Co-ordination, Project Management, Project Management (Design), Quantity Surveying/Cost Management and Risk Management services
