Egypt's flour mills face a struggle

Egypt flour mills are being hurt by fixed fees by the government even as demand intensifies following the unrest in the country.

Egyptian flour mill companies are struggling to remain profitable even though demand for staple products has intensified following unrest in the country.

There are seven flour milling companies listed on the Egyptian Exchange.

"Demand for subsidised flour has increased in recent months as families in Egypt turn to cheaper staple products which would normally mean more business for the flour mills," said Ahmed Abdel Ghani, an analyst at CI Capital, who is based in Cairo.

"But the government fixed fees are making it difficult for companies to even cover their expenses," he added.

The government buys imported and locally produced wheat and then distributes it to the mills in each governate to be ground at a fixed price of 75 Egyptian pounds per tonne. But that price is making it difficult to break even for companies facing higher costs for materials, electricity and wages. The flour is then delivered to the government to distribute to the bakeries.

"Government intervention in the production and pricing of subsidised flour is resulting in lower margins for the sector," Mr Abdel Ghani said.

This comes as most flour mills are facing higher capital expenditures to move from traditional stone-ground flour mills to modern mills, and refurbishing existing ones, in an effort to reduce costs and produce higher-grade flour.

Middle Egypt Flour Mills yesterday postponed signing a final agreement with Switzerland's Buhler Group to refurbish two of its mills at a total cost of 110 million Egyptian pounds until the political and economic situation in the country improves, the company said in a statement to the stock exchange.

It operates 10 mills with an annual production capacity of 1 million tonnes, in addition to eight bakeries. The company held a market share of 15 per cent in the production of subsidised flour last year.

The company's shares lost 1.7 per cent to 11.3 pounds after the news was announced. Mr Abdel Ghani has a "sell" rating on the stock with a fair value price of 11.2 pounds.

The total cost of the refurbishment was expected to cost the company 110 million pounds. Middle Egypt Flour Mills sold land in southern Egypt for about 13m pounds in March to pay for the maintenance of the two mills.