Projects slowdown tipped to hit Orascom

Governments across the region look to trim public spending.

Orascom Construction Industries (OCI), the Egyptian conglomerate with interests including development and fertilisers, is heavily reliant on major infrastructure projects across the region. That should weigh on investors as Middle East governments look to trim public spending. The stock was cut to "equal weight" from "overweight" yesterday by Morgan Stanley.

The price target was also lowered to US$50 a share from $60. The company is expected to report its second-quarter earnings on September 1. Major project awards have slowed across the Middle East this year as contractors have been forced to submit lower prices to win work. "We also expect margins to come under pressure given increased competition," said Muneeba Kayani, a co-author of a Morgan Stanley report.

"We think the street still has to adjust for slower construction activity." The bank has lowered its expectations for new contract awards at OCI to $2.5 billion for this year and $3.2bn next year. The company's fertiliser business may also come under pressure without a further increase in urea prices. While the company's stock has risen by about 15 per cent since June, Morgan Stanley believes this reflects recent rises in the price of urea.

The price is directly correlated with oil because of oil-linked contracts for fertiliser producers in Europe and Ukraine. It means that a fall in oil prices reduces costs for those producers and therefore leads to lower urea prices. Bad weather conditions for harvest in key export markets such as India can further lower urea prices globally. "We calculate that every $10 change in the price of oil in 2010 has a $40 per tonne impact on urea prices," Morgan Stanley said.