Wednesday, June 6, 2012

SAUDI ARABIA: Saudi cement producers to maintain competitiveness



Backed by sizeable government funding of physical and social infrastructure, access to subsidized fuel and limestone, and the proximity to respective markets, the Saudi cement producers are likely to maintain their competitive advantage over global players in the coming two years, the National Commercial Bank said Monday in its latest “Saudi Cement Sector Review”.

On average, energy costs represent 30-40 percent of total production costs, and are the second largest consideration to be factored into the cost structure of producing cement. 


The local price of natural gas is set at $0.75 MMBtu, significantly lower than international spot market prices that average between $2.50-$5.50 MMBtu. 

Given the ongoing construction boom, the report forecast that by 2013, designed clinker capacity will reach 55 million tons, with cement consumption increasing to 53 million tons. On the supply side, it forecasts designed clinker capacity to continue at 51 million tons in 2012. While capacity was meant to increase by 4.5 million tons this year, the shortage in fuel allocation may affect output this year for both Yanbu Cement and Southern Cement. 

Cement demand will rise to 49 million tons and 52 million tons in 2012 and 2013, respectively. 

It estimates that construction gross fixed capital formation (GFCF) will increase to SR209 billion as the GDP will reach an estimated SR2.27 trillion next year, with a resulting increase in cement prices. These will fluctuate within the range of SR268-SR290/ ton in 2013. “However MOCI is likely to intervene to maintain a stable price,” it added.

The report projects local per capita cement consumption to be 1,730 kg. Oil prices are likely to remain elevated for the coming year, albeit at a lower level of $95/bbl strengthening the demand for construction. 

With an estimated total of SR472 billion worth of contracts in the execution and EPC (bid) phases, SR217 billion represent projects that will be completed within 2012, and SR255 represent those that will be completed within 2013. On a Kingdom-wide scale, the Western region will command the most construction activity, accounting for an upcoming 39 percent of projects, followed by the Eastern region at an estimated 26 percent. An additional 8 percent of projects will be dispersed Kingdom-wide.

As demand from the Western region is poised to grow, existing companies will continue to compete for market share. The region, encompassing Jeddah, Makkah and Madina, enjoys major infrastructure projects across a number of sectors. It is the hub for both local (Red Sea) and religious tourism (Haj pilgrimage) necessitating hospitality services.

Transport infrastructure projects will command the largest share until 2013. These encompass expansionary works for King Abdulaziz International Airport, as well as developing the Haramain high-speed rail network with an awarded contract value of SR42 billion.

In the Eastern region, Saudi Aramco dominates the project market over the forecasted period, at an awarded contract value of SAR21 billion. This is followed by the aluminum project at Ras Al-Khair, which is owned by Ma’aden, at an estimated SR9 billion. Of the SR124 billion worth of awarded contracts in this area, SR50 billion worth of projects are set to be completed by 4Q 2012. 

The Central region’s importance as the political and business center of the Kingdom makes it an important target for cement companies. There are currently 114 ongoing projects, the largest of which is owned by Rayadah Investment Company (RIC). RIC is the Saudi Public Pension Agency’s company for investing in real estate in the Kingdom. In total, it is undertaking 14 projects in the Central region, with a total contract value of SAR27 billion. 

In the Southern region, Jizan province is commanding the largest share, at 42 percent of total contract value. Overall, the construction category accounts for SR7 billion of the total, with residential construction commanding the bulk, at 82 percent share. In the North, Prince Abdulaziz Bin Mousaed Economic City is a sizeable project. Its construction commenced in 2006, with a total outlay of SR30 billion over 10 years. 

Moving forward, Qatar will prove to be an important export destination for Saudi cement firms following its award of the 2022 World Cup. It is planning on spending an estimated $70 billion to develop the country’s infrastructure. With more favorable export conditions, the Kingdom has the potential for positioning itself as Qatar’s lead supplier. 

However, challenges faced the Kingdom’s cement sector, including the conditional export ban, which limits growth opportunities within the domestic market. Additionally, fuel shortages reported by some cement companies, and ongoing unresolved discussions with Aramco regarding fuel allocation, will cause delays in clinker production, affecting supply. 

Consequently, the tight demand-supply balance will continue to serve as another difficulty going forward, with the eight primary players competing to protect market share from new entrants. 

Despite the strong appetite and competitive pricing in funding the cement sector, the risk to Saudi banks remains in financing projects that are largely geared toward meeting transient demand.

“The ongoing export ban will serve to constrain growth for Saudi cement producers. In the almost four years since its introduction, neighboring and regional countries have developed their cement markets, becoming substitutes to the Saudi production. This will make it difficult for local producers to retain their high levels of exports should the export ban be removed,” the report said.

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