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29 March 2024

Region's cement firms see surge in Q2 profits

Slackening construction projects are to blame for poor Q1 performance. (EB FILE)

Published
By Nadim Kawach

Gulf cement companies sharply recovered in the second quarter of 2009 but ended the first half of the year down by nearly 24.4 per cent because of slackening construction projects, a Kuwait investment bank said.

The UAE and Kuwait recorded the steepest fall in the first half of 2009 compared with the first half of 2008, while Qatar and Oman maintained growth and Saudi Arabia, the largest Gulf cement producer, recorded a relatively small drop, the Global Investment House (GIH) said in a study sent to Emirates Business.

From around $1.2 billion (Dh4.4bn) in the first half of 2008, the net income of cement companies listed in the bourses of the six-nation Gulf Co-operation Council (GCC) shrank to about $922.2 million in the first half of this year, GIH said.

The decline of 24.4 per cent is far lower than the 35 per cent drop recorded through 2008 and 43 per cent in the first quarter of the year.

GIH said a surge in profits in the second quarter of 2009 over the preceding quarter allowed the GCC cement producers to record a lower first half decline.

The report said waning project activity in the region would ally with growing cement supply to put downward pressure on prices and earnings of regional cement manufacturers in the short term.

"Tables are turning and times are changing. Previous expectation of prolonged recession has been ruled out by recently released economic and financial numbers worldwide… sectors which at the end of 2008 and Q1 2009 were recording huge losses and declines have eventually turned the tables and are posting better than expected results," the study said.

"The cement sector of GCC has also followed in the footsteps of the leaders… after registering a year-on-year (y-o-y) decline of 35 and 43 per cent in 2008 and Q1 2009 respectively, the sector reported quarter-on-quarter increase of 61.6 per cent in Q2 2009, which eventually restricted the half year y-o-y decline to 24.4 per cent."

Its figures showed the combined profits of listed cement companies soared to around $567.9m in Q2 2009 from $351.3m in Q2 2009.

"In the current scenario, the equity market has been on the path of recovery. Year to date, majority of the equity markets have recovered and posted growth. Despite this, ongoing projects have come down," the report said. It showed that the projects market, which was estimated at around $2.68 trillion in April declined to nearly $2.2trn in May.

It said a major decline in the projects announcement came from the UAE whose total size plunged to $960bn from $1.32trn in April. Oman had the second-highest decline in the project pipeline to $96bn from $110bn.

Although work on different projects in Saudi Arabia and Qatar is going on at a brisk pace, the overall project pipeline in these countries went down by nine and four per cent to $586bn and $209bn respectively.

"Despite the decline in projects, we believe Saudi Arabia, Qatar and Abu Dhabi are still having a healthy outlook, but we note that new contract awards on average are down by 50 per cent year-to-date across the GCC," GIH said.

"A large amount of new cement supply is coming to the market at a time when demand is slowing. We expect supply to grow by 20 per cent in 2009, while demand is going to remain low. The cement capacity build-up in the GCC and neighbouring regions, alongside a reduction in spending with lowered oil receipts, would place downward pricing pressure on construction commodities across the whole region. While the long-term prospects are stable, in our opinion short-term volatility in both prices and profitability is a likely scenario."

The report considered the outlook for cement demand as relatively good in some countries, albeit with slower growth than in recent years.

"If all planned projects in GCC go ahead, the region in particular could see continued growth in demand. Saudi Arabia and Qatar would top the growth trend, while we expect a slowdown in Kuwait," the study said.

"The scenario for Kuwait does not include the substantial demand we expect from the development of Silk City and hence we expect demand growth in this country to be the slowest among the six GCC countries," GIH said.

 

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