UAE cement production expected to surpass consumption by 2011

In an optimistic scenario, a recent Al Mal Capital report on the cement sector in the UAE anticipates a construction sector growth of 25 per cent and 20 per cent in 2008 and 2009, respectively.

This is one of the three possibilities examined in the study regarding the growth of the construction industry and the demand for cement.

In the most possible case, the report expects the construction industry to experience a nominal growth of 20 per cent in 2008 and 15 per cent in 2009, while cement consumption should grow in line with construction at a rate of 32 per cent in 2008 and 15 per cent in 2009.

"In our pessimistic scenario we have forecast slower growth of 15 per cent in 2008 and 10 per cent in 2009," said the report.

The UAE construction industry has experienced phenomenal growth since 2003.

"The UAE GDP composition shows the construction industry increased by 29 per cent in 2006 and a further 29 per cent in 2007. Amid the liquidity crisis and global recession woes we anticipate construction grow rates to slow down. Developers may find it increasingly difficult to fund projects and there could be an increasing number of projects being delayed or postponed," it added.

Based on the most probable construction forecast of cement consumption estimates and expansion plans of cement and clinker producers, the Al Mal report envisages the production of cement to surpass consumption at the end of 2010 or the beginning of 2011.

MULTI-FUEL OPTIONS

Unreliable fuel supply and rising costs of cement production have plagued cement manufacturers in the past two years. Coal and oil prices reached an all-time high of $143 (Dh525) per tonne and $147 per barrel, respectively, in July 2008. To compound the issue, the increase in production costs could not be passed on to the consumers due to government-imposed price caps. However, the report sees some relief as fuel prices begin to fall and the price remains, in the short term, at Dh360 per tonne.

The cement companies have responded by installing multi-fuel burners so that production is not solely reliant on the supply and the cost of one fuel. Cement manufacturers that have not entered into fixed-price fuel contracts in the first half of the year should begin to see margins increase in the fourth quarter, said the report. Multi-fuel systems should also improve margins as the cement companies become less reliant on the availability and price of natural gas and diesel.

CLINKER LIMITATIONS

Essentially, clinker is the predominant limiting factor in cement production. The UAE is a net importer of clinker and the majority of capacity that is coming online in 2009 is only for cement grinding plants. The report estimates that the UAE should produce 15.3 million tonnes per annum (mtpa) of clinker in 2008.

At 100 per cent utilisation, the UAE is capable of producing 24.9mtpa of cement (in reality utilisation is approximately 90 per cent). The shortfall of 9.6mtpa of clinker needs to be met from clinker imports.

In 2009, Al Mal estimates an increase in grinding facilities of 3.9mtpa compared to an increase in clinker production of 4.8mtpa, decreasing the shortfall from 9.6mtpa to 8.7mtpa.

A tonne of clinker costs approximately Dh280 and if it is imported to meet the needs of the grinding facilities, then the report estimates an oversupply of cement at the beginning of 2010. Assuming the cement factories operate at 90 per cent utilisation, the report estimates production of 35.6mtpa compared to the consumption estimate of 31.1mtpa.

However, if clinker prices increase or there are restrictions with imports due to availability or port facilities/ storage, then the production capacity is limited to the amount of clinker produced in the UAE.

"In this scenario, we do not expect an oversupply of cement until the beginning of 2011 when clinker production would have increased and demand would have fallen. We estimate clinker production of 37.4mtpa compared to consumption estimates of 35.1mtpa," it said.

"In our opinion, cement production should fall somewhere in between the two scenarios. Clinker should remain the limiting factor until production in the UAE falls in line with cement grinding capacity. We believe that clinker should continue to be imported but not to the extent that all of the upcoming grinding facilities can operate at full capacity and therefore we anticipate a surplus of cement at the end of 2010 or beginning 2011."

RICK FROM IMPORTS

Since the beginning of the construction boom, the UAE has been a net importer of cement. There is a risk that the global slowdown could increase cement imports in the Middle East as demand in the US and Europe starts to dry up.

Saudi Arabia has restrictions on cement exports, but these are expected to be lifted by the end of the year and could also contribute to an increase in imports.

The fundamental driver of the UAE cement sector is the growth of the construction industry. Amid the serious liquidity crisis and global recession woes, Al Mal anticipates construction growth rates to slow down from 20 per cent in 2008 to 15 per cent and 13 per cent in 2009 and 2010, respectively.

PRICE CAP STILL IN PLACE

The supply-demand dynamics over the past five years has significantly influenced the price of cement. In 2003, a tonne of cement was priced at Dh230, increasing to Dh360 in 2004 as construction boomed and the cost of production increased.

The escalating cost of the commodity caused the UAE Government to intervene, introducing price caps to help combat construction delays and curb domestic inflation. In 2007, the price was capped at Dh295 per tonne, which was increased to Dh360 in 2008. However, despite these attempts, cement prices have continued to increase on the black market. The price cap only applies to Ordinary Portland Cement (OPC). According to the Abu Dhabi building material price index, in September cement was priced at Dh440 per tonne, Dh80 above its capped cost.

At the end of 2007 there were nine listed and six unlisted cement companies operating in the UAE. "The total cement capacity is 24.9mtpa and with the proposed expansion plans, we anticipate this to increase to 48.7mtpa in 2011," said the Al Mal report.

Production has fallen short of consumption since the beginning of the construction boom in 2003.

VIABLE OPTION

The shortfall has been met by imports from around the globe and in 2007 the UAE imported 2.9mtpa of cement (64 per cent from China, 19 per cent from India and 17 per cent from Pakistan, Thailand and Indonesia).

The shortage of commodity at the beginning of the construction boom gave rise to significant private and public investments in cement factories to increase the UAE's production capacity. Capacity has since expanded by 55 per cent from 9mtpa in 2003 to 14mtpa in 2007.

"The majority of cement consumed in the UAE is produced domestically and, therefore, a slowdown in construction would have a negative impact on local producers," said the report.

"Whilst we do see this as a risk to the sector, we believe that the reinstatement of import duties that have been temporarily suspended and the capacity constraints of the UAE ports should restrict the volumes imported into the country."

Exporting is a viable option for the surplus cement in the UAE if the cost of production is less than that of neighbouring countries such as Oman and Saudi Arabia. Currently the cost base in the UAE is higher than that of other GCC countries.

"In our opinion a surplus of cement and declining production costs could cause the price per tonne soften at the end of 2010," said the report.

In May 2008 the UAE Ministry of Economy signed an agreement with producers to increase production and remove import duties to alleviate the pressure on local suppliers. Consequently, many of the cement companies are in expansion mode.

Al Mal expects a significant capacity increase by the end 2009/early 2010, with Arkan attributing an almost five-fold capacity expansion from 1.2mtpa to 5.7mtpa. It foresees the total grinding capacity of UAE cement industry to reach 48.7mtpa in 2011, reflecting a compound annual growth rate (CAGR) of 36.5per cent between 2007 and 2011.

TIME WILL TELL

World cement production in 2007 was estimated to be 2.6 billion tonnes and is forecast to reach approximately 3.2 billion tonnes by 2012.

China is by far the largest cement consuming nation in the world (50 per cent), with consumption of 1,270 million tonnes in 2007. India is the second largest cement consuming nation, followed by the US, consuming 169 million and 115 million tonnes, respectively. The GCC states have high economic growth rates, high GDP and high cement consumption per capita. The UAE and Qatar are the most notable, with the highest consumption of 3,830kg/ capita and 3,368kg/capita, respectively. The cement consumption per capita in the UAE significantly surpasses the consumption per capita of countries with a similar GDP.

Al Mal anticipates cement consumption in 2008 to reach 24mtpa and to grow at a CAGR of 18 per cent between 2007 and 2011.

Given the three possible scenarios outlined in the report, only time will tell which forecast proves true.

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