Low cement production costs key to survival

Countries with low cost of cement production will be better positioned to survive the declining global cement prices, according to a recent report from Global Investment House. It terms Egypt's cement sector outlook as positive.

"The negative effect on Egypt's cement sector will be marginal, especially, because of its relatively low cost of production," it said. Egypt's cost of producing cement is $32 (Dh118) per tonne, which is much lower than $55 in Jordan, $54 in Oman and $45 in Europe. "Despite the ban on cement exports, Europe which represents Egypt's main export market is witnessing a severe decline in demand, Egypt's cement sector outlook is positive," says the report.

Cement production cost varied among different Middle East and North Africa (Mena) countries, depending on the cost of energy, raw materials and labour. The Mena's average cash cost of production in 2008 reached $40 per tonne. Algeria, among the Mena countries, has the lowest cash cost of production at $15 per tonne. However, the UAE's cost of producing cement remains at $33 per tonne, compared to $26 in China, $24 in Saudi Arabia and $23 in Iran.

According to the report, retail price of cement in the UAE is highest in the GCC. On an average, a tonne of cement in the country is priced at $99 compared to $90 in Bahrain and Kuwait, $78 in Oman, $77 in Qatar and $70 in Saudi Arabia.


Retail price

In Egypt, the retail price of cement is about $90 per tonne, compared to $100 in Algeria, $101 in Turkey, $118 in Jordan, $130 in Syria and $151 in Yemen.

Entitled, "Egypt cement sector – against all odds," the report says increased capacity expansion within Mena countries coupled with government regulated markets means that emerging from the economic slowdown would depend on the value of the projects in the region and its unhindered progress. Due to this very reason, the UAE is vulnerable as the negative consequences of the credit crunch are much harsher than other countries in the region.

Excess cement production would result in price wars and coupled with cancellation of construction projects will result in a severe glut, leaving the export market as the main source for cement companies source of revenue. This is where the cost advantage of cement production will become crucial, the report says.

The cement industry in Mena has seen significant expansions over the past five years, on the back of the high activity witnessed in the construction sector.

However, the situation of the world cement industry has changed after the global financial crisis, where the added cement capacities during the past couple of years and the announcement of multiple new capacities coming on-stream in the next four years, mainly in emerging markets, coupled with the expected slow-down in the construction sector will create an oversupply situation in the global cement markets.

The world map of cement has changed dramatically over the past 60 years, where the centre of gravity has been moving steadily away from the West towards the East or developing economies.

North America's and Europe's share in world cement consumption has been declining from about 80 per cent in the 1950's to about 20 per cent recently.

Mena's cement production capacity in 2008 is estimated at about 376million tonnes, which is forecasted to increase by 40.5 per cent, reaching about 529mn tonnes in 2012, according to the announced expansion plans. Arab countries cement annual production capacity stood at 222 million tonnes, representing 59 per cent of the Mena's annual production capacity.

Turkey is considered the largest cement producer in the region, producing 20.1 per cent of the region's total cement production in 2008. Iran produces about 17.4 per cent of the region's cement production and comes in the second place, followed by Egypt, which produced almost 15.5 per cent of Mena cement production in 2008. Saudi Arabia and the UAE ranked the fourth and fifth biggest cement producers in the region in 2008, manufacturing about 12.9 per cent and 6.3 per cent, respectively.

Annual cement production capacity in the Arab World is expected to increase by 99million tonnes over the next four years, reaching 321million tonnes.

The UAE, Egypt and Saudi Arabia are implementing considerable capacity expansion plan, contributing about 32 per cent of the new capacity expansion in the region. Egypt is projected to add about 18.5 million tonnes, increasing its annual production capacity from 43 million tonnes in 2008 to 62 million tonnes in 2012.

In addition, Saudi Arabia is expected to increase its annual cement production capacity by 27 per cent, reaching 61 million tonnes in 2012, compared to 48 million tonnes in 2008. Similarly, the UAE is forecasted to lift its annual production capacity by 17 million tonnes by 2012, representing 56 per cent increase from 2008 production capacity level of 30 million.


Unlucky coincidence

"These huge cement capacity addition in the Mena coming on stream over the next years, unluckily coincided with the global economic slowdown and a declining activity in the construction sector. This situation is expected to create an oversupply in the regional cement market and trigger price wars, in addition to possible delays in the planned commissioning dates of the new capacities, shutdowns of some of the inefficient existing capacities and lower utilisation rates," says the report.

According to the report in the UAE, the Jebel Ali Cement factory's completion date has been postponed to 2010. The plant will have an annual production capacity of 2.5 million tonnes. In addition, JK Cement, which is expected to have an annual capacity of 2.2 million tonnes, was postponed to commence operation in 2011.

In Saudi Arabia, Arabian Cement Company postponed its 3 million tonnes cement plant to start operations in 2011, whereas Southern Provence Cement Company froze its expansion plans until market conditions improve.

Also the cement industry especially in the region is highly regulated following intervention by most governments. In Saudi Arabia, for example, cement prices soared from an average of $67 per tonne in 2007 to more than $100 per tonne, in June 2008. In turn, the Ministry of Commerce and Industry (MOCI) imposed a ceiling on the factory price of cement at SR250 per tonne ($68 per tonne).

In addition, the government also banned all cement exports effective June 2008, following growing complaints from contractors and individuals that traders are directing cement for exports, attracted by higher profit.

On the other hand, the UAE government decided to set cement price at $81 per tonne in 2007. Price cap was further raised to $94 per tonne and again to about $99 per tonne in 2008. The surge witnessed in cost of raw materials and fuel coupled with supply shortage pushed cement prices to a record high.

Accordingly, the Ministry of Economy signed an agreement with producers to increase production and remove import duties, as well as reducing port handling fees on May 2008. Later in February 2009, import duties of five per cent were reintroduced to protect local manufacturers and avoid an oversupply in the market.


Positive outlook

In Egypt, the latest set of regulations were issued by the Minister of Trade and Industry in April 2009, to control local cement prices including, banning cement exports for four months, reduction of cement imports clearing period from a 30-day period to a three-day period, as well as obliging cement producers to print their selling prices on cement bags for all distribution channels, including end-user price.

Overall the report argues that Egypt's cement sector outlook is positive, on the back of the continuing activity in the construction sector although the government intervention in the cement industry through increasing energy prices for energy intensive industries, including cement, harmed the competitive edge of the Egyptian cement sector, for its relatively low cost of production. In addition, banning cement exports could jeopardise the position of the Egyptian cement in export markets.

With respect to local price, the report concludes that prices will go down in 2010 and 2011.

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